OF 1934UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 20162020
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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) |
972-294-1010972-294-1010
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common | RVP | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨oNo No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨oNo No x
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. YesxNo ¨o
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o¨No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliates as of June 30, 2016,2020, was $35,012,406,$121,416,123, assuming a closing price of $2.52$7.02 and outstanding shares held by non-affiliates of 13,893,812.17,295,744.
APPLICABLE ONLY TO REGISTRANTS 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 Section 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 ¨o No o¨
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 1, 2017,12, 2021, there were 31,666,45433,982,604 shares of our Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunderPortions of the following documents ifregistrant’s Proxy Statement filed on an even date herewith for the Annual Meeting of Shareholders to be held May 11, 2021 are incorporated by reference and theinto Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).III hereof.
None except exhibits.
RETRACTABLE TECHNOLOGIES, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 20162020
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, the impact of COVID-19 on all facets of logistics and operations, as well as costs, our ability to complete capital improvements and ramp up domestic production in response to government agreements, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, 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”("BD"), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors. Given these uncertainties, undue reliance should not be placed on forward-looking statements.
DESCRIPTION OF BUSINESS
General Development of Business
On May 9, 1994, our companyRetractable Technologies, Inc. was incorporated in Texas to design, develop, manufacture,in 1994. Our business is the manufacturing and market innovative patentedmarketing of safety medical products (predominately syringes) for the healthcare industry. Our syringes are used for vaccinations and our revenues for 2020 materially increased over prior years due to demand during the COVID-19 pandemic. Our principal customer was the U.S. government which purchased products representing 39.0% ($31.6 million) of our revenues in 2020. We have manufacturing facilities in Little Elm, Texas and use manufacturers in China as well. We are increasing our capacity for production at our U.S. manufacturing facility, funded in part by a grant by the U.S. government.
Description of Business
Our dominant revenue-generating products are our injection devices (syringes and needles). Such products are marketed under the VanishPoint®, Patient Safe®, and EasyPoint® brands. Other products which make up approximately 4.3% of our revenues include our blood collection devices and IV catheters. We have only one reporting segment. Most of our products incorporate a feature whereby our needles retract which is a safety feature designed to protect healthcare workers from needlestick injuries. Our VanishPoint® 1mL syringes meet the criteria set by pharmaceutical manufacturers for low dead space, which results in a reduction of wasted medication caused by residual medication remaining in the syringe after a dose has been administered. In some instances, the low dead space allows for additional doses to be obtained from a medication vial.
In 2020, the U.S. government was a significant customer due to efforts to vaccinate the U.S. population against COVID-19. On May 1, 2020, we received an order from the Department of Health and Human Services to supply certain automated safety syringes through May 2021 for $83.8 million (the “HHS Order”), plus $10 million in expedited freight costs. As of December 31, 2020, we recorded sales of $31.6 million under the 2020 HHS Order, representing 39.0% of our overall revenues for 2020. In February 2021, we received a new contract from the Department of Health and Human Services for additional safety syringes representing $54.2 million in expected revenues and reimbursable freight costs for a five-month base period of performance (February 15, 2021 to July 14, 2021) with additional renewal periods available at the option of the U.S. government.
During 2020, we also continued to provide products to our existing and new private healthcare customers. Our growth in sales in 2020 was predominantly driven by demand for syringes for COVID-19 vaccines and flu vaccines. Meeting demand for COVID-19 vaccines will continue to be our primary focus for the first half of 2021. As of December 31, 2020, our production and deliveries materially met or exceeded contract requirements despite the significant increase in demand.
Our goal is to become a leading provider of safety medical products. Advantages of our safetyOur principal products include protectionwere designed to protect healthcare workers, patients, and others from needlestick injuries, prevention of cross contaminationcross-contamination through reuse, and reduction ofreduce disposal and other associated costs.
WeVanishPoint® syringe sales have designed, developed,historically comprised most of our sales. VanishPoint® syringe sales were 84.0%, 85.3%, and currently market the VanishPoint®84.0% of our revenues in 2018, 2019, and Patient Safe2020. EasyPoint® products. The VanishPoint®products are designed specifically to prevent needlestick injuries and to prevent reuse. The patented designs permit the automated retractionaccounted for 11.8% of the needle directly from the patient after completion of the procedure.sales in 2020.
Our VanishPoint® safety products currently consist of tuberculin, insulin, and allergy antigen VanishPoint® syringes; 0.5mL, 1 mL, 2mL, 3mL, 5mL, and 10mL VanishPoint® syringes; and the VanishPoint® autodisable syringe.
We also sell the VanishPoint® IV catheter; the VanishPoint® blood collection tube holder; and the VanishPoint® blood collection set.
The Patient Safe® syringe embodies a unique patented design and protects patients by reducing the risk of bloodstream infections associated with catheter hub contamination. Our Patient Safe® products currently consist of 3mL, 5mL, 10mL, 20mL, 30mL, 60mL syringes and the Patient Safe® Luer cap.
In the second quarter of 2016, we began selling a new product, the EasyPoint® needle. 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. According to a December 2016 press release from Zion Market Research, prefilled syringes play an important role in the injectable drug delivery devices market and the compound annual growth rate is expected to be approximately 9.5% between 2016 and 2021. The global market size for prefilled syringes was approximately 4.1 billion units ($3.5 billion) in 2015.
We currently have under development additional safety products that add to or build upon our current product line offering. These products include: retractable needles and syringes, glass syringes, dental syringes, IV catheter introducers, and blood collection sets.
Our products have been and continue to be distributed nationally through numerous distributors. However, we have been blocked from access toNotwithstanding the market by the practices engaged in by BD which dominatesforegoing, our market. We initiated a lawsuit in 2007 against BD. As previously reported, on December 2, 2016, the Fifth Circuit Court of Appeals overturned a district court judgment that had previously awarded us $340 million in antitrust damages from BD, but affirmed a finding of false advertising liability against BD and remanded the case to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled. Although the result of the damages redetermination is unknown, our stock price materially declined following the entry of the Fifth Circuit’s opinion. The Eastern District of Texas trial date is May 11, 2017. Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.
We have taken steps to reduce our future litigation expenses and expect such expenses to be significantly less in 2017.
We reevaluated several compensation strategies in late 2016 and early 2017. See Compensation Discussion and Analysis. We also approved three of our executive officers to purchase shares directly from the Company. Thomas J. Shaw exercised a portion of such right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million.
In April of 2016, Mr. Shaw exercised an option for one million shares for an aggregate exercise price of $810 thousand. Another director exercised a portion of a stock option for an aggregate exercise price of $16 thousand in March of 2016 and $12 thousand in March of 2015.
We continue to attempt to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.
The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium on the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191. Thus, the medical device excise tax was suspended beginning on January 1, 2016 and ending on December 31, 2017. The impact of this tax was $360,000 in 2015 and $856,000 in 2014.
In 2014, the Company took steps to decrease non-litigation legal costs by approximately $1.1 million. In 2014 and 2015, the Company reduced its workforce to further cut costs. In the future, if such cost cutting measures prove insufficient, we may reduce other operating expenses, reduce the workforce, reduce the salaries of officers as well as other employees, and/or defer royalty payments. The Company instituted two percent raises for most non-executive employees in early 2016 and engaged in other compensation increases for executive officers in late 2016 and early 2017. See Compensation Discussion and Analysis.
We exchanged 728,000 shares of Common Stock for 200,000 shares of our Series IV Class B Convertible Preferred Stock as of November 30, 2015, pursuant to an agreement with a shareholder. Such shareholder agreed to waive all unpaid dividends in arrears associated with the tendered preferred stock, equaling $3,094,795. Future dividend requirements of $200,000 per year are avoided as a result of this transaction.
Financial Information
Please see the financial statements in Item 8. Financial Statements and Supplementary Data for information about our revenues, profits, and losses forprimary focus over the last three years and total assets, liabilities, and stockholder equity for the last two years.
Principal Products
Ouryear has centered on providing existing products with Notice of Substantial Equivalence to the U.S. Food and Drug Administration (“FDA”) and which are currently sold, include the 1mL tuberculin; insulin syringes; allergy antigen VanishPoint® syringes; 0.5mL, 2mL, 3mL, 5mL, and 10mL VanishPoint® syringes; EasyPoint® needle, the VanishPoint® blood collection tube holder; the VanishPoint® IV safety catheter; small diameter tube adapter; the allergy tray; the Patient Safe® syringes; the Patient Safe® Luer Cap; and the VanishPoint® Blood Collection Set. We are also selling VanishPoint® autodisable syringes in the international market in additionmeet demand related to our other products.
Syringe sales comprised 97.3%, 98.2%, and 93.0% of revenues in 2014, 2015, and 2016, respectively. EasyPoint® needles, which were introduced in the second quarter of 2016, made up 4.5% of revenues in 2016.
Principal MarketsCOVID-19 vaccinations.
Our products are sold to and used by healthcare providers primarily in the U.S. (with 11.8%9.8% of revenues in 20162020 generated from sales outside the U.S.) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, long-term care facilities, Veterans Administration facilities, military organizations, public health facilities, and prisons..
The need to change to safety devices is dueIn years not dominated by direct sales to the risk that is carried with each needlestick injury which includes the potential transmission of over 20 bloodborne pathogens, including the human immunodeficiency virus (“HIV,” which causes AIDS), hepatitis B, and hepatitis C. Because of the occupational and public health hazards posed by conventional disposable syringes, public health policy makers, domestic organizations, andU.S. government, agencies have been involved in the effort to get more effective safety needle products to healthcare workers. Federal legislation was signed into law on November 6, 2000, by former President William Jefferson Clinton. This legislation, which became effective for most states on April 12, 2001, requires safety needle products be used for the vast majority of procedures. However, even with this requirement, some hospitals are neglecting to follow the law intended to protect healthcare workers.
A healthcare journal (AOHP Journal) published an article in 2013 indicating that over 320,000 needlestick injuries occur every year in the United States.
Methods of Marketing and Distribution
Under the current supply chain system in the U.S. acute care market, the vast majority of decisions relating to the contracting for and purchasing of medical supplies are made by the representatives of group purchasing organizations (“GPOs”) and purchasing representatives rather(rather than the end-users of the product (nurses, doctors, and testing personnel).product) make the vast majority of decisions relating to the purchase of medical supplies. The GPOs and larger manufacturers often enter into contracts which can prohibit or limit entry in the marketplace by competitors.
We distribute our products throughout the U.S. through general line and specialty distributors. We also use international distributors. We have developed a national direct marketing network in order to market our products to health care customers and their purchaser representatives. Our marketers make contact with all of the departments that affect the decision-making process for safety products, including the purchasing agents. They call on acute care and alternate care sites and speak directly with the decision-makers of these facilities. We employ trained sales representatives and clinicians, including nurses and/or medical technologists that educate healthcare providers and healthcare workers on the use of safety devices through on-site clinical training, exhibits at related tradeshows, and publications of relevant articles in trade journals and magazines. These employees provide clinical support to customers. In addition to marketing our products, the network demonstrates the safety and cost effectiveness of our products to customers.
In the needle and syringe market, the market share leader, BD, has utilized conduct which we believe has restricted the entry of VanishPoint® syringes into the market. Other products manufactured by us that are being denied market access as a result of BD’s actions include the IV safety catheters and Patient Safe® syringes.
We have numerous agreements with organizations for the distribution of our products in foreign markets. In Canada, the provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, and Saskatchewan have passed laws or regulations regarding healthcare worker safety and the use of safe needle products. The European Union has issued Directive 2010/32/EU regarding safe procedures and the use of safe needle products to prevent needlestick injuries. Peru’s vaccination manual mandates that all syringes used in that country’s national vaccination program must be retractable syringes. Brazil has also initiated a regulation requiring the use of safe needle products to prevent needlestick injuries. Except for Victoria and Western Australia, all of the states and territories of Australia have guidelines or directives regarding the prevention of needlestick injuries.
Key components of our strategy to increase our market share are to: (a) defeat unfair practices through litigation; (b) focus on methods of upgrading our manufacturing capability and efficiency in order to enable us to reduce costs and improve profit margins; (c) continue marketing emphasis in the U.S.; (d) continue to add Veterans Administration facilities, health departments, emergency medical services, federal prisons, long-term care, home healthcare facilities, and retail pharmacies as customers; (e) educate healthcare providers, insurers, healthcare workers, government agencies, government officials, and the general public on the reduction of risk and the cost effectiveness afforded by our products; (f) market product through GPO contracts and supply Integrated Delivery Networks where possible; (g) consider possibilities for future licensing agreements and joint venture agreements for the manufacture and distribution of safety products in the U.S. and abroad; (h) introduce new products; and (i) increase international sales.
Status of Publicly Announced New Products
We have applied for patent protection and are in the process of developing additional safety medical products.
EasyPoint® needles, which were introduced in the second quarter of 2016, made up 4.5% of revenues in 2016. Our application for a CE mark is under review by bsi.
Sources and Availability of Raw Materials
We purchase most of ourOur product components, from single suppliers, including needle adhesives and packaging materials.materials, are purchased from various suppliers. There are multiple sourcesis no current scarcity of these materials. We own the printing plates that are used to print artwork on packagingsuch materials and the molds that are used to manufacture the plastic components of our products in the U.S. Our current suppliers include AMCOR, Bemis Healthcare Packaging Inc., Caraustar, Channel Prime Alliance, Exacto, Interwire, KovacMed, Plastic Ingenuity, and Polyone.or such suppliers.
Patents, Trademarks, Licenses, and Proprietary RightsIntellectual Property
Soon afterIntellectual property rights, particularly patent rights, are material to our business. The patent rights are jointly owned by the Company was formed in May 1994, in recognition of the preexisting technology, intellectual property rights, products, inventive knowhow and ongoing research and development projects (the “Core Technology”) that were brought into the Company by Thomas J. Shaw, as itsour founder and CEO, and have varying expiration dates. Under the terms of an exclusive license agreement that has been in effect since 1995, the Company is exclusively licensed to use the patent rights held by Mr. Shaw, and Mr. Shaw entered intogenerally receives a Technology License Agreement dated June 23, 1995, which was subsequently amended July 3, 2008, and again to its present form September 7, 2012.
As amended, the Technology License Agreement encompasses the Core Technology, all technology and knowhow arising out of the Core Technology that has been developed since its inception, all related future improvements, and all the related domestic and foreign patents and patent applications naming Mr. Shaw as an inventor. The knowhow component is broadly defined to include both technical and valuable proprietary business information. Under the Technology License Agreement, Mr. Shaw has granted the Company an exclusive worldwide license in the inventions and under his related patent rights to manufacture, market, sell and distribute the licensed technology and improvements that perform the same function in a better or more economical way. The Company has the right to grant sublicenses and assign the Technology License Agreement subject to Mr. Shaw’s approval. The term of the Technology License Agreement is coextensive with the life of the patent rights that are subject to it.
In return for the rights granted, the Company paid Mr. Shaw an initial licensing fee and pays a continuing 5%five percent (5%) royalty on gross sales as well as the costs of obtaining and maintaining the patentsproducts subject to the license. Thelicense and he receives fifty percent (50%) of the royalties paid to the Company has reservedby certain sublicensees of the righttechnology subject to controlthe license.
Recent and expected modifications to our VanishPoint® syringes will effectively cause the modified VanishPoint® syringes products to have extended patent prosecutionexpiration dates. Following the expiration of patents related to the old design, competitors may attempt to copy aspects of such prior design, but not the current design. Patents related to recent modifications to the VanishPoint® syringes and core technology of the right not to pursue or maintain any patent or patent application, in which case the rights in any non-elected technology revert to Mr. Shaw and are excluded from the license. The Technology License Agreement also acknowledges a march-in right held by the U.S. government as a result of federal funding that was provided under Small Business Innovation Research grants madeVanishPoint® syringes will expire during the early development of what later becameyears 2028 through 2032. Other patent applications covering inventions applicable to the Company’s VanishPoint® product line. syringes are pending.
The Company holds exclusive rights under domestic and foreignhas unexpired patents and has pending applications relatedwhich relate to the EasyPoint® technology embodied inand other products that are currently marketed. The Company also holds rights related
to new products under development. The patents exclusively licensed by the Company have varying remaining terms and expiration dates. While patents covering some features of the VanishPoint® syringes have recently expired, another patent with a later expiration date will continue to provide patent coverage for VanishPoint® syringes until 2020.as well.
The Company has also registered the following trade names and trademarks:trademarks for our products: VanishPoint®, EasyPoint®, Patient Safe®, VanishPoint® logos, RT with a circle mark,and design, the Spiral Logo used in packaging VanishPoint® products, and design, the color coded spots onspot design and the ends of our VanishPoint® syringes and others. The Company has also obtained federal trademark protection for the sloganslogans “The New Standard for Safety.” The Company has trademarked the sloganSafety” ® and “We Make Safety Safe” and is awaiting registration for it.®.
We are involved in patent litigation detailed in Item 3. Legal Proceedings. We have decided, on the advice of patent counsel, not to purchase patent insurance because it would require inappropriate disclosure of information that is currently proprietary and confidential.
Seasonality
Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season. We cannot determine what percent of our increase in domestic sales (excluding the HHS Order) in the second half of 2020 were attributable to flu shots versus preparation for a COVID-19 vaccine.
Working Capital PracticesDependence on Customers
Cash and cash equivalents include unrestricted cash, money market accounts, and investments with original maturitiesAlthough our business has historically derived significant percentages of three months or less.its revenues from a few customers, we do not believe that the loss of any one of these customers would have a material adverse effect on our business.
We record trade receivables when revenue is recognized. No product has been consigned to customers. Our 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.Government Contracts
Inventories are valued atIn 2020, we entered into a material contract with the lowerU.S. government providing a significant grant and accepted the HHS Order under an existing contract for the sale of cost or market,syringes. In February 2021, we and the Department of Health and Human Services entered into a new contract and it placed another material order with cost being determined using actual average cost. The Company compares the average cost to the market price and records the lower value. Management considersus for syringes. All 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 theycontracts may be written off.terminated by the U.S. government but given current conditions with COVID-19, we do not believe termination (or renegotiation) is likely.
Receivables are established for federal and state taxes where we have determined we are entitled to a refund for overpayments of estimated taxes or loss carrybacks.
Accounts payable and other short-term liabilities include amounts that we believe we have an obligation for at the end of year. These include charges for goods or services received in 2016 but not billed to us at the end of the year. It also includes estimates of potential liabilities such as rebates and other fees.
Our domestic return policy is set forth in our standard Distribution Agreement. This 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 us and affix the code to the returned product. We will not accept returned goods without a returned goods authorization number. We may refund the customer’s money or replace the product.
Our 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 upon the following terms: i) an “overstocked” product is that portion of distributor’s inventory of the product which exceeds distributor’s sales volume for the product during the preceding four months; ii) distributor must not have taken delivery of the product which is overstocked during the preceding
four months; iii) overstocked product held by distributor in excess of 12 months from the date of original invoice will not be eligible for return; iv) the product must have an expiration date of at least 12 months from the date of return; v) the overstocked product must be returned to us in our saleable case cartons which are unopened and untampered, with no broken or re-taped seals; vi) distributor will be granted a credit which may be used only to purchase other products from us, the credit to be in the amount of the invoice price of the returned product less a 10% restocking fee which will be assessed against distributor’s subsequent purchase of product; vii) distributor must obtain an authorization code from our distribution department and affix the code to the returned product; and viii) distributor shall bear the cost of shipping the returned products to us. All product overstocks and returns are subject to inspection and acceptance by us.
Our international contracts generally do not provide for any returns.
Dependence on Major Customers
One customer accounted for an aggregate of 31.4% of our revenue in 2016. We have numerous other customers and distributors that sell our products in the U.S. and internationally.
Backlog Orders
Order backlog is not material to our business inasmuch as orders for our products generally are received and filled on a current basis, except for items temporarily out of stock.
Government Funding of Research and Right to License
Thomas J. Shaw received grants from the federal government for his initial 1991 version of a safety syringe, which may give the federal government the right to allow others to manufacture that syringe. However, we believe the government has no right to allow others to manufacture the current version of the VanishPoint® syringe.
Government Approval and Government Regulations
The development, manufacture, marketing, sale, promotion, and distribution of our products are subject to government regulation by the U.S. Food and Drug Administration (FDA) and similar international regulatory agencies. Regulation by various international, federal and state agencies address the development and approval to market medical products, as well as approval and supervision of manufacturing, labeling, packaging, supply chains, distribution and record-keeping.
For all products manufactured for sale in the domestic market, we have given notice of intent to market to the FDA, and the devices were shown to be substantially equivalent to the predicate devices for the stated intended use.
For all products manufactured for sale in the domestic market and foreign market, we hold a Quality Management System certification to ISO 13485. We also have approval to label13485:2016. Additionally, for all products manufactured for sale into the applicable countries, we hold a Quality Management System certification in compliance with the Medical Device Single Audit Program (MDSAP). For all products manufactured for sale into European Union countries, withwe hold a CE mark. BothFull Quality Assurance System certification to Directive 93/42/EEC Annex II (excluding section 4). All of these certifications are issued by our notified body, bsi,BSI, and are reviewed annually.
Compliance with domestic and international laws and regulations may affect our business. Among other effects, health care regulations and significant changes thereto may substantially increase the time, difficulty, and costs incurred in developing, obtaining, and maintaining approval to market, and marketing newly developed and existing products. We expect this regulatory environment will continue to require effort and investment to ensure compliance. Failure to comply could delay the release of a new product or result in regulatory and enforcement actions, the seizure or recall of a product, the suspension or revocation of the authority necessary for a product’s production and sale, and other civil or criminal sanctions including fines and penalties.
The regulation of data privacy and security, and the protection of the confidentiality of certain personal information (including patient health information, financial information, and other sensitive personal information), is increasing. For example, the European Union, various other countries, and various U.S. states (e.g., California) have enacted stricter data protection laws that contain enhanced financial penalties for noncompliance. Similarly, the U.S. Department of Health and Human Services has issued rules governing the use, disclosure, and security of protected health information, and the FDA has issued further guidance concerning cybersecurity for medical devices. In addition, certain countries have issued or are considering “data localization” laws, which limit companies’ ability to transfer protected data across country borders. Failure to comply with data privacy and security laws and regulations can result in business disruption and enforcement actions, which could include civil or criminal penalties.
The sale of medical products is subject to laws and regulations pertaining to health care fraud and abuse, including state and federal anti-kickback, anti-self-referral, and false claims laws in the United States.
We will continue to comply with applicable regulations of all countries in which our products are registered for sale.
In a typical year, the cost of compliance with government regulations does not have a material effect on our capital expenditures, earnings, or competitive position (as measured against other U.S. entities). We cannot anticipate changesbelieve that we do not incur material costs in trade policy from the current administration.connection with compliance with environmental laws.
Competitive Conditions
Our products are sold to and used by healthcare providers primarily in the U.S. (with 11.8% of revenues in 2016 generated from sales outside the U.S.) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, long-term care facilities, Veterans Administration facilities, military organizations, public health facilities, and prisons.
We compete primarily on the basis of healthcare worker and patient safety, product performance, and quality. We believe our competitive advantages include, but are not limited to, our leadership in quality and innovation. We believe our products continue to be the most effective safety devices in today’s market. Our syringe products include passive safety activation, require less disposal space, and are activated while in the patient, reducing exposure to the contaminated needle. Our price per unit is competitive or even lower than the competition
once all the costs incurred during the life cycle of a syringe are considered. Such life cycle costs include disposal costs, testing and treatment costs for needlestick injuries, and treatment for contracted illnesses resulting from needlestick injuries.
Major domestic competitors include BD and Medtronic Minimally Invasive Therapies (“Medtronic,” formerly known as Covidien). Terumo Medical Corp., Smiths Medical, and B Braun are additional competitors with smaller market shares.
Founded in 1897, BD is headquartered in New Jersey. BD’s medical segment safety-engineered device sales accounted for approximately 15.4% of BD’s total 2016 sales. BD’s classification of medical segment safety-engineered devices include the Safety-Lok™ syringe, which features a tubular plastic sheath that must be manually slid over the needle after removal from the patient, and the SafetyGlide™ hypodermic needle which utilizes a manually activated hinged lever to cover the needle tip after removal from the patient. BD markets the SafetyGlide™ blood collection set that has a manually activated cover designed to extend over the needle after use. The BD Eclipse™ safety blood collection needle and hypodermic needle is also designed to manually cover the needle after removal from the patient. BD manufactures the Integra™ 3mL retracting needle and syringe product, as well as a spring activated Vacutainer® Passive Shielding Blood Collection Needle and spring activated retracting Vacutainer® blood collection set. BD’s “Vacutainer®” brand name is commonly used as industry jargon to refer to blood collection products in general.
Medtronic offers the Monoject® safety syringe, which, like the BD SafetyLok™, requires the use of two hands to manually extend the tubular plastic shield to cover the needle after removal from the patient. Medtronic also markets the Magellan™ needle, similar to BD’s SafetyGlide™ needle, which has a manually activated hinged lever to cover the needle tip after removal from the patient.
Many of BD’s and Medtronic’s products result in exposure to the contaminated needle or allow for needle removal and potential syringe reuse.
In contrast, VanishPoint® syringes can be used without significant changes in injection technique. The automated needle retraction is activated when the plunger handle is fully depressed, in conjunction with the delivery of the complete medication dose, while the needle is still in the patient. This pre-removal activation virtually eliminates exposure to the contaminated needle, reducing the risk of needlestick injuries. Activation is easily accomplished in one step, using one hand. Upon activation of the retraction mechanism, VanishPoint® syringes are rendered unusable, reducing the risk of disposal-related injuries or reuse.
EasyPoint® retractable needles offer unique safety benefits not found in other commercially available safety needles. Manually activated safety needles, such as BD’s SafetyGlide™ and Eclipse™ needles, and Medtronics’ Magellan™ needle, must be removed from the patient, exposing the contaminated needle prior to activation of the manual safety mechanism. EasyPoint® needles allow for activation of the automated retraction mechanism while the needle is still in the patient, reducing exposure to the contaminated needle and effectively reducing the risk of needlestick injuries. BD’s Integra™ needle allows for retraction from the patient but must be used in conjunction with a BD Integra™ 3mL syringe. The Integra™ needle does not have a luer fitting, making it incompatible with commonly used luer-fitting syringes and pre-filled syringes. In addition, the safety feature of the Integra™ needle/syringe combination can only be activated when the plunger handle is fully depressed and the contents have been expelled. EasyPoint® retractable needles are compatible with luer-fitting syringes, including pre-filled syringes. In addition, EasyPoint® retractable needles may be activated with fluid in the syringe, making it applicable for aspiration procedures such as blood collection.
Our safety needle products have several advantages over non-retracting safety needles, including, but not limited to: pre-removal activation; needle retraction; integrated safety mechanism; reuse prevention; ease of use; disposal safety and efficiency; and minimal training.
BD and Medtronic have controlling U.S. market share; greater financial resources; larger and more established sales, marketing, and distribution organizations; and greater market influence, including long-term and/or exclusive contracts. Additionally, BD may be able to use its resources to improve its products through research or acquisitions or develop new products which may compete with our products.
Several factors could materially and beneficially affect the marketability of our products. Demand could be increased by existing legislation and other legislative and investigative efforts. Licensing agreements could provide entry into new markets and generate additional revenue. Further, outsourcing arrangements could increase our manufacturing capacity with little or no capital outlay and provide a competitive cost.
We compete primarily on the basis of healthcare worker and patient safety, product performance, and quality. We believe our competitive advantages include, but are not limited to, our leadership in quality and innovation. We believe our products continue to be the most effective safety devices in today’s market. Our competitive position is weakenedVanishPoint® 1mL syringes meet the criteria set by pharmaceutical manufacturers for low dead space, which results in a reduction of wasted medication caused by residual medication remaining in the method that providers usesyringe after a dose has been administered. In some instances, the low dead space allows for making purchasing decisionsadditional doses to be obtained from a medication vial. Our syringe products include passive safety activation, require less disposal space, and are activated while in the fact that our initialpatient, reducing exposure to the contaminated needle. Our price per unit is competitive or even lower than the competition once all the costs incurred during the life cycle of a syringe are considered. Such life cycle costs include disposal costs, testing and treatment costs for ourneedlestick injuries, and treatment for contracted illnesses resulting from needlestick injuries.
EasyPoint® retractable needles offer unique safety benefits not found in other commercially available safety needles. Manually activated safety needles that compete with EasyPoint® must be removed from the patient, exposing the contaminated needle productsprior to activation of the manual safety mechanism. EasyPoint® needles allow for activation of the automated retraction mechanism while the needle is still in the patient, reducing exposure to the contaminated needle and effectively reducing the risk of needlestick injuries. EasyPoint® retractable needles are compatible with Luer-fitting syringes, including pre-filled syringes. In addition, EasyPoint® retractable needles may be higher than some ofactivated with fluid in the less effective safety needle products that are on the market.syringe, making it applicable for aspiration procedures such as blood collection.
Research and Development
We spent $572,000; $608,000; and $617,000 in 2016, 2015, and 2014, respectively, on research and development. Costs in 2016 were primarily for employee compensation and validation and engineering samples. Our ongoing research and development activities are performed by an internal research and development staff and includes developing process improvements for current and future automated machines. Our limited access to the market has slowed the introduction of products.
Environmental Compliance
We believe that we do not incur material costs in connection with compliance with environmental laws. We are considered a Conditionally Exempt Small Quantity Generator because we generate less than 100 kilograms (220 lbs.) of hazardous waste per month. Therefore, we are exempt from the reporting requirements set forth by the Texas Commission on Environmental Quality. The waste that is generated at our facility is primarily made up of flammable liquids and paint-related waste and is sent for fuel blending by Safety Kleen. This fuel blending process completely destroys our waste and satisfies our “cradle-to-grave” responsibility.
Other nonhazardous production waste includes clean polypropylene regrind, paper, and corrugated material that is recycled. All other nonhazardous waste produced is considered municipal solid waste and sent to a sanitary landfill by CWD.
We also produce small amounts of regulated biohazardous waste from contaminated sharps and laboratory wastes. This waste is sent for incineration by Stericycle.
Employees
As of March 1, 2017,9, 2021, we had 135182 employees. 133178 of such employees were full time employees. We provide equal employment opportunities to all employees and applicants for employment without regard to race, color, religion, gender, national origin, age, disability, marital status, ancestry, veteran status, workers’ compensation status or any other characteristic protected by federal, state, or local law. We have adopted a policy of zero tolerance for any form of unlawful discrimination or retaliation.
Financial Information about Geographic Areas
We have minimal long-lived assets in foreign countries. Shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit. We do 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. If customers designate a specific destination for its order, we attribute sales to countries based on the destination of shipment.
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| 2016 |
| 2015 |
| 2014 |
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U.S. sales |
| $ | 26,308,246 |
| $ | 23,029,976 |
| $ | 27,649,974 |
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North and South America sales (excluding U.S.) |
| 2,741,518 |
| 5,668,785 |
| 5,651,426 |
| |||
Other international sales |
| 776,872 |
| 853,439 |
| 1,219,230 |
| |||
Total sales |
| $ | 29,826,636 |
| $ | 29,552,200 |
| $ | 34,520,630 |
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|
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|
|
|
| |||
Long-lived assets |
|
|
|
|
|
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| |||
U.S. |
| $ | 11,930,293 |
| $ | 11,282,192 |
| $ | 10,642,859 |
|
International |
| $ | 161,744 |
| $ | 185,869 |
| $ | 209,994 |
|
Most large international sales of VanishPoint® products are filled by production from Chinese manufacturers. In the event that we become unable to purchase such product 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.
We do not maintain patent or trademark protection in all foreign countries, but, where possible, have taken steps to protect our patents and trademarks in those countries where we routinely conduct a material amount of business. Our lack of patent and trademark protection, particularly in certain foreign countries, heightens the risk that our designs may be copied by a competitor.
We cannot anticipate changes in trade policy from the current administration.
Available Information
We make available, free of charge on our website (www.retractable.com), our Form 10-K Annual Report and Form 10-Q Quarterly reportsReports and current reportsCurrent Reports on Form 8-K (and any amendments to such reports) as soon as reasonably practical after such reports are filed.
We could be subject to complex and costly regulatory activities. Our business could suffer if we or our suppliers encounter manufacturing problems. We could be subject to risks associated with doing business outside of the U.S. Current or worsening economic conditions may adversely affect our business and financial condition.
You should carefully consider the following material risks facing us. If any of these risks occur, our business, results of operations, or financial condition could be materially affected.
We Compete in a Marketplace Dominated by BD
We operate in an environment that is dominated by BD, the major syringe manufacturer in the U.S. We initiated a lawsuit in 2007 against BD. The suit was for patent infringement, antitrust practices, and false advertising. The court severed the patent claims from the other claims. The antitrust and false advertising claims resulted in a final judgment for $352 million plus prejudgment and post-judgment interest at the district court level, but on December 2, 2016, the Fifth Circuit Court of Appeals overturned the antitrust damages. The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled. The Eastern District of Texas trial date is May 11, 2017. Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.
Although we have made limited progress in some areas, such as the alternate care and some international markets, 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. We believe this is due to BD’s activities, despite our litigation efforts described briefly above.
We Have Generally Been Unable to Gain Sufficient Market Access to Achieve Profitable Operations
We have a history of incurring net operating losses. We may experience operating losses in the future. If we are unable to gain sufficient market access and market share, we may be unable to continue to finance research and development as well as support operations and expansion of production.
We Are Dependent on Our Aging Patent ProtectionChallenged by Uncertainties in Obtaining and Enforcing Intellectual Property Rights
Our main competitive strength is our technology. We are dependent on patent rights, and if the patent rights are invalidated or circumvented, our business would be adversely affected. Patent protection is considered, in the aggregate, to be of material importance in the design, development, and marketing of our products.
The Company holds exclusive rights under domestic and foreign patents and has pending applications related to the technology embodied in products that are currently marketed. The Company also holds rights related to new products under development. The patents exclusively licensed by the Company have varying remaining terms and expiration dates. While patents covering some features of the VanishPoint® syringes have recently expired, another patent with a later expiration date will continue to provide patent coverage for VanishPoint® syringes until 2020.
VanishPoint® syringes comprised 93.0%84.0% of our sales in 2016.2020. When the patents expireof the VanishPoint® syringes and we lose market exclusivity in 2020,other products expire, we may experience a significant and rapid loss of sales, from VanishPoint® syringes, whichand our competitive position in the marketplace may weaken if other competitors use our technology. Such occurrences could have a material adverse effect on our business.
Patent life may be extended, not through the original patents, but through related improvements. As our technology ages (and the associated patent life expires), our competitive position in the marketplace could weaken. The patent protection may decrease and make us vulnerable to other competitors utilizing our technology.profitability.
We do not maintain patent or trademark protection in all foreign countries, but, where possible, have taken steps to protect our patents and trademarks in those countries where we routinely conduct a material amount of business.market our products or where we believe other manufacturers are most likely to attempt to replicate our technology. Our lack of patent and trademark protection particularly in certain foreign countries heightens the risk that our designs may be copied by a competitor.competitor in those countries.
Our Patents Are Subject to Litigation
We have been sued by BD and MDC Investment Holdings, Inc. for patent infringement. This case has been administratively closed until our case against BD is resolved. Patent litigation and challenges involving our patents are costly and unpredictable and may deprive us of market exclusivity for a patented product or, in some cases, third party patents may prevent us from marketing and selling a product in a particular geographic area.
We Are Vulnerable to New Technologies
Because we have a narrow focus on particular product lines and technology (currently, predominantly retractable needle products), we are vulnerable to the development of superior competing products and to changes in technology which could eliminate or reduce the need for our products. If a superior technology is created, the demand for our products could greatly diminish.
Our Competitors Have Greater Resources
Our competitors have greater financial resources, larger and more established sales and marketing and distribution organizations, and greater market influence, including long-term contracts. These competitors may be able to use these resources to improve their products through research and acquisitions or develop new products, which may compete more effectively with our products. If our competitors choose to use their resources to create products superior to ours, we may be unable to sell our products and our ability to continue operations would be weakened.
The Majority of Our Sales Are Filled Using Third Party ManufacturersOperations May Be Affected by Foreign Trade Policy
Most international sales, as well as a substantial portionWe are subject to risks associated with foreign trade policy. In 2020, we used Chinese manufacturers to produce 85.2% of domestic sales,our products. We are filled by production from Chinese manufacturers. currently working to expand our U.S. manufacturing facility, however.
In the event that we become unable to purchase such product 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. Even with increased domestic production, we may not be able to avoid a disruption in supply. In 2016,
Trade protection measures, including tariffs, and/or changes to import or export requirements could materially adversely impact our operations. We cannot predict the 1mL and 3mL syringes made up 86.0%impact of potential changes to U.S. foreign trade policy. Additionally, we derive 9.8% of our unitrevenues from international sales. International sales, particularly in emerging market countries, are further subject to a variety of regulatory, economic, and 85.2% of our revenues. We have a strong relationship with our Chinese manufacturers and we communicate with them frequently.
Fluctuations in Supplies of Inventory Could Temporarily Increase Costspolitical risks as well.
Fluctuations in the cost and availability of raw materials and inventory and the ability to maintain favorable third party manufacturing arrangements and relationships could result in the need to manufacture all of our products in the U.S. This could temporarily increase unit costs as we ramp up domestic production.
We Are Controlled by One Shareholder
Thomas J. Shaw, our President and Chief Executive Officer, has investment or voting power over a total of 51.6%46.1% of the outstanding Common Stock. He has the right to buy one million additional shares (3.1%) pursuant to private stock sales from the Company.Stock as of March 12, 2021. Mr. Shaw therefore has the ability to direct our operations and financial affairs and significant influence to substantially influence the election ofelect members of our Board of Directors. His interests may not always coincide with the Company’s interests or the interests of other stockholders. This concentration of ownership, for example, may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially adversely affect
the market price of our Common Stock. Mr. Shaw’s rights under the Technology License Agreement, as the owner of the technology we produce, present similar conflicts of interest.
Current Economic Conditions May Decrease Collectability of AccountsOur Stock Has Recently Experienced Significant Price Fluctuation
Although we believeOur stock price experienced significant fluctuation during 2020 and may continue to be unpredictable. Our stock price fluctuated in 2020 from a low price in January of $1.36 per share to a high in December of $15.79 per share. As of March 12, 2021, the stock price was $13.65 per share. We expect that wethe overall increase is connected with our recent orders from the Department of Health and Human Services and the Technology Investment Agreement, a contract with the U.S. government described in Item 2 of this report (“TIA”). We do not have granted creditassurance that the TIA will translate into increased sales of our products. Additionally, the products sold to credit-worthy firms, current economic conditions may affect the timing and/or collectabilityDepartment of some accounts.Health and Human Services will be used in connection with administering a vaccine for COVID-19. We cannot predict our sales volumes if the country slows its immunization efforts.
Challenges from the Significant Orders
In 2020, the U.S. government was a significant customer representing 39.0% ($31.6 million) of our net sales. With additional 2021 deliveries under the HHS Order plus the new February 2021 contract from the U.S. government, the U.S. government will likely continue to be a materially significant customer in 2021. This presents unusual challenges to our business. Our 2021 performance under these orders will be somewhat dependent upon our timely completion of expansions to our facility and machinery, which we cannot guarantee will occur according to schedule. Moreover, in light of the government’s significant volume requirements, we may not be able to maintain our usual service levels to our existing customers. However, during 2020, we not only fulfilled obligations under the government’s order, but we also increased delivery volumes to existing customers.
We Face Inherent Product Liability Risks
As a manufacturer and provider of safety needle products, we face an inherent business risk of exposure to product liability claims. Additionally, our success depends on the quality, reliability, and safety of our products and defects in our products could damage our reputation. If a product liability claim is made and damages are in excess of our product liability coverage, our competitive position could be weakened by the amount of money we could be required to pay to compensate those injured by our products. In the event of a recall, we have recall insurance.
Our business may be affectedBusiness May Be Affected by changesChanges in the health care regulatory environmentHealth Care Regulatory Environment
In the U.S. and internationally, government authorities may enact changes in regulatory requirements, reform existing reimbursement programs, and/or make changes to patient access to health care, all of which could adversely affect the demand for our products and/or put downward pressure on our prices. In the U.S., significant debate surrounds the repeal and/or replacement of the Affordable Care Act. Future health carehealthcare rulemaking could affect our business. We cannot predict the timing or impact of any future rulemaking or changes in the law.
InternationalWe May Experience Losses in Our Investment Account
Our investment portfolio is subject to market risk. As a result, the value and liquidity of our cash equivalents and marketable securities could fluctuate substantially. Likewise, our other income and expenses could vary materially depending on gains or losses realized on the sale or exchange of investments and other factors. Increased volatility in the financial markets and overall economic uncertainty could increase the risk that actual amounts realized on our investments may differ from the fair values currently assigned to them. Because 31.5% of our liquid assets are invested in the market, fluctuations in market values could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
Health Crises Could Have an Adverse Effect on Our Business
Particularly during 2020, several states and local jurisdictions imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Although our manufacturing facility has continued to operate during the 2020-2021 COVID-19 pandemic due to its status as an essential business, we continue to monitor the evolving
situation and cannot guarantee that the situation would be the same for any future pandemic. In the future, we may elect or be required to close temporarily which would result in a disruption in our activities and operations. Our supply chain, including transportation channels, may be impacted by any such restrictions as well. Any such disruption could impact our sales and operating results.
Widespread health crises also negatively affect economies which could affect demand for our products. With a new contract in place for 2021 sales directly to the U.S. government, our risk is somewhat mitigated for the 2021 year. However, in the event of a resurgence of this disease or in the case of any future pandemic, there is no guarantee that revenues from syringes needed for vaccines would offset the effects to our business of a global economic decline.
Health systems and other healthcare providers in our markets that provide procedures that use our products have suffered financially and operationally and may not be able to return to pre-pandemic levels of operations. Travel and import restrictions may also disrupt our ability to manufacture or distribute our devices. Any import or export or other cargo restrictions related to our products or the raw materials used to manufacture our products could restrict our ability to manufacture and ship products and harm our business, financial condition, and results of operations.
Our key personnel and other employees could still be affected by legislationCOVID-19 or any future pandemic, which could affect our ability to operate efficiently. In addition, the conduct of clinical trials and/or regulatory reviews of our new products may continue to be affected by the COVID-19 pandemic and would be affected in any future pandemic. Our sales and marketing personnel often rely on in-person and onsite access to healthcare providers which is currently restricted as hospitals are still not operating at pre-pandemic levels.
Disruption of Critical Information Systems or Material Breaches in the Security of Our Systems Could Harm Our Business, Customer Relations, and Financial Condition
Information technology helps us operate efficiently, interface with customers and suppliers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do not effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our internal and external operating results. Third parties may attempt to fraudulently induce employees or customers into sensitive information, which may in turn be used to access our information technology systems. In addition, unauthorized persons may attempt to hack into our systems to obtain our confidential or proprietary information or confidential information we hold on behalf of third parties. If the unauthorized persons successfully hack into or interfere with our system, we may experience a negative impact to our business and reputation. We have programs in place to detect, contain, and respond to data security incidents, and we make ongoing improvements to our systems in order to minimize vulnerabilities, in accordance with industry and regulatory standards. However, we may not be able to anticipate and prevent these intrusions or mitigate them when and if they occur. We also rely on external vendors to supply and/or support certain aspects of our information technology systems. The systems of these external vendors may contain defects in design or manufacture or other problems that could unexpectedly compromise information security of our own systems, and we are dependent on these third parties to deploy appropriate security programs to protect their systems. It is possible for such vulnerabilities to remain undetected for an extended period, including several years or longer. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, ransomware and other malicious software programs, and security vulnerabilities could be significant. Our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, cessation of service, and harm to our business operations. Depending on the type of breach, we could also be exposed to a risk of loss or litigation and potential liability, which could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
Illegal Distribution and Sale by Third Parties of Counterfeit Versions of Our Products Could Have A Negative Impact
Third parties may illegally distribute and sell counterfeit versions of our products which do not meet our rigorous manufacturing and testing standards. Our reputation and business could suffer harm as a result. In addition, diversion of products into other channels may result in reduced revenues.
We Are Subject to Various Risks Related To The PPP Loan.
Under our promissory note in favor of Independent Bank pursuant to the Paycheck Protection Program (the “PPP Loan”), we will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA. There can be no assurance that we will be eligible or able to take advantage of certain of the changes under the PPP Flexibility Act. The PPP Loan application required us to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP Loan and that our receipt of the PPP Loan is consistent with the broad objectives of the PPP of the CARES Act, the certification described above does not contain any objective criteria and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are found to have been ineligible to receive the PPP Loan or in violation of any of the laws or governmental regulations that apply to us in connection with the PPP Loan, including the False Claims Act, we may be subject to administrative penalties and could be required to repay the PPP Loan. Our request for loan forgiveness remains subject to audit and review by governmental entities.
General Risk Factors
We face risk factors common to other U.S. businesses. We could be subject to complex and costly regulation. Our business could suffer if we or our suppliers encounter manufacturing problems or disruptions to transportation channels. We could be subject to risks associated with doing business outside of the U.S, including risks associated with global economic, regulatory, or political changes, or health crises. Current or worsening economic conditions may adversely affect our international operations. In 2016, we used Chinese manufacturers to produce 78.4% of our products. Trade protection measures and/or changes to import or export requirements could adversely impact our operations. We cannot predict changes in U.S. foreign trade policy, but some trade protection measures have been recently discussed by the current administration. Additionally, we derive 11.8% of our revenues from international sales. International sales, particularly in emerging market countries, are further subject to a variety of regulatory, economic,business and political risks as well.financial condition.
Our new products may not replace lost VanishPoint® sales after 2020
Patent coverage for VanishPoint® syringes will expire in 2020. Following the patent expiration, expected declines in sales of VanishPoint® syringes, which currently comprise 93.0% of our revenues, means that our future success is dependent on new products. We have engaged in research and development for many years to develop other commercially successful products. Often, new products take a number of years to develop and sales of a new
product may be disappointing. Based on industry-wide trends, we anticipate that demand may increase for one of our newer products, the EasyPoint® needle, but sales in 2016 for this product were only 4.5% of our total revenues.
Item 1B. Unresolved Staff Comments.
Not applicable and none.
Our headquarters isare located at 511 Lobo Lane, on 35 acres, which we own, overlooking Lake Lewisville in Little Elm, Texas. The headquarters isare in good condition and houses our administrative offices and manufacturing facility. The manufacturing facility produced approximately 21.6%14.8% of the units that were manufactured in 2016.2020. In the event that we become unable to purchase product 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. The 5mL and 10mL syringes are sold principally in the international market. In 2016, we used approximately 18.0% of our current U.S. productive capacity.
A loan in the original principal amount of approximately $4,210,000 is secured by our land and buildings. See Note 78 to our financial statements for more information.
In the opinion of Management, the property and equipment are suitable for their intended use and are adequately covered by an insurance policy.
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 $53,664,286 in government funding for expanding our domestic production of needles and syringes. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. We have substantially completed construction of new controlled environment facilities and have begun construction of additional warehousing facilities which should be completed within the second quarter of 2021. The estimated cost of the controlled environment within existing properties is $6.4 million, and construction of the new warehouse is estimated to be $5.8 million. The cost of the controlled environment will be funded by the U.S. government under the TIA, while the cost of the new warehouse will be our financial obligation.
In May 2010, our and Mr. Shaw’s suit against BD inPlease refer to Note 10 to the U.S. District Court for the Eastern District of Texas, Marshall Division alleging violations of antitrust acts, false advertising, product disparagement, tortious interference, and unfair competition was reopened. The trial commenced on September 9, 2013, in the U.S. District Court for the Eastern District of Texas, Tyler Division, and the jury found that BD illegally engaged in anticompetitive conduct with the intent to acquire or maintain monopoly power in the safety syringe market and engaged in false advertising under the Lanham Act. The jury awarded us $113,508,014 in damages, which was trebled pursuant to statute. The Court granted injunctive relief to take effect January 15, 2015. In doing so, the Court found that BD’s business practices limited innovation, including false advertisements that suppressed sales of the VanishPoint®. The specific injunctive relief includes: (1) enjoining BD’s use of “World’s Sharpest Needle” or any similar assertion of superior sharpness; (2) requiring notification to all customers who purchased BD syringe products from July 2, 2004, to date that BD wrongfully claimed that its syringe needles were sharper and that its statement that it had “data on file” was false and misleading; (3) requiring notification to employees, customers, distributors, GPOs, and government agencies that the deadspace of the VanishPoint® has been within ISO standards since 2004 and that BD overstated the deadspace of the VanishPoint® to represent that it was higher than some of BD’s syringes when it was actually less, and that BD’s statement that it had “data on file” was false and misleading, and, in addition, posting this notice on its websitefinancial statements for a period of three years; (4) enjoining BD from advertising that its syringe products save medication as compared to VanishPoint® products for a period of three years; (5) requiring notification to all employees, customers, distributors, GPOs, and government agencies that BD’s website, cost calculator, printed materials, and oral representations alleging BD’s syringes save medication as compared to the VanishPoint® were based on false and inaccurate measurement of the VanishPoint®, and, in addition, posting this notice on its website for a period of three years; and (6) requiring the implementation of a comprehensive training program for BD employees and distributors that specifically instructs them not to use old marketing materials and not to make false representations regarding VanishPoint® syringes. Final judgment was entered on January 15, 2015, awarding us $340,524,042 in damages and $11,722,823 in attorneys’ fees, as well as granting injunctive relief consistent with the orders as indicated above. The parties stipulated that the amount of litigation costs recoverable by us is $295,000. On January 14, 2015, the District Court stayed the portion of the injunctive relief that requires BD to notify end-user customers but also ordered BD to comply with internal correction activities as well as mandatory disclosures as set out above to its employees, customers, distributors and Group Purchasing Organizations. BD filed an appeal of that ruling with the 5th Circuit Court of Appeals and that appeal was denied on February 3, 2015. On February 12, 2015, BD filed a motion to amend the judgment directed most specifically to the
issue of award of prejudgment interest. On April 23, 2015, the Court entered an Amended Final Judgment that removed prejudgment interest but kept all other monetary and injunctive relief the same as was granted in the original Final Judgment. BD filed its brief in the appeal on July 20, 2015. Oral argument occurred on Monday, February 29, 2016. On December 2, 2016, the 5th Circuit Court of Appeals overturned the antitrust damages. The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled. The Eastern District of Texas trial date is May 11, 2017. Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.
In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued us in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that we are infringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seek injunctive relief and unspecified damages. We counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patents. The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and we subsequently dropped our counterclaims for unenforceability of the asserted patents. On June 30, 2015, the Court ordered that further proceedings in this matter be stayed and that this case remain administratively closed until resolutioncomplete description of all appeals in the case detailed in the preceding paragraph. The case remains stayed as a result of the ongoing proceedings regarding the Lanham Act claims in the separate proceeding described above.legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
MARKET INFORMATION
Our Common Stock has been listed on the NYSE MKTAmerican (or its predecessor entities) under the symbol “RVP” since May 4, 2001. Our closing price on March 1, 2017, was $1.04 per share. Shown below are the high and low sales prices of our Common Stock as reported by the NYSE MKT for each quarter of the last two fiscal years:
2016 |
| High |
| Low |
| ||
Fourth Quarter |
| $ | 2.74 |
| $ | 0.88 |
|
Third Quarter |
| $ | 2.79 |
| $ | 2.10 |
|
Second Quarter |
| $ | 2.90 |
| $ | 2.13 |
|
First Quarter |
| $ | 3.15 |
| $ | 2.10 |
|
2015 |
| High |
| Low |
| ||
Fourth Quarter |
| $ | 3.85 |
| $ | 2.77 |
|
Third Quarter |
| $ | 4.34 |
| $ | 3.60 |
|
Second Quarter |
| $ | 4.55 |
| $ | 3.73 |
|
First Quarter |
| $ | 5.70 |
| $ | 3.80 |
|
SHAREHOLDERS
As of March 1, 2017,12, 2021, there were 31,666,45433,982,604 shares of Common Stock held by 204184 shareholders of record, not including shareholders who beneficially own Common Stock held in nomineeCede & Co. participants or “street name.”beneficial owners thereof.
DIVIDENDS
We have not ever declared or paid any dividends on the Common Stock. We have no current plans to pay any cash dividends on the Common Stock. We intend to retain all earnings, except those required to be paid to the holders of the Preferred Stock as resources allow, to support operations and future growth. Dividends on Common
Stock cannot be paid so long as preferred dividends are unpaid. As of December 31, 2016,2020, there was an aggregate of $10.8$5.0 million in preferred dividends in arrears. As of December 31, 2015,2019, there was an aggregate of $10.3$12.3 million in preferred dividends in arrears.
EQUITY COMPENSATION PLAN INFORMATION
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a chart describingThe following table sets forth information relating to our equity compensation plans under which equity securities are authorized.as of December 31, 2020:
Equity Compensation Plan Information
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | ||||||||||
| Plan category | (a) | (b) | (c) | |||||||||
| Equity compensation plans approved by security holders | 199,450 | $2.05 | — | |||||||||
| Total | 199,450 | $2.05 | — | |||||||||
Stock Performance Graph
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return for our Common Stock (RVP) from December 31, 20112015 to December 31, 2016,2020, to the total returns for the Russell Microcap® and Becton, Dickinson and Company (or “BDX”), a peer issuer. The graph assumes an investment of $100 in the aforementioned equities as of December 31, 2011,2015, and that all dividends are reinvested.
RECENTUNREGISTERED SALES OF UNREGISTEREDEQUITY SECURITIES AND USE OF PROCEEDS
No unregistered securities were sold duringIn addition to the transactions disclosed previously in Item 2 of Part II of the Quarterly Reports on Form 10-Q, in October 2020, we purchased a total of 30,000 shares of Series IV Preferred Stock and 25,000 shares of Series V Preferred Stock from six shareholders in exchange for a total of $400,000 (of which $303,330 is to be paid over a three-year period covered by this report.beginning February 2021) and 110,000 shares of Common Stock. Such preferred shareholders agreed to waive all unpaid dividends in arrears associated with their Preferred Stock, which resulted in a waiver of a total of $757,759 in unpaid dividends in arrears.
In December 2020, we purchased a total of 20,000 shares of Series III Preferred Stock, 5,000 shares of Series IV Preferred Stock, and 9,000 shares of Series V Preferred Stock from five shareholders in exchange for a total of $286,000 and 34,000 shares of Common Stock. Such preferred shareholders agreed to waive all unpaid dividends in arrears associated with their Preferred Stock, which resulted in a wavier of a total of $592,892 in unpaid dividends.
We are relying on Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”) to exempt the foregoing transactions from the registration requirements of the Securities Act.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
TherePurchases by affiliate(s) during 2020 were nonot repurchases duringby or on behalf of the period covered by this report.issuer.
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| December 31, 2020(1) | 14,300 | $7.50(2) | 14,300 | 0 |
(1) On November 24, 2020, we delivered to holders of Class B Series I Preferred Stock a Notice of Redemption notifying such preferred shareholders that, pursuant to the Certificate of Designation for the Series I Preferred Stock, we determined to redeem all Series I Preferred Stock. The redemption date was December 31, 2020. The redemption was publicly announced on Form 8-K on December 1, 2020.
(2) Not all Series I Preferred Shareholders have submitted adequate documentation to receive the redemption payments.
Item 6. Selected Financial Data.
The following selected financial data is qualified by reference to, and should be read in conjunction with, our audited financial statements and the notes to those statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein. The selected Statements of Operations data presented below for the years ended December 31, 2013 and 2012 and the Balance Sheet data as of December 31, 2014, 2013, and 2012 have been derived from our audited financial statements, which are not included herein.Not required.
(In thousands except for earnings per share, shares, and percentages)
|
| As of and for the Years Ended December 31, |
| |||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 |
| |||||
Sales, net |
| $ | 29,827 |
| $ | 29,552 |
| $ | 34,521 |
| $ | 30,785 |
| $ | 33,644 |
|
Cost of sales |
| 19,485 |
| 18,987 |
| 22,499 |
| 20,475 |
| 22,468 |
| |||||
Gross profit |
| 10,342 |
| 10,565 |
| 12,022 |
| 10,310 |
| 11,176 |
| |||||
Total operating expenses |
| 13,849 |
| 13,773 |
| 14,180 |
| 16,241 |
| 15,115 |
| |||||
Loss from operations |
| (3,507 | ) | (3,208 | ) | (2,158 | ) | (5,931 | ) | (3,939 | ) | |||||
Interest income |
| 26 |
| 25 |
| 34 |
| 39 |
| 47 |
| |||||
Interest expense, net |
| (213 | ) | (220 | ) | (223 | ) | (231 | ) | (231 | ) | |||||
Litigation proceeds |
| — |
| 7,725 |
| — |
| — |
| — |
| |||||
Income (loss) before income taxes |
| (3,694 | ) | 4,322 |
| (2,347 | ) | (6,123 | ) | (4,123 | ) | |||||
Provision (benefit) for income taxes |
| 1 |
| 8 |
| 8 |
| 91 |
| 10 |
| |||||
Net income (loss) |
| (3,695 | ) | 4,314 |
| (2,355 | ) | (6,214 | ) | (4,133 | ) | |||||
Deemed capital contribution on extinguishment of preferred stock |
| — |
| 2,306 |
| — |
| — |
| — |
| |||||
Preferred Stock dividend requirements |
| (705 | ) | (709 | ) | (915 | ) | (916 | ) | (918 | ) | |||||
Income (loss) applicable to common shareholders |
| $ | (4,400 | ) | $ | 5,911 |
| $ | (3,270 | ) | $ | (7,130 | ) | $ | (5,051 | ) |
Earnings (loss) per share — basic |
| $ | (0.15 | ) | $ | 0.21 |
| $ | (0.12 | ) | $ | (0.26 | ) | $ | (0.19 | ) |
Earnings (loss) per share — diluted |
| $ | (0.15 | ) | $ | 0.20 |
| $ | (0.12 | ) | $ | (0.26 | ) | $ | (0.19 | ) |
Weighted average shares outstanding — basic |
| 29,354,437 |
| 27,822,593 |
| 27,375,450 |
| 26,999,698 |
| 26,219,728 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average shares outstanding — diluted |
| 29,354,437 |
| 29,481,294 |
| 27,375,450 |
| 26,999,698 |
| 26,219,728 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets |
| $ | 26,677 |
| $ | 30,811 |
| $ | 33,983 |
| $ | 37,660 |
| $ | 35,194 |
|
Current liabilities |
| $ | 7,172 |
| $ | 8,096 |
| $ | 15,100 |
| $ | 16,621 |
| $ | 8,077 |
|
Property, plant, and equipment, net |
| $ | 12,092 |
| $ | 11,468 |
| $ | 10,853 |
| $ | 10,910 |
| $ | 11,900 |
|
Total assets |
| $ | 38,779 |
| $ | 42,294 |
| $ | 45,106 |
| $ | 48,850 |
| $ | 47,385 |
|
Long-term debt, net of current maturities |
| $ | 3,498 |
| $ | 3,417 |
| $ | 3,425 |
| $ | 3,577 |
| $ | 3,826 |
|
Stockholders’ equity |
| $ | 28,108 |
| $ | 30,781 |
| $ | 26,581 |
| $ | 28,653 |
| $ | 35,482 |
|
Redeemable Preferred Stock (in shares) |
| 781,445 |
| 781,445 |
| 987,445 |
| 994,945 |
| 1,001,552 |
| |||||
Capital leases |
| — |
| — |
| — |
| — |
| — |
| |||||
Cash dividends per common share |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Gross profit margin |
| 34.7 | % | 35.8 | % | 34.8 | % | 33.5 | % | 33.2 | % | |||||
Events that could affect the trends indicated above include changes in manufacturing costs, changing average sales prices, changing raw material cost, the gaining of market access, protection of our patents, foreign currency exchange rates, the Medical Device Excise Tax, the impact of flu season requirements, new or changing regulations, and new products. As our products are made from petroleum products, the changing cost of oil and transportation may have an impact on our costs to the extent increases may not be recoverable through price
increases of our products and reductions in oil prices may not quickly affect petroleum product prices. Our purchase of 200,000 shares of our Preferred Stock in 2015 reduced Preferred Stock Dividend Requirements. The receipt of $7,724,826 from BD pursuant to litigation affects both the current assets and current liabilities in 2013 and 2014. The recognition of the $7,724,826 in the second quarter of 2015 had a significant impact on 2015 income. The introduction of the Medical Device Excise Tax in 2013 affects comparability between 2013 and prior years. The Medical Device Excise Tax was suspended for two years beginning January 1, 2016. In 2014, we took steps to decrease our non-litigation legal costs by approximately $1.1 million. Additionally, in 2014, we reduced our workforce by 13.7% in an effort to cut costs. Any recovery from BD in our lawsuit against them, if received, could materially affect our future financial condition. Future legal expenses are expected to be lower in 2017 due to an anticipated reduction in litigation fees. Some increases in compensation were instituted in 2016 and 2017, both for existing employees and new hires.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
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, the impact of COVID-19 on all facets of logistics and operations, as well as costs, our ability to complete capital improvements and ramp up domestic production in response to government agreements, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, 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 BD,Becton, Dickinson and Company ("BD"), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.Factors. Given these uncertainties, undue reliance should not be placed on forward-looking statements.
Overview
We have been manufacturing and marketing our products since 1997. SafetyVanishPoint® syringes comprised 93.0%84.0% of our sales in 2016.2020. EasyPoint® products accounted for 11.8% of sales in 2020. We also manufacture and market thea 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 a new product, the EasyPoint�� needle. EasyPoint® needles made up 4.5% of revenues in 2016. 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. According to a December 2016 press release from Zion Market Research, prefilled syringes play an important role in the injectable drug delivery devices market and the compound annual growth rate is expected to be approximately 9.5% between 2016 and 2021. The global market size for prefilled syringes was approximately 4.1 billion units ($3.5 billion) in 2015. A March 2016 article published in Medical Design Technology details the benefits of the EasyPoint® needle as well as the existing VanishPoint® syringe. The article states, “for the first time, clinicians will be able to change needles and have the safety of automated needle retraction.” The article is available on the Resource Center link on our website at www.retractable.com.
Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.
Our products have been and continue to be distributed nationally and internationally through numerous distributors. Although
On May 1, 2020, we were awarded the HHS 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. As of December 31, 2020, we recorded sales of $31.6 million under the 2020 HHS Order, representing 39.0% of our overall revenues
for 2020, and we expect the remaining sales under the HHS Order in 2021. During 2020 and through March 2021, we have made limited progress in some areas, such astimely completed our delivery obligations under 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.HHS Order.
We continueThe Department of Health and Human Services awarded us another contract on February 12, 2021 to pursue various strategiessupply low dead space safety syringes for COVID-19 vaccination efforts. The base price for the contract and purchase order is $54,217,800 for the five-month base period of performance (February 15, 2021 to have better access toJuly 14, 2021). Such price includes both the hospital market,fixed price for the products as well as other markets,cost reimbursement for freight. The terms of the contract allow for extensions at the option of the U.S. government for up to seven additional one-month periods. If all option periods are exercised, the value of the contract could increase by an additional $92,772,680, including attempting to gain accessthe price of the products and freight reimbursement. For each period, the freight cost is estimated at approximately 25% of the overall price.
Effective July 1, 2020, we entered into the 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 $53,664,286 in government funding for expanding our domestic production of needles and syringes. Pursuant to the market through our sales efforts, our innovative technology, introductionterms of new products, and, when necessary, litigation.
We have reported in the past that our progress is limited principally due to the practices engaged in by BD, the dominant maker and seller of disposable syringes. We initiated a lawsuit in 2007 against BD. As previously reported, on December 2, 2016, the Fifth Circuit Court of Appeals overturned a district court judgment that had previously awarded us $340 million in antitrust damages from BD, but affirmed a finding of false advertising liability against BD and remanded the case to the Eastern District of Texas for a redetermination as to the amount of damages to whichTIA, we are entitled. The Eastern Districtexpecting to make significant additions to our facilities which should allow us to increase domestic production. Additionally, the TIA provides for reimbursement for equipment and supplies. As of Texas trial date is May 11, 2017. Our petitionearly March 2021, we have negotiated contracts for certiorari to the U.S. Supreme Court was denied on March 20, 2017.
We have taken steps to reduce our future litigation expensespurchase of automated assembly equipment, molds, and expect such expenses to be significantly less in 2017.
In 2014, the Company took steps to decrease non-litigation legal costs by approximately $1.1 million. In 2014 and 2015, the Company reduced its workforce to further cut costs. In the future, if such cost cutting measures prove insufficient, we may reduce other operating expenses, reduce the workforce, reduce the salaries of officersmolding equipment, as well as other employees, and/or defer royalty payments. Some increasesportions of auxiliary equipment, for approximately $42.1 million. As of March 2021, we have substantially completed construction of expanded facilities consisting of approximately 27,800 square feet of additional controlled environment within existing properties and we expect to complete approximately 55,000 square feet of new warehouse space within the second quarter of 2021. The estimated cost of the controlled environment within existing properties is $6.4 million. The increase from the original $6 million estimate is due to change orders and an expedited completion date in compensation were made in 2016 and 2017.order to receive certain manufacturing equipment at an earlier date. The cost of the controlled environment will be funded by the U.S. government under the TIA, while the cost of the new warehouse will be our financial obligation.
The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium onBoth of the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191. Thus, the medical device excise tax was suspended beginning on January 1, 2016 and ending on December 31, 2017. The impact of this tax was $360,000 in 2015.
We reevaluated several compensation strategies in late 2016 and early 2017. See Compensation Discussion and Analysis. We also approved three of our executive officers to purchase shares directlyabovementioned orders from the Company. Thomas J. Shaw exercised a portionDepartment of such right on January 12, 2017, buying two million shares at market priceHealth and Human Services as well as the TIA from the U.S. government are material events particular to the COVID-19 pandemic and may not be indicative of future operations. While the addition of manufacturing equipment and facilities will greatly increase our production capacity, we cannot be assured that there will be increased demand for an aggregate purchase price of $1.78 million. In April 2016, Mr. Shaw exercised an option for one million shares for an aggregate exercise price of $810,000.
We exchanged 728 thousand shares of our Common Stock for 200 thousand shares of our Series IV Class B Convertible Preferred Stock as of November 30, 2015 pursuant to an agreement with a shareholder. Such shareholder agreed to waive all unpaid dividends in arrears associated withproducts once orders from the tendered preferred stock, equaling $3.1 million. Future dividend requirements of $200 thousand per yearU.S. government have been filled. If future orders are avoided as a result of this transaction.not placed by the U.S. government and orders from new and existing customers do not materialize, we would have significant excess productive capabilities.
On April 17, 2020, we entered into the PPP Loan in the principal amount of $1,363,000 in favor of Independent Bank 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’s original maturity date is April 17, 2022 and bears interest at a rate of 1.0% per annum. We have applied for forgiveness for the entirety of the loan granted under the PPP. We cannot be certain of the amount, if any, which may be forgiven.
As detailed in Note 4 to the financial statements, we held $8.1 million in debt and equity securities as of December 31, 2020, which represented 11.6% of our current assets. We continually monitor our invested balances.
During 2020, we hired 48 new full-time employees, predominantly as production line workers, and terminated several back office employees. We also moderately increased non-executive pay. The net effect of these actions caused a net increase of approximately $1.8 million in our operating expenses for 2020 as compared to 2019.
Historically, unit sales have increased during the flu season. We cannot determine what percent of our increase in domestic sales (excluding the HHS Order) in the second half of 2020 were attributable to flu shots versus preparation for a COVID-19 vaccine.
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 2016,2020, our primary Chinese manufacturermanufacturers produced approximately 86.3%85.2% of our VanishPoint® syringes.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.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.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 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.
RESULTS OF OPERATIONS
The following discussion contains 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 the forward-looking statements. All period references are to our fiscal years ended December 2016, 2015, or 2014.2020 and 2019. Dollar amounts have been rounded for ease of reading.
Comparison of Year Ended
December 31, 20162020 and Year Ended December 31, 20152019
Domestic sales, including sales to the U.S. government, accounted for 88.2%90.2% and 77.9%76.3% of the revenues in 20162020 and 2015,2019, respectively. Domestic revenues increased 14.2%131.4% principally due to sales of our 1 mL syringe and EasyPoint® needles.increased volumes. Domestic unit sales increased 15.6%120.0%. Domestic unit sales were 83.3%85.9% of total unit sales for 2016.2020. Domestic unit sales excluding the HHS Order rose approximately 36.4%. International revenues decreased from $6.5 million18.6% representing a return to normal levels after unusually high volumes in 2015 to $3.5 million in 2016, primarily due to fluctuation in the timing of orders. Overall unit sales decreased 7.0%.2019. Our international orders may be subject to significant fluctuation over time. Such orders may fluctuate dueOverall unit sales increased 74.0%. Other than the Department of Health and Human Services, our increased sales are predominantly attributable to health initiatives at various timesexisting customers as well as economic conditions.several new smaller customers who do not operate as distributors. Our sales under the HHS Order were approximately $31.6 million in 2020 and we expect the remaining sales under the HHS Order in 2021, as well as orders of at least $54.2 million under the new February 2021 contract.
Cost of manufactured product increased $448 thousand62.7% principally due to higher manufacturing costs.an increase in units sold. Royalty expense increased $50 thousand58.7% due to increased gross sales. Gross profit margins decreasedincreased from 35.8%33.8% in 20152019 to 34.7%45.2% in 2016.2020 principally due to an overall increase in sales.
Operating expenses increased 0.6%15.9% from the prior year due substantially to an impairment chargeincreased headcount and other employee-related expenses attributable to a larger volume of $456 thousand,orders and the expansion activities required by the TIA.
Income from operations was $24.1 million in 2020 compared to income from operations of $3.0 million in 2019 due to the increase in net revenues and resulting gross profit.
Interest and other income increased $1.8 million for the year ended December 31, 2020 compared to the same period last year principally due unrealized gains from our investments.
For the year ended December 31, 2020, we recorded a provision for income taxes of $1,850,234. For a detailed description of the determination and components of calculating the provision, please refer to Note 11 of the financial statements.
During 2020, we engaged in private purchase agreements to purchase shares of outstanding preferred stock option expense, consulting costs,in exchange for cash consideration and 401(k) plan matching expense.the issuance of new common stock. We repurchased a total of 22,500 shares of Series III Class B Convertible Preferred Stock, 342,500 shares of Series IV Class B Convertible Preferred Stock,
and 34,000 shares of Series V Class B Convertible Preferred Stock. The impairment chargeaggregate cash consideration equaled $3,786,000, of $456 thousandwhich $482,670 was paid in 2020 with the remainder payable over a three-year period beginning in February 2021. The aggregate consideration was 754,000 shares of Common Stock. As a result of the transactions, $7,642,049 in unpaid dividends were waived by the shareholders, as measured from the effective date of the transactions. In connection with the transactions, the difference between the fair value of the consideration transferred to the preferred shareholders and the carrying amount of the preferred stock was added to net income available to common shareholders as a deemed capital contribution for the purpose of the calculation of earnings per share. As a result of the described transactions, a total of $2,975,708 was included in the calculation of Income (loss) applicable to common stockholders. Amounts payable as the result of our purchase of preferred stock also comprises a portion of the long-term liabilities set forth on our Balance Sheets. As further discussed in Note 9 of the financial statements, the long-term liabilities of $24,478,697 also includes amounts related to Patient Safe® assembly equipment. These expenses were largely offset by decreasesreimbursements from the U.S. government in connection with the Medical Device Excise tax of $360 thousand, severance pay, professional fees, and bonus pay.TIA.
A non-recurring recognitioncomparison of $7,724,826 receivedthe results of operations for the years ended December 31, 2019 and December 31, 2018 is omitted from BDthis discussion. Such comparison was included in our Annual Report on Form 10-K filed with the second quarterSEC on March 30, 2020 in Item 7 of 2015 pursuant to a patent infringement case had a significant impact on 2015 income. Recognizing this payment also significantly decreased 2015 current liabilities on the Balance Sheets.Part II thereof.
LIQUIDITY AND CAPITAL RESOURCES
In 2015, earnings per share was positively affected by our acquisitionDiscussion of 200,000 sharesStatement of IV Class B convertible preferred stock. Under the guidelines of ASC 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, we reflected the gain on extinguishment of this preferred stock in net income per common stockholder used to calculate earnings per share. This accounting treatment had the effect of increasing the income applicable to common shareholders by $2.3 million in 2015 which had a material effect on the determination of earnings per share for that year.
The loss from operations was $3.2 million in 2015 compared to an operating loss of $3.6 million in 2016.Cash Flow Items
Cash flow from operations was a negative $795 thousand for 2016$19.0 million in 2020, principally due to our Net loss, mitigatednet income for the year. The increase in cash was offset by noncash expense consisting principallyan increase in accounts receivable, largely driven by the HHS Order. There was also an increase in inventory. Additionally, we have recorded a deferred tax asset of Depreciation, Impairment$4,631,206 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. The determination and calculation of assets, Share based compensation, and reduced working capital.
Comparison of Year Ended
December 31, 2015 and Year Ended December 31, 2014
Domestic sales accounted for 77.9% and 80.1%such asset is further discussed in Note 11 of the revenues in 2015 and 2014, respectively. Domestic revenues decreased 16.7% principally due to reduced flu demand. Domestic unit sales decreased 17.6%. Domestic unit sales were 67.0% of total unit sales for 2015. International revenues decreased from $6.9 million in 2014 to $6.5 million in 2015, primarily due to more restrictive qualification requirements by the Company. Overall unit sales decreased 11.9%. Our international orders may be subject to significant fluctuation over time. Such orders may fluctuate due to health initiatives at various times as well as economic conditions.
Cost of manufactured product decreased $3.3 million principally due to lower volumes. Royalty expense decreased $251 thousand due to decreased gross sales. Gross profit margins increased from 34.8% in 2014 to 35.8% in 2015.
Operating expenses decreased 2.9% from the prior year due to decreased Medical Device Excise Taxes attributable to refunds, lower compensation costs, and lower travel and entertainment costs.
A non-recurring recognition of $7,724,826 received from BD in the second quarter of 2015 pursuant to a patent infringement case had a significant impact on 2015 income. Recognizing this payment also significantly decreased 2015 current liabilities on the Balance Sheets.
The loss from operations was $3.2 million in 2015 compared to an operating loss of $2.2 million in 2014.
Earnings per share were positively affected by our acquisition of 200,000 shares of IV Class B convertible preferred stock. Under the guidelines of ASC 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, we reflected the gain on extinguishment of this preferred stock in net income per common stockholder used to calculate earnings per share.financial statements.
Cash flow from operationsused by investing activities was a negative $3.3$19.3 million for 2015the year ended December 31, 2020 due primarily to the losspurchase of property, plant and equipment, but offset by the net proceeds from operationsthe sales and changespurchases of debt and equity securities. The $21.0 million impact to cash from the purchase of such fixed assets reflects down payments on orders for certain assets detailed in working capital, namely increased inventories and other current assets, mitigated by a decreasethis report in Accounts receivable and an increase in Accounts payable.connection with the TIA.
LIQUIDITY AND CAPITAL RESOURCESCash provided by financing activities was $12.0 million for the year ended December 31, 2020. This was primarily due to the proceeds from the PPP Loan, proceeds from the exercise of stock options, and proceeds from the government under the TIA for down payments on our orders for fixed assets.
At the present time, Management does not intend to publicly raise equity capital. Due to the funds received from prior litigation, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing, when available, as the primary ongoing sources of cash. Our ability to obtain additional funds through loans is uncertain. We cannot predict any recovery of damages in our litigation against BD at this time. The ultimate outcome of this suit could have a material effect on our financial condition.
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 routinely achieve 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 order to reduce costs.
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 21.6%) of our products in the U.S. 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. Typically, largeSome international sales of VanishPoint®our products are shipped directly from China to the customer. Purchases of product manufactured in China usually decrease the average cost of manufacture for all units. The number of units produced by us versus manufactured in China can have a significant effect on the carrying costs of inventoryInventory as well as Cost of sales. Additionally, the effect of an overall increase in units sold also has a positive effect on 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.
Fluctuations in the cost of oil (since our products are petroleum based) and transportation and the volume of units purchased from our Chinese manufacturers may have an impact on the unit costs of our product. Increases in such costs may not be recoverable through price increases of our products. Reductions in oil prices may not quickly affect petroleum product prices.
SeasonalityCash Requirements
Historically, unit sales have increased during the flu season.
Cash Requirements
Due to funds received from prior litigation, weWe have sufficient cash reserves, received a PPP Loan, and intendhave begun to rely on operations, cash reserves, and debt financing, when available, asrealize income from operations. We also have access to our investments which may be liquidated in the primary ongoing sources of cash. We have taken stepsevent that we need to decrease our non-litigation legal costs and we continue to evaluate these costs. Additionally, in 2014 and 2015, we reduced our workforce. We have also taken steps to reduce our future litigation expenses and expect such expenses to be significantly lower in 2017. Inaccess the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, reduce the workforce, reduce the salaries of officers and other employees, and/or defer royalty payments. Some increases in compensation were made in 2016 and 2017.funds for operations.
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. For the year ended December 31, 2020, our sales under this HHS Order were approximately $31.6 million and we expect such sales to increase each quarter through May 2021. In February 2021, we received a new contract from the Department of Health and Human Services for additional safety syringes representing $54.2 million in expected revenues and reimbursable freight costs for a five-month base period of performance (February 15, 2021 to July 14, 2021) with additional renewal periods available at the option of the U.S. government.
As discussed above, we entered into a TIA with the U.S. government for approximately $53.7 million in government funding for expanding our domestic production of needles and syringes. As of December 31, 2020, we have received approximately $10.7 million for down payments on the purchase of certain fixed assets. Pursuant to the terms of the TIA, we have begun making significant additions to our facilities which should allow us to increase domestic production. We have substantially completed construction of new controlled environment facilities and we have begun construction of warehousing facilities which are expected to be completed in the second quarter of 2021. While a portion of the planned construction will be funded by the U.S. government, we expect to fund the construction of the new warehouse and expect the cost to be approximately $5.8 million. Through December 31, 2020, have paid a total of approximately $320,000 in progress payments for the new warehouse.
Option Exercises
Stock options were exercised by our employees and directors during 2020, and, consequently, we received approximately $923 thousand to exercise such options.
External Sources of Liquidity
We recently received a PPP Loan, as described above, in the principal amount of $1,363,000. We have obtained several loans since our inception,applied for forgiveness of this loan but we cannot be certain of the amount, if any, which have, together with the proceeds from the sales of equities and litigation efforts, enabled us to pursue development and production of our products. Our ability to obtain additional funds through loans is uncertain. Due to the current market price of our Common Stock, itmay be forgiven.
It is unlikely we would choose to raise funds by the public sale of equity. We have approved threeequity despite recent increases in the value of our executive officers to engage in private purchasesstock. Our stock price increased materially during 2020 and during the first several months of stock at market prices. Mr. Shaw exercised a portion of his purchase right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million.2021.
We consider our investment portfolio a source of liquidity as well. For example, in the third quarter of 2020, we liquidated approximately $4.0 million from our investment portfolio for operational needs. As of December 31, 2020, $8.1 million was invested in third party securities.
Capital Resources
In 2016,Since the execution of the TIA on July 1, 2020, we purchasedhave begun construction for significant expansion to our facilities. As of March 2021, we have substantially completed construction of expanded facilities consisting of approximately 27,800 square feet of additional controlled environment within existing properties and we expect to complete approximately 55,000 square feet of new warehouse space within the second quarter of 2021. The estimated cost of the controlled environment within existing properties is $6.4 million. The increase from the original $6 million estimate is due to change orders and an expedited completion date in order to receive certain manufacturing equipment at an earlier date. As of early March 2021, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for manufacturingapproximately $42.1 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 approximately $1.9 million. Most of this expenditure was specifically forlarger purchases when necessary. The expenditures which are not reimbursable from the manufacture ofU.S. government under the EasyPoint® needle, TIA are funded with the remainder being for molding machines which may be utilized for any of our molds.cash from operations.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS
Contractual Obligations and Commercial CommitmentsNot applicable to smaller reporting companies.
The following chart summarizes our material obligations and commitments to make future payments under contracts for long-term debt as of December 31, 2016:CRITICAL ACCOUNTING ESTIMATES
|
| Payments Due by Period |
| |||||||||||||
|
| Total |
| Less |
| 1-3 |
| 3-5 |
| More |
| |||||
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| $ | 3,928,637 |
| $ | 430,393 |
| $ | 3,498,244 |
| $ | — |
| $ | — |
|
Operating leases |
| 322,195 |
| 77,015 |
| 245,180 |
| — |
| — |
| |||||
Total |
| $ | 4,250,832 |
| $ | 507,408 |
| $ | 3,743,424 |
| $ | — |
| $ | — |
|
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 of 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 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.
Item 7A. Quantitative and Qualitative Disclosures Aboutabout Market Risk.
We believe that our market risk exposures regarding our cash and cash equivalents are immaterial as we do not have instruments for trading purposes. Additionally, reasonable, possible near-term changes in market rates or prices will not result in material changes in near-term earnings.Not applicable to smaller reporting companies.
16
Item 8. Financial Statements and Supplementary Data.
RETRACTABLE TECHNOLOGIES, INC.
RETRACTABLE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2016 AND 20152020, 2019, and 2018
F-1
RETRACTABLE TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS | Page | ||
| F-3 | |||
Financial Statements: | |||
| F-5 | ||
Statements of Operations for the years ended December 31, |
| F-6 | |
| F-7 | ||
Statements of Cash Flows for the years ended December 31, |
| F-9 | |
| F-10 | ||
| |||
Financial Statement Schedule: | |||
| 18 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMIndependent Registered Public Accounting Firm
To the Stockholders and the Board of Directors and Stockholdersof
of Retractable Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Retractable Technologies, Inc. (the “Company”) as of December 31, 2016,2020 and 2015, and2019, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included2020, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statement schedulestatements present fairly, in all material respects, the financial position of Retractable Technologies, Inc., listedthe Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in Item 15(a). the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements and schedule based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements referredthat was communicated or required to above present fairly, in allbe communicated to the audit committee and that (1) relates to accounts or disclosures that are material respects,to the financial positionstatements and (2) involved our especially challenging, subjective, or complex judgments. The communication of Retractable Technologies, Inc. as of December 31, 2016, and 2015, and the results of its operations and its cash flows for each of the three yearscritical audit matters does not alter in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, inany way our opinion such financial statement schedule, when considered in relation toon the basic financial statements, taken as a whole, presents fairly,and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Rebates
As described in Note 2 to the financial statements, the Company’s rebate accrual at December 31, 2020 is $3,435,352. The Company recognizes revenue when it has satisfied all material respects,performance obligations to the information set forth therein.customer. Under certain contracts, revenue is recorded based on the 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 the Company has not received tracking reports. Once rebates are issued they are applied against the customer’s receivable balance.
We identified management’s estimates of rebates attributable to contractual pricing allowances, which are based on management’s evaluation of available internal and external data and for which the Company has not received tracking reports, as a critical audit matter. The Company’s evaluation uses internally developed assumptions, which involves a high degree of judgement. This leads to a high degree of auditor judgment and an increased extent of effort is required when performing audit procedures to evaluate the methodology and reasonableness of the estimates and assumptions.
The following are the most relevant procedures we performed to address this critical audit matter:
| · | We evaluated and tested the appropriateness of management’s process for estimating rebates, including: |
| o | Testing the completeness, accuracy, and relevance of the underlying data used in management’s estimate. |
| o | Obtaining management’s analysis and supporting documentation related to sales distribution, and testing whether sales distribution factors used in the calculation of rebates were supported by the analysis provided by management. |
| · | We developed an independent expectation of rebates based on historic trends in sales to distributors and credits issued and compared such expectation to the Company’s estimate, including testing the completeness and accuracy of the data used in the calculation, application of product categories and sales distribution channels determined by management and used in the calculation, and recalculation of the rebates. |
| · | We compared the year end rebate allowance to credits issued subsequent to year end and investigated variances between management’s estimate and actual results. |
/s/ Moss Adams LLP
Dallas, Texas
March 31, 20172021
Table of ContentsWe have served as the Company’s auditor since 2016.
RETRACTABLE TECHNOLOGIES, INC.
|
| December 31, |
| December 31, | |||||||||||
|
| 2016 |
| 2015 |
| 2020 | 2019 | ||||||||
ASSETS |
|
|
|
|
| ||||||||||
Current assets: |
|
|
|
|
| ||||||||||
Cash and cash equivalents |
| $ | 16,199,043 |
| $ | 18,045,044 |
| $ | 17,566,682 | $ | 5,934,749 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,731,985 and $1,795,481, respectively |
| 3,267,838 |
| 4,900,997 |
| ||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $205,822 and $146,832 | 32,910,919 | 6,564,371 | |||||||||||||
| Investments in debt and equity securities, at fair value | 8,081,833 | 7,771,660 | |||||||||||||
Inventories, net |
| 7,017,224 |
| 6,296,625 |
| 10,234,646 | 7,450,592 | ||||||||
| Income taxes receivable | — | 50,392 | |||||||||||||
Other current assets |
| 192,548 |
| 1,568,032 |
| 684,317 | 635,201 | ||||||||
Total current assets |
| 26,676,653 |
| 30,810,698 |
| 69,478,397 | 28,406,965 | ||||||||
|
|
|
|
|
| ||||||||||
Property, plant, and equipment, net |
| 12,092,037 |
| 11,468,061 |
| 30,816,504 | 10,632,057 | ||||||||
| Income taxes receivable | — | 50,393 | |||||||||||||
| Deferred tax asset | 4,631,206 | — | |||||||||||||
Other assets |
| 10,289 |
| 15,326 |
| 44,567 | 88,315 | ||||||||
Total assets |
| $ | 38,778,979 |
| $ | 42,294,085 |
| $ | 104,970,674 | $ | 39,177,730 | ||||
|
|
|
|
|
| ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||||||||||
Current liabilities: |
|
|
|
|
| ||||||||||
Accounts payable |
| $ | 4,471,756 |
| $ | 5,697,518 |
| $ | 16,256,444 | $ | 5,007,604 | ||||
Current portion of long-term debt |
| 430,393 |
| 249,349 |
| 1,030,763 | 260,939 | ||||||||
Accrued compensation |
| 536,456 |
| 763,576 |
| 826,762 | 607,339 | ||||||||
Dividends payable |
| 55,113 |
| 55,414 |
| 49,091 | 54,800 | ||||||||
Accrued royalties to shareholder |
| 659,443 |
| 631,145 |
| 1,973,781 | 921,445 | ||||||||
Other accrued liabilities |
| 1,008,699 |
| 690,535 |
| 3,398,904 | 1,387,149 | ||||||||
Income taxes payable |
| 10,584 |
| 8,176 |
| 4,365,770 | 17,944 | ||||||||
Total current liabilities |
| 7,172,444 |
| 8,095,713 |
| 27,901,515 | 8,257,220 | ||||||||
|
|
|
|
|
| ||||||||||
| Other long-term liabilities | 24,478,697 | — | |||||||||||||
Long-term debt, net of current maturities |
| 3,498,244 |
| 3,417,471 |
| 2,710,337 | 2,378,055 | ||||||||
Total liabilities |
| 10,670,688 |
| 11,513,184 |
| 55,090,549 | 10,635,275 | ||||||||
|
|
|
|
|
| ||||||||||
Commitments and contingencies – See Note 8 |
|
|
|
|
| ||||||||||
| Commitments and contingencies – See Note 10 | |||||||||||||||
|
|
|
|
|
| ||||||||||
Stockholders’ equity: |
|
|
|
|
| ||||||||||
Preferred Stock, $1 par value: |
|
|
|
|
| ||||||||||
Class B; authorized: 5,000,000 shares |
|
|
|
|
| ||||||||||
Series I, Class B; outstanding: 98,500 shares (liquidation preference of $615,625) |
| 98,500 |
| 98,500 |
| ||||||||||
Series II, Class B; outstanding: 171,200 shares (liquidation preference of $2,140,000) |
| 171,200 |
| 171,200 |
| ||||||||||
Series III, Class B; outstanding: 129,245 shares (liquidation preference of $1,615,563) |
| 129,245 |
| 129,245 |
| ||||||||||
Series IV, Class B; outstanding: 342,500 shares (liquidation preference of $3,767,500) |
| 342,500 |
| 342,500 |
| ||||||||||
Series V, Class B; outstanding: 40,000 (liquidation preference of $176,000) |
| 40,000 |
| 40,000 |
| ||||||||||
Common Stock, no par value; authorized: 100,000,000 shares; outstanding: 29,666,454 and 28,619,874 shares, respectively |
| — |
| — |
| ||||||||||
| Series I, Class B; outstanding: 0 and 96,000 shares at December 31, 2020 and 2019 | — | 96,000 | |||||||||||||
| Series II, Class B; outstanding: 156,200 and 171,200 shares at December 31, 2020 and 2019 (liquidation preference of $1,952,500) | 156,200 | 171,200 | |||||||||||||
| Series III, Class B; outstanding: 106,745 and 129,245 shares at December 31, 2020 and 2019 (liquidation preference of $1,334,313) | 106,745 | 129,245 | |||||||||||||
| Series IV, Class B; outstanding: 0 and 342,500 shares at December 31, 2020 and 2019 | — | 342,500 | |||||||||||||
| Series V, Class B; outstanding: 0 and 34,000 shares at December 31, 2020 and 2019 | — | 34,000 | |||||||||||||
| Common Stock, no par value; authorized: 100,000,000 shares; outstanding: 33,957,204 and 32,674,954 shares at December 31, 2020 and 2019 | — | — | |||||||||||||
Additional paid-in capital |
| 59,290,333 |
| 58,268,036 |
| 59,285,401 | 61,660,744 | ||||||||
Accumulated deficit |
| (31,963,487 | ) | (28,268,580 | ) | (9,668,221 | ) | (33,891,234 | ) | ||||||
Total stockholders’ equity |
| 28,108,291 |
| 30,780,901 |
| 49,880,125 | 28,542,455 | ||||||||
Total liabilities and stockholders’ equity |
| $ | 38,778,979 |
| $ | 42,294,085 |
| $ | 104,970,674 | $ | 39,177,730 | ||||
See accompanying notes to financial statements
RETRACTABLE TECHNOLOGIES, INC.
|
| Years Ended December 31, |
| Years Ended December 31, | ||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | ||||||||||||
Sales, net |
| $ | 29,826,636 |
| $ | 29,552,200 |
| $ | 34,520,630 |
| $ | 81,862,453 | $ | 41,797,179 | $ | 33,274,702 | ||||||
Cost of Sales |
|
|
|
|
|
|
| |||||||||||||||
Costs of manufactured product |
| 16,957,073 |
| 16,509,446 |
| 19,770,226 |
| 39,377,794 | 24,209,401 | 20,108,798 | ||||||||||||
Royalty expense to shareholders |
| 2,527,508 |
| 2,477,583 |
| 2,728,701 |
| |||||||||||||||
| Royalty expense to shareholder | 5,476,306 | 3,449,822 | 2,944,102 | |||||||||||||||||||
Total cost of sales |
| 19,484,581 |
| 18,987,029 |
| 22,498,927 |
| 44,854,100 | 27,659,223 | 23,052,900 | ||||||||||||
Gross profit |
| 10,342,055 |
| 10,565,171 |
| 12,021,703 |
| 37,008,353 | 14,137,956 | 10,221,802 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Operating expenses: |
|
|
|
|
|
|
| |||||||||||||||
Sales and marketing |
| 4,025,786 |
| 3,837,491 |
| 3,967,081 |
| 4,061,904 | 4,217,863 | 4,404,441 | ||||||||||||
Research and development |
| 571,842 |
| 607,527 |
| 616,784 |
| 574,527 | 516,095 | 621,365 | ||||||||||||
General and administrative |
| 8,795,310 |
| 9,328,029 |
| 9,595,399 |
| 8,301,169 | 6,432,158 | 6,786,041 | ||||||||||||
Impairment of assets |
| 456,119 |
| — |
| — |
| |||||||||||||||
Total operating expenses |
| 13,849,057 |
| 13,773,047 |
| 14,179,264 |
| 12,937,600 | 11,166,116 | 11,811,847 | ||||||||||||
Loss from operations |
| (3,507,002 | ) | (3,207,876 | ) | (2,157,561 | ) | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Litigation proceeds |
| — |
| 7,724,826 |
| — |
| |||||||||||||||
| Income from insurance proceeds | — | — | 260,514 | |||||||||||||||||||
| Income (loss) from operations | 24,070,753 | 2,971,840 | (1,329,531 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Interest and other income |
| 26,522 |
| 24,917 |
| 33,941 |
| 2,262,758 | 351,166 | 153,460 | ||||||||||||
Interest expense, net |
| (213,295 | ) | (219,672 | ) | (222,808 | ) | |||||||||||||||
| Interest expense | (260,264 | ) | (166,897 | ) | (177,190 | ) | ||||||||||||||||
Income (loss) before income taxes |
| (3,693,775 | ) | 4,322,195 |
| (2,346,428 | ) | 26,073,247 | 3,156,109 | (1,353,261 | ) | |||||||||||
Provision for income taxes |
| 1,132 |
| 7,877 |
| 8,177 |
| |||||||||||||||
| Provision (benefit) for income taxes | 1,850,234 | 7,875 | (13,318 | ) | ||||||||||||||||||
Net income (loss) |
| (3,694,907 | ) | 4,314,318 |
| (2,354,605 | ) | 24,223,013 | 3,148,234 | (1,339,943 | ) | |||||||||||
Preferred Stock dividend requirements |
| (704,996 | ) | (709,351 | ) | (915,225 | ) | (573,868 | ) | (702,618 | ) | (704,996 | ) | |||||||||
Deemed capital contribution on extinguishment of preferred stock |
| — |
| 2,305,678 |
| — |
| |||||||||||||||
Income (loss) applicable to common shareholders |
| $ | (4,399,903 | ) | $ | 5,910,645 |
| $ | (3,269,830 | ) | ||||||||||||
| Deemed contribution on extinguishment of preferred stock | 2,975,708 | — | — | |||||||||||||||||||
| Income (loss) applicable to common stockholders | $ | 26,624,853 | $ | 2,445,616 | $ | (2,044,939 | ) | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Basic earnings (loss) per share |
| $ | (0.15 | ) | $ | 0.21 |
| $ | (0.12 | ) | $ | 0.80 | $ | 0.07 | $ | (0.06 | ) | |||||
|
|
|
|
|
|
|
| |||||||||||||||
Diluted earnings (loss) per share |
| $ | (0.15 | ) | $ | 0.20 |
| $ | (0.12 | ) | $ | 0.80 | $ | 0.07 | $ | (0.06 | ) | |||||
|
|
|
|
|
|
|
| |||||||||||||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
| |||||||||||||||
Basic |
| 29,354,437 |
| 27,822,593 |
| 27,375,450 |
| 33,169,307 | 32,672,475 | 32,666,454 | ||||||||||||
Diluted |
| 29,354,437 |
| 29,481,294 |
| 27,375,450 |
| 33,300,654 | 32,672,475 | 32,666,454 | ||||||||||||
See accompanying notes to financial statements
RETRACTABLE TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| Series I Class B |
| Series II Class B |
| Series III Class B |
| Series IV Class B |
| Series V Class B |
| Common |
| ||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| ||||||
Balance as of December 31, 2013 |
| 103,500 |
| $ | 103,500 |
| 178,700 |
| $ | 178,700 |
| 130,245 |
| $ | 130,245 |
| 542,500 |
| $ | 542,500 |
| 40,000 |
| $ | 40,000 |
| 27,187,702 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Conversion of Preferred Stock into Common Stock |
| (5,000 | ) | (5,000 | ) | (2,500 | ) | (2,500 | ) | — |
| — |
| — |
| — |
| — |
| — |
| 7,500 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options exercised |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 418,195 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance as of December 31, 2014 |
| 98,500 |
| 98,500 |
| 176,200 |
| 176,200 |
| 130,245 |
| 130,245 |
| 542,500 |
| 542,500 |
| 40,000 |
| 40,000 |
| 27,613,397 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Conversion of Preferred Stock into Common Stock |
| — |
| — |
| (5,000 | ) | (5,000 | ) | (1,000 | ) | (1,000 | ) | (200,000 | ) | (200,000 | ) | — |
| — |
| 206,000 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options exercised |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 272,477 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of new Common Stock |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 528,000 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Registration of new shares |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Retirement of treasury stock |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance as of December 31, 2015 |
| 98,500 |
| 98,500 |
| 171,200 |
| 171,200 |
| 129,245 |
| 129,245 |
| 342,500 |
| 342,500 |
| 40,000 |
| 40,000 |
| 28,619,874 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock options exercised |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,046,580 |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock option compensation |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance as of December 31, 2016 |
| 98,500 |
| $ | 98,500 |
| 171,200 |
| $ | 171,200 |
| 129,245 |
| $ | 129,245 |
| 342,500 |
| $ | 342,500 |
| 40,000 |
| $ | 40,000 |
| 29,666,454 |
| $ | — |
|
Series I Class B | Series II Class B | Series III Class B | Series IV Class B | Series V Class B | Common | |||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||
| Balance as of December 31, 2017 | 98,500 | $98,500 | 171,200 | $171,200 | 129,245 | $129,245 | 342,500 | $342,500 | 40,000 | $40,000 | 32,666,454 | $ — | ||||||||||||
| Dividends | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Balance as of December 31, 2018 | 98,500 | 98,500 | 171,200 | 171,200 | 129,245 | 129,245 | 342,500 | 342,500 | 40,000 | 40,000 | 32,666,454 | — | ||||||||||||
| Conversion of Preferred Stock into Common Stock | (2,500 | ) | (2,500 | ) | — | — | — | — | — | — | (6,000 | ) | (6,000 | ) | 8,500 | — | ||||||||
| Dividends | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Balance as of December 31, 2019 | 96,000 | 96,000 | 171,200 | 171,200 | 129,245 | 129,245 | 342,500 | 342,500 | 34,000 | 34,000 | 32,674,954 | — | ||||||||||||
| Exchange of Preferred Stock for Common Stock | — | — | — | — | (22,500 | ) | (22,500 | ) | (342,500 | ) | (342,500 | ) | (34,000 | ) | (34,000 | ) | 754,000 | — | ||||||
| Conversion of Preferred Stock into Common Stock | (81,700 | ) | (81,700 | ) | (15,000 | ) | (15,000 | ) | — | — | — | — | — | — | 96,700 | — | ||||||||
| Stock Option Exercises | — | — | — | — | — | — | — | — | — | — | 431,550 | — | ||||||||||||
| Redemption | (14,300 | ) | (14,300 | ) | — | — | — | — | — | — | — | — | — | — | ||||||||||
| Dividends | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||
| Balance as of December 31, 2020 | — | $ — | 156,200 | $156,200 | 106,745 | $106,745 | — | $ — | — | $ — | 33,957,204 | $ — | ||||||||||||
See accompanying notes to financial statements
RETRACTABLE TECHNOLOGIES,TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| Additional |
| Accumulated |
| Treasury |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2013 |
| $ | 58,983,166 |
| $ | (30,228,293 | ) | $ | (1,096,609 | ) | $ | 28,653,209 |
|
|
|
|
|
|
|
|
|
|
| ||||
Conversion of Preferred Stock into Common Stock |
| 7,500 |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock options exercised |
| 398,328 |
| — |
| — |
| 398,328 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dividends |
| (115,225 | ) | — |
| — |
| (115,225 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| — |
| (2,354,605 | ) | — |
| (2,354,605 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2014 |
| 59,273,769 |
| (32,582,898 | ) | (1,096,609 | ) | 26,581,707 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Conversion of Preferred Stock into Common Stock |
| 206,000 |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock options exercised |
| 283,933 |
| — |
| — |
| 283,933 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Issuance of new Common Stock |
| — |
| — |
| — |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Registration of new shares |
| (60,101 | ) | — |
| — |
| (60,101 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Retirement of treasury stock |
| (1,096,609 | ) | — |
| 1,096,609 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dividends |
| (338,956 | ) | — |
| — |
| (338,956 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| — |
| 4,314,318 |
| — |
| 4,314,318 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2015 |
| 58,268,036 |
| (28,268,580 | ) | — |
| 30,780,901 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock options exercised |
| 855,021 |
| — |
| — |
| 855,021 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dividends |
| (220,450 | ) | — |
| — |
| (220,450 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock option compensation |
| 387,726 |
| — |
| — |
| 387,726 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| — |
| (3,694,907 | ) | — |
| (3,694,907 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance as of December 31, 2016 |
| $ | 59,290,333 |
| $ | (31,963,487 | ) | $ | — |
| $ | 28,108,291 |
|
Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||
| Balance as of December 31, 2017 | $ | 62,092,206 | $ | (35,699,525 | ) | $ | 27,174,126 | |||||
| Dividends | (220,450 | ) | — | (220,450 | ) | |||||||
| Net loss | — | (1,339,943 | ) | (1,339,943 | ) | |||||||
| Balance as of December 31, 2018 | 61,871,756 | (37,039,468 | ) | 25,613,733 | ||||||||
| Conversion of Preferred Stock into Common Stock | 8,500 | — | — | |||||||||
| Dividends | (219,512 | ) | — | (219,512 | ) | |||||||
| Net income | — | 3,148,234 | 3,148,234 | |||||||||
| Balance as of December 31, 2019 | 61,660,744 | (33,891,234 | ) | 28,542,455 | ||||||||
| Exchange of Preferred Stock for Common Stock | (3,090,672 | ) | — | (3,489,672 | ) | |||||||
| Conversion of Preferred Stock into Common Stock | 96,700 | — | — | |||||||||
| Stock Option Exercises | 922,512 | — | 922,512 | |||||||||
| Redemption | (92,950 | ) | — | (107,250 | ) | |||||||
| Dividends | (210,933 | ) | — | (210,933 | ) | |||||||
| Net income | — | 24,223,013 | 24,223,013 | |||||||||
| Balance as of December 31, 2020 | $ | 59,285,401 | $ | (9,668,221 | ) | $ | 49,880,125 | |||||
See accompanying notes to financial statements
RETRACTABLE TECHNOLOGIES, INC.
|
| Years Ended December 31, |
| Years Ended December 31, | ||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | ||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||||||||||||||
Net income (loss) |
| $ | (3,694,907 | ) | $ | 4,314,318 |
| $ | (2,354,605 | ) | $ | 24,223,013 | $ | 3,148,234 | $ | (1,339,943 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |
|
|
|
|
|
|
| |||||||||||||||
Depreciation and amortization |
| 872,868 |
| 858,391 |
| 1,074,520 |
| 832,069 | 852,080 | 886,814 | ||||||||||||
Share based compensation |
| 387,726 |
| — |
| — |
| |||||||||||||||
| Realized gains on investments | (162,595 | ) | (7,925 | ) | — | |||||||||||||||||
| Net unrealized gains on investments | (1,870,010 | ) | (129,315 | ) | — | |||||||||||||||||
| Deferred taxes | (4,631,206 | ) | — | — | ||||||||||||||||||
Inventories reserve |
| 176,424 |
| — |
| — |
| — | — | (297,731 | ) | |||||||||||
Provision for doubtful accounts |
| 92,000 |
| 116,395 |
| 27,300 |
| |||||||||||||||
Impairment of assets |
| 456,119 |
| — |
| — |
| |||||||||||||||
(Increase) decrease in assets: |
|
|
|
|
|
|
| |||||||||||||||
| Provision for doubtful accounts, net of write-offs | 59,440 | — | 47,793 | |||||||||||||||||||
| Loss on disposal of assets | 33,140 | — | — | |||||||||||||||||||
| (Increase) decrease in operating assets: | ||||||||||||||||||||||
| Accounts receivable | (14,626,910 | ) | (1,652,015 | ) | 145,407 | |||||||||||||||||
Inventories |
| (897,023 | ) | (1,633,077 | ) | 1,072,041 |
| (2,784,054 | ) | 94,502 | (1,041,202 | ) | ||||||||||
Accounts receivable |
| 1,541,159 |
| 624,699 |
| (2,192,673 | ) | |||||||||||||||
Other current assets |
| 1,375,484 |
| (373,977 | ) | (128,414 | ) | (49,116 | ) | 9,602 | (226,649 | ) | ||||||||||
| Income taxes receivable | 100,785 | 100,937 | (13,266 | ) | ||||||||||||||||||
Other assets |
| (750 | ) | — |
| — |
| 43,748 | 77,541 | — | ||||||||||||
Increase (decrease) in liabilities: |
|
|
|
|
|
|
| |||||||||||||||
| Increase (decrease) in operating liabilities: | ||||||||||||||||||||||
Accounts payable |
| (1,225,762 | ) | 554,722 |
| 35,018 |
| 11,248,840 | (362,072 | ) | 411,927 | |||||||||||
Litigation proceeds subject to stipulation |
| — |
| (7,724,826 | ) | — |
| |||||||||||||||
Other accrued liabilities |
| 119,342 |
| 11,312 |
| (1,318,327 | ) | |||||||||||||||
| Accrued liabilities | 2,232,059 | 55,150 | 699,030 | |||||||||||||||||||
| Insurance proceeds | — | — | (466,293 | ) | ||||||||||||||||||
Income taxes payable |
| 2,408 |
| (114 | ) | (82,682 | ) | 4,347,826 | 7,919 | (1,382 | ) | |||||||||||
Net cash used by operating activities |
| (794,912 | ) | (3,252,157 | ) | (3,867,822 | ) | |||||||||||||||
| Net cash provided (used) by operating activities | 18,997,029 | 2,194,638 | (1,195,495 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||||||||||||||
Purchase of property, plant, and equipment |
| (1,947,172 | ) | (1,465,010 | ) | (1,007,933 | ) | (21,049,656 | ) | (632,078 | ) | (382,156 | ) | |||||||||
Changes in restricted cash |
| — |
| 600,897 |
| (600,897 | ) | |||||||||||||||
| Purchase of debt and equity securities | (2,242,897 | ) | (7,360,398 | ) | (2,986,156 | ) | ||||||||||||||||
| Proceeds from the sales of debt and equity securities | 3,965,329 | 2,712,134 | — | |||||||||||||||||||
Net cash used by investing activities |
| (1,947,172 | ) | (864,113 | ) | (1,608,830 | ) | (19,327,224 | ) | (5,280,342 | ) | (3,368,312 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||||||||||||||
Repayments of long-term debt and notes payable |
| (263,200 | ) | (184,447 | ) | (249,220 | ) | |||||||||||||||
Proceeds from long-term debt |
| 525,017 |
| 276,495 |
| — |
| |||||||||||||||
| Proceeds of long-term debt | 1,363,000 | — | — | |||||||||||||||||||
| Repayments of long-term debt | (260,894 | ) | (407,014 | ) | (446,350 | ) | ||||||||||||||||
| Proceeds from TIA | 10,636,822 | — | — | |||||||||||||||||||
Proceeds from the exercise of stock options |
| 855,021 |
| 283,933 |
| 398,328 |
| 922,512 | — | — | ||||||||||||
Stock registration fees |
| — |
| (60,101 | ) | — |
| |||||||||||||||
| Repurchase of preferred stock | (482,670 | ) | — | — | ||||||||||||||||||
Payment of Preferred Stock dividends |
| (220,755 | ) | (283,543 | ) | (172,838 | ) | (216,642 | ) | (219,825 | ) | (220,450 | ) | |||||||||
Net cash provided (used) by financing activities |
| 896,083 |
| 32,337 |
| (23,730 | ) | 11,962,128 | (626,839 | ) | (666,800 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Net decrease in cash and cash equivalents |
| (1,846,001 | ) | (4,083,933 | ) | (5,500,382 | ) | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 11,631,933 | (3,712,543 | ) | (5,230,607 | ) | |||||||||||||||||
Cash and cash equivalents at: |
|
|
|
|
|
|
| |||||||||||||||
Beginning of period |
| 18,045,044 |
| 22,128,977 |
| 27,629,359 |
| 5,934,749 | 9,647,292 | 14,877,899 | ||||||||||||
End of period |
| $ | 16,199,043 |
| $ | 18,045,044 |
| $ | 22,128,977 |
| $ | 17,566,682 | $ | 5,934,749 | $ | 9,647,292 | ||||||
|
|
|
|
|
|
|
| |||||||||||||||
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
| |||||||||||||||
Interest paid |
| $ | 213,295 |
| $ | 219,672 |
| $ | 222,808 |
| $ | 260,264 | $ | 166,897 | $ | 177,190 | ||||||
Income taxes paid |
| $ | 2,000 |
| $ | 3,700 |
| $ | 94,332 |
| $ | 2,106,000 | $ | — | $ | 1,173 | ||||||
|
|
|
|
|
|
|
| |||||||||||||||
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
| |||||||||||||||
Preferred dividends declared, not paid |
| $ | 55,113 |
| $ | 55,414 |
| $ | — |
| $ | 49,091 | $ | 54,800 | $ | 55,113 | ||||||
| Conversion of preferred stock to common stock | $ | 96,700 | $ | 8,500 | $ | — | ||||||||||||||||
| Redemption price payable | $ | 107,250 | $ | — | $ | — | ||||||||||||||||
| Preferred stock repurchase payable | $ | 3,007,002 | $ | — | $ | — | ||||||||||||||||
| Amounts receivable under TIA | $ | 11,779,078 | $ | — | $ | — | ||||||||||||||||
See accompanying notes to financial statements
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 small diameter tube adapter; the blood collection tube holder; 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, as well as a standard 3mL syringe packaged with an EasyPoint® needle. The Company also sells VanishPoint® autodisable syringes in the international market in addition to the Company’s other products.
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 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 continue to carry forward the deposit for future orders. Such amounts are included in Other accrued liabilities on the Balance Sheets and are shown in Note 6,7, Other Accrued Liabilities.
The Company records an allowance for estimated returns as a reduction to Accounts receivable and Gross sales. Historically, returns have been immaterial.insignificant.
Inventories
Inventories are valued at the lower of cost or market,net realizable value, with cost being determined using actual average cost. The Company compares the average cost to the market pricenet 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, equity securities, and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the 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 property disposals are included in income.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.
During 2016, the Company recognized an impairment charge of $456,119 associated with its Patient Safe® production equipment. The Company determined it was more cost effective to outsource this production through an overseas manufacturer,Fair value measurements
For assets and thus the Company’s Patient Safe® production equipment has been taken out of service. Minimal cash flowsliabilities that are expected to be generated by this equipment. Accordingly, the Company reduced the carrying value of the Patient Safe® production equipment to an estimatedmeasured using quoted prices in active markets, total fair value is the published market price per unit multiplied by the number of zero.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 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.
The Company’s remaining property, plant, and equipment primarily consists of buildings, land, assembly equipment for syringes, blood collection tube holders, and EasyPoint® needles, as well as molding machines, molds, office equipment, furniture, and fixtures.
The Company’s property, plant, and equipment primarily consist of buildings, land, assembly equipment, molding machines, molds, office equipment, furniture, and fixtures.
Intangible assets — correction of errors
The Balance Sheet as of December 31, 2015 as well as the Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2014 and 2015 have been revised to reflect a correction of errors that occurred in the 2007 and 2008 financial statements. The errors were due to capitalizing certain legal costs related to patents under the Company’s exclusive license agreement with the Chief Executive Officer that should have been expensed in accordance with the Company’s capitalization policy. The errors were immaterial to the Company’s previously filed financial statements. However, the cumulative effect of correcting the errors was determined by the Company to be material to the Statement of Operations for the year ended December 31, 2016. Accordingly, only the Balance Sheet and Statements of Changes in Stockholders’ Equity as of December 31, 2015, have been revised for comparative purposes. The effect on the 2015 Balance Sheet is to reduce Intangible and Other Assets by $246,779, and to increase the Accumulated deficit by $246,779. The opening balances of Accumulated deficit included in the Statements of Changes in Stockholder’s Equity have also been revised to reflect the correction of the errors for all years presented. The correction of the errors did not impact the Statement of Operations or the Statement of Cash Flows for all of the periods presented.
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 marketfair 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’sManagement's estimates, equals their recorded values. Investments in equity securities consist primarily of individual equity securities, 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, equity securities, 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 majority of accounts receivable are due from companies whichthat are well-established entities. 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. In 2020, a significant portion of the Company’s sales were to the U.S. government, which Management does not consider a credit risk. As a consequence, Management considers any exposure from concentrations of credit risks to be limited.
The following table reflects our significant customers in 2016, 2015,2020, 2019, and 2014:2018:
|
| Years Ended December 31, |
| Years Ended December 31, | |||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | |||||
Number of significant customers |
| 1 |
| 2 |
| 3 |
| 2 | 3 | 2 | |||||
Aggregate dollar amount of net sales to significant customers |
| $ | 9.4 million |
| $ | 13.5 million |
| $ | 16.5 million |
| $41.6 million | $19.0 million | $13.1 million | ||
Percentage of net sales to significant customers |
| 31.4 | % | 45.7 | % | 47.9 | % | 50.6% | 45.6% | 39.2% | |||||
The Company decreasedincreased its allowance for doubtful accounts by approximately $63$125 thousand in 2016.2020.
TableIn 2020, approximately $31.6 million of Contentsthe Company’s sales were to the Department of Health and Human Services of the United States in partial fulfillment of a recent $83.8 million delivery order to supply automated retraction safety syringes (the “HHS Order”). Management expects the U.S. government to remain a significant customer through at least July 2021.
The Company manufactures syringessome of its products in Little Elm, Texas, as well as utilizing manufacturers in China. The Company purchases mostobtained roughly 85.2% of its product components from single suppliers, including needle adhesives and packaging materials. There are multiple sources of these materials. The Company obtained roughly 86.3% of its VanishPoint® syringesproducts in 20162020 from its primary Chinese manufacturer.manufacturers. Purchases from this Chinese manufacturermanufacturers aggregated 77.7%82.6% and 73.1%85.3% of VanishPoint® finished products in 20152019 and 2014,2018, respectively. 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.syringes and EasyPoint® needles. Regardless of vendor availability, the Company expects to increase its domestic syringe production capacity at its facilities pursuant to the plans outlined in the TIA as hereinafter defined.
Revenue recognition
Revenue is recognized for salesThe Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of ownership passesloss pass to the customer, generally upon shipment.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 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 Balance Sheets and deducted from revenues in the Statements of Operations. Accounts payable included estimated contractual allowances for $3,591,534$3,435,352 and $3,733,199$3,586,726 as of December 31, 20162020 and 2015,2019, 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.
Certain distributors have taken rebatesThe 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 whichthe descriptions set forth in their respective labeling, provided that they are not entitled,used in accordance with such as utilizing a rebatelabeling and the Company’s written directions for products not purchased directly from the Company. Major customers said they have ceased the practices resulting in claiming non-contractual rebates. Rebates can only be claimed on purchases made directly from the Company.use. The Company has established a reserve for the collectability of these non-contractual rebate amounts. The expense for the reserve is recorded in Operating expense, General and administrative. The reserve for such non-contractual deductions is included in the allowance for doubtful accounts. There has been no change to the reserve for contractual rebates in the periods currently presented.historically not incurred significant warranty claims.
The Company’s domestic return policy is set forth in its standard Distribution Agreement. This 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 will not accept returned goods without a returned goods authorization number. The Company may refund the customer’s money or replace the 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.
TableThe Company requires certain customers to pay in advance of Contentsproduct shipment. Such prepayments from customers are recorded in Other accrued liabilities and are generally recognized as revenue upon shipment of the product.
Litigation proceedsThe 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.
ProceedsDisaggregated information of revenue recognized from litigationcontracts with customers and licensing fees recognized are recognized when realizable. Generally, realization is not reasonably assured and expected until proceeds are collected.as follows:
| For the year ended December 31, 2020: | ||||||||||
| Geographic Segment | Syringes | Blood Collection Products | EasyPoint® Needles | Other Products | Total Product Sales | |||||
| U.S. sales (excluding HHS Order) | $ | 30,446,858 | $ | 2,116,108 | $ | 9,542,122 | $ | 64,375 | $ | 42,169,463 |
| HHS Order sales to U.S. government | 31,634,343 | — | — | — | 31,634,343 | |||||
| North and South America sales (excluding U.S.) | 5,733,116 | 8,450 | 86,816 | 1,064,768 | 6,893,150 | |||||
| Other international sales | 917,478 | 239,329 | 235 | 8,455 | 1,165,497 | |||||
| Total | $ | 68,731,795 | $ | 2,363,887 | $ | 9,629,173 | $ | 1,137,598 | $ | 81,862,453 |
On September 30, 2013, the Company received payment of $7,724,826 (the “Judgment Amount”) from Becton, Dickinson and Company (“BD”) pursuant to a stipulation in the patent infringement case Retractable Technologies, Inc. and Thomas Shaw v. Becton Dickinson and Company, Civil Action No. 2:07-cv-250, in the U.S. District Court for the Eastern District of Texas, Marshall Division. The Judgment Amount was included as income in the second quarter of 2015 due to the conclusion of the case and related appeals. Prior to the second quarter of 2015, the Judgment Amount had been shown as a liability on the balance sheet since the Company was paid the Judgment Amount and the litigation did not come to a final conclusion until the second quarter of 2015.
| For the year ended December 31, 2019: | ||||||||||
| Geographic Segment | Syringes | Blood Collection Products | EasyPoint® Needles | Other Products | Total Product Sales | |||||
| U.S. sales | $ | 26,722,414 | $ | 2,130,767 | $ | 2,970,374 | $ | 74,369 | $ | 31,897,924 |
| North and South America sales (excluding U.S.) | 7,863,796 | 6,313 | 7,996 | 370,885 | 8,248,990 | |||||
| Other international sales | 1,052,217 | 578,617 | 635 | 18,796 | 1,650,265 | |||||
| Total | $ | 35,638,427 | $ | 2,715,697 | $ | 2,979,005 | $ | 464,050 | $ | 41,797,179 |
| For the year ended December 31, 2018: | ||||||||||
| Geographic Segment | Syringes | Blood Collection Products | EasyPoint® Needles | Other Products | Total Product Sales | |||||
| U.S. sales | $ | 23,803,483 | $ | 1,365,936 | $ | 3,401,389 | $ | 75,766 | $ | 28,646,574 |
| North and South America sales (excluding U.S.) | 3,521,823 | 8,805 | 252 | 66,564 | 3,597,444 | |||||
| Other international sales | 940,740 | 48,101 | 11,768 | 30,075 | 1,030,684 | |||||
| Total | $ | 28,266,046 | $ | 1,422,842 | $ | 3,413,409 | $ | 172,405 | $ | 33,274,702 |
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. TheIn prior periods, the Company utilized some of its net operating loss carry forwards in 2013 and paid Alternative Minimum Tax on its taxable income. The Company has established a valuation allowance for its net deferred tax asset as future taxable income cannotwhich could not be reasonably assured. Penalties and interest related to income taxtaxes are classified as General and administrative expense and Interest expense, respectively,respectively. During the quarter ended June 30, 2020, the Company released its valuation allowance based on available evidence supporting that its deferred tax assets will be realized in the Statements of Operations.full.
Earnings per share
The Company computes basic earnings or loss per share (“EPS”) by dividing net earnings or loss 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. TheAt December 31, 2020, the calculation of diluted EPS excluded 1,774,520under the treasury stock method included 131,347 shares of Common Stock underlying issued and outstanding stock options at December 31, 2014 as theiroptions. Common stock issuable upon the conversion of convertible preferred stock is excluded from the calculation of diluted EPS for 2020, 2019, and 2018 because the effect was antidilutive. TheAt December 31, 2019 and December 31, 2018, the calculation of diluted EPS excluded 783,730639,300 and 1,357,803 shares of Common Stockcommon stock, respectively, underlying issued and outstanding stock options, at December 31, 2016 as their effect was antidilutive.the exercise prices of the stock options were greater than the average stock prices. The potential dilution, if any, is shown on the following schedule:
|
| Years Ended December 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Net income (loss) |
| $ | (3,694,907 | ) | $ | 4,314,318 |
| $ | (2,354,605 | ) |
Preferred dividend requirements |
| (704,996 | ) | (709,351 | ) | (915,225 | ) | |||
Deemed capital contribution on extinguishment of preferred stock |
| — |
| 2,305,678 |
| — |
| |||
Income (loss) applicable to common shareholders after assumed conversions |
| $ | (4,399,903 | ) | $ | 5,910,645 |
| $ | (3,269,830 | ) |
Average common shares outstanding |
| 29,354,437 |
| 27,822,593 |
| 27,375,450 |
| |||
Average common and common equivalent shares outstanding - assuming dilution |
| 29,354,437 |
| 29,481,294 |
| 27,375,450 |
| |||
Basic earnings (loss) per share |
| $ | (0.15 | ) | $ | 0.21 |
| $ | (0.12 | ) |
Diluted earnings (loss) per share |
| $ | (0.15 | ) | $ | 0.20 |
| $ | (0.12 | ) |
| Years Ended December 31, | |||||||
| 2020 | 2019 | 2018 | |||||
| Net income (loss) | $ | 24,223,013 | $ | 3,148,234 | $ | (1,339,943 | ) |
| Preferred stock dividend requirements | (573,868 | ) | (702,618 | ) | (704,996 | ) | |
| Years Ended December 31, | |||||||
| 2020 | 2019 | 2018 | |||||
| Deemed contribution on extinguishment of preferred stock | 2,975,708 | — | — | ||||
| Income (loss) applicable to common stockholders | $ | 26,624,853 | $ | 2,445,616 | $ | (2,044,939 | ) |
| Weighted Average common shares outstanding | 33,169,307 | 32,672,475 | 32,666,454 | ||||
| Weighted Average common and common equivalent shares outstanding - assuming dilution | 33,300,654 | 32,672,475 | 32,666,454 | ||||
| Basic earnings (loss) per share | $ | 0.80 | $ | 0.07 | $ | (0.06 | ) |
| Diluted earnings (loss) per share | $ | 0.80 | $ | 0.07 | $ | (0.06 | ) |
The Financial Accounting Standards Board Accounting StandardsFASB Codification 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, requires the gain or loss on extinguishment of equity-classified preferred stock to be included in the net income per common stockholder used to calculate earnings per share (similar to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.
The Company has determined to apply this guidance to its accounting treatment of the preferred stock transactiontransactions described in Note 19. From a legal standpoint, the transaction was neither a redemption nor conversion pursuant of the terms of the Certificate of Designation, Preferences, Rights and Limitations of the Series IV Class B Convertible Preferred Stock.
Shipping and handling costs
The Company classifies shipping and handling costs as part of Cost of sales in the Statements of Operations.
Self-insured employee benefit costs
The Company self-insures certain health insurance benefits for its employees under certain policy limits. The Company has additional coverage provided by an insurance company for any individual with claims in excess of $100,000 and/or total plan claims in excess of $1,000,000 for the plan year.
Research and development costs
Research and development costs are expensed as incurred.
Share-based compensation
The Company’s share-based payments are accounted for using the Black-Scholes fair value method. The Company records share-based compensation expense on a straight-line basis over the requisite service period. The Company incurred the following share-based compensation costs:
|
| Years Ended December 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Cost of sales |
| $ | 141,782 |
| $ | — |
| $ | — |
|
Sales and marketing |
| 77,583 |
| — |
| — |
| |||
Research and development |
| 23,623 |
| — |
| — |
| |||
General and administrative |
| 144,738 |
| — |
| — |
| |||
|
| $ | 387,726 |
| $ | — |
| $ | — |
|
Insurance Proceeds
Options awardedReceipts from insurance, up to employees in 2016 were amortized over twelve months. Thethe amount of any loss recognized by the Company, amortized four month’s expense for options granted in September 2016. Non-employee Directors’ option expense wasare considered recoveries. Any such recoveries are recorded when they are received. Insurance proceeds are not recognized as a component of income (loss) from operations until all expensed in the fourth quarter of 2016.repairs are made.
Leases
The Company early adopted FASB Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” for its annual period ended December 31, 2016. This ASU addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest ordetermines if an arrangement is a lease at inception. Operating and finance leases are settled, (b) classification of awards as either equity orincluded in Other assets, Other accrued liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impactsOther long-term liabilities on the statement of cash flows.Balance Sheets. Right-of-use
As a result of adoption, excess tax benefits in 2016 resulting(“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 exerciselease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of non-qualified stock options were recognized inlease payments over the income tax provision rather than in additional-paid-in capital.lease term. As there were previously no excess income tax benefits recognized in additional-paid-in capital or other material changes to the Company’s accounting for share based compensation resulting from adoption of this ASU, no cumulative effect adjustments were required.
Recent pronouncements
In November 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendmentsleases 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 definitionstraight-line basis over the lease term. Leases with an initial term of restricted cashtwelve months or restricted cash equivalents. The updated guidanceless are not recorded on the Balance Sheets; however, rent expense is effectiverecognized on a straight-line basis over the lease term.
Technology Investment Agreement (TIA)
Effective July 1, 2020, the Company 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 $53,664,286 in government funding for expanding the Company’s quarter ending March 31, 2018, with early adoption permitted. Thedomestic production of needles and syringes. Pursuant to the terms of the TIA, the Company is currently assessingexpected to make significant additions to its facilities which should allow the impact that adoptionCompany to increase domestic production. As reimbursements are received from the U.S. government for such expenditures, the Company records a deferred liability. The deferred liability will be systematically amortized as a gain over the life of this guidancethe related property, plant, and equipment as to offset the related depreciation expense of the assets acquired. The amortization will havebe presented separately from the depreciation expense on its financial statements and related disclosures.the Statements of Operations.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)Recently Adopted Pronouncements
The Company adopted ASU 2016-13, “Financial Instruments —Credit— Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments”.Instruments,” as well as subsequent clarifying amendments on January 1, 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 todaypreviously will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. ThisThe adoption of ASU is effective for2016-13, 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 significant impact on the Company’s quarter ending March 31, 2020 with early application permitted for the Company’s quarter ending March 31, 2019. 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 currently assessinga Service Contract (a Consensus of the impactFASB Emerging Issues Task Force)” on January 1, 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 guidance willASU did not have a significant impact on itsthe Company’s financial statements and relatedor disclosures.
In February 2016,August 2018, the FASB issued ASU No. 2016-02, Leases (topic 842). Under2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the newDisclosure 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 was effective for annual periods beginning after December 15, 2019 and interim periods within the annual period. The adoption of ASU lessees will be required to recognize2018-13 did not have a significant effect on the following
Company’s financial statements, as the Company does not currently have any investments classified as Level 3 fair value measurements.
Recently Issued Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance lessor accounting is largely unchanged.Income Taxes”. The new lease guidance simplifiedstandard is intended to simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transitionincome taxes by eliminating certain exceptions related to the approach for leases existing at, or entered into after,intraperiod tax allocation, the beginningmethodology 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 earliest comparative period presentedaccounting 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 financial statements.tax basis of goodwill. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. This ASUstandard is effective for annual periods beginning after December 15, 2020 and interim periods within the Company’s quarter ending March 31, 2019,annual period, with early adoption permitted. Adoption of the standard requires certain changes primarily be made prospectively, with some changes to be made retrospectively. The Company is currently evaluatinghas determined that the impactadoption of this standard.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) Simplifying the Measurement of Inventory,” which is part of the FASB’s Simplification Initiative. Inventory, including inventory measured at average cost, would be valued at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for the Company’s annual periods and interim periods within those annual periods beginning January 1, 2017. Amendments in this ASU should be applied prospectively with earlier application permitted at the beginning of an interim or annual reporting period. The Company is currently assessing the potential2019-12 will not have a material impact of this ASU on its financial statements.
In May 2014,March 2020, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, whichto ease the potential burden in accounting for reference rate reform. The new guidance provides guidanceoptional expedients for revenue recognition. This ASU’s core principlecontracts that reference LIBOR, if certain criteria are met, that can be applied through December 31, 2022. As reference rate reform is that a companystill an ongoing process, the Company will recognize revenue when it transfers promised goods or servicescontinue to customers in an amount that reflects consideration to whichevaluate the company expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption. In July 2015, the FASB voted to delay the effective date of this ASU by one year. The ASU will now be effective commencing with the Company’s quarter ending March 31, 2018. Early adoption of this ASU is allowed no sooner than the original effective date. The Company is currently assessing the potential impact of this ASU on its financial statements.adoption for optional expedients when deemed necessary.
3.INVENTORIESINVENTORIES
Inventories consist of the following:
|
| Year Ended December 31, |
| December 31, | |||||||||||
|
| 2016 |
| 2015 |
| 2020 | 2019 | ||||||||
Raw materials |
| $ | 1,303,278 |
| $ | 1,664,241 |
| $ | 1,358,552 | $ | 1,254,313 | ||||
Finished goods |
| 6,309,469 |
| 5,313,779 |
| 9,173,302 | 6,493,487 | ||||||||
|
| 7,612,747 |
| 6,978,020 |
| 10,531,854 | 7,747,800 | ||||||||
Inventory reserve |
| (595,523 | ) | (681,395 | ) | (297,208 | ) | (297,208 | ) | ||||||
|
| $ | 7,017,224 |
| $ | 6,296,625 |
| $ | 10,234,646 | $ | 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:
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Equity securities | $ | 3,990,533 | $ | — | $ | — | $ | 3,990,533 | ||||||||
| Mutual funds and exchange traded funds | 4,013,956 | — | — | 4,013,956 | ||||||||||||
| Certificates of deposit | — | 77,344 | — | 77,344 | ||||||||||||
| $ | 8,004,489 | $ | 77,344 | $ | — | $ | 8,081,833 | |||||||||
| 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 ETFs, mutual funds, individual equity stocks, and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the Balance Sheets. The Company intends to hold these assets for possible future operating requirements.
The following table summarizes gross unrealized gains and losses from Investments in debt and equity securities:
| December 31, 2020 | ||||||||||||||||
| Gross Unrealized | Aggregate | |||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| Equity securities | $ | 2,098,144 | $ | 1,892,389 | $ | — | $ | 3,990,533 | ||||||||
| Mutual funds and exchange traded funds | 3,909,364 | 104,592 | — | 4,013,956 | ||||||||||||
| Certificates of deposit | 75,000 | 2,344 | — | 77,344 | ||||||||||||
| $ | 6,082,508 | $ | 1,999,325 | $ | — | $ | 8,081,833 | |||||||||
| 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 | |||||||||
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
|
| December 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
|
|
|
|
|
| ||
Land |
| $ | 261,893 |
| $ | 261,893 |
|
Buildings and building improvements |
| 11,561,320 |
| 11,485,797 |
| ||
Production equipment |
| 17,762,025 |
| 15,648,515 |
| ||
Office furniture and equipment |
| 3,415,985 |
| 3,316,390 |
| ||
Construction in progress |
| 1,941,687 |
| 2,739,260 |
| ||
Automobiles |
| 102,321 |
| 102,321 |
| ||
|
| 35,045,231 |
| 33,554,176 |
| ||
Accumulated depreciation |
| (22,953,194 | ) | (22,086,115 | ) | ||
|
| $ | 12,092,037 |
| $ | 11,468,061 |
|
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Land | $ | 261,893 | $ | 261,893 | ||||
| Buildings and building improvements | 11,593,952 | 11,566,115 | ||||||
| Production equipment | 20,290,331 | 19,903,236 | ||||||
| Office furniture and equipment | 3,630,455 | 3,527,577 | ||||||
| Construction in progress | 21,365,915 | 765,176 | ||||||
| 57,142,546 | 36,023,997 | |||||||
| Accumulated depreciation | (26,326,042 | ) | (25,391,940 | ) | ||||
| $ | 30,816,504 | $ | 10,632,057 | |||||
Depreciation expense for the years ended December 31, 2016, 2015,2020, 2019, and 20142018 was $867,080; $849,804;$832,069; $851,673; and $1,065,248,$883,610, respectively.
6. 5.LICENSE AGREEMENT
In 1995, the Company entered into a license agreement with the Chief Executive Officer of the Company, Thomas J. Shaw, for the exclusive right to manufacture, market, and distribute products utilizing automated retraction technology, which agreement has been amended twice. This technology is the subject of various patents and patent applications owned by such officer of the Company. The initial licensing fee of $500,000 was amortized over 17 years.Mr. Shaw. The license agreement also provides for quarterly payments of a 5% royalty fee on gross sales. Additionally, if the Company sublicenses the technology and the sublicensee’s customers are not known to the Company, then Mr. Shaw shall be entitled to receive from the Company fifty percent (50%) of the royalties actually paid to the Company by such sublicensee. The royalty fee expense is
recognized in the period in which it is earned. Royalty fees of $2,527,508; $2,477,583;$5,476,306; $3,449,822; and $2,728,701$2,944,102 are included in Cost of sales for the years ended December 31, 2016, 2015,2020, 2019, and 2014,2018, respectively. Royalties payable under this agreement aggregated $659,443$1,973,781 and $631,145$921,445 at December 31, 2016,2020, and 2015,2019, respectively. Gross sales upon which royalties are based were $50,550,165; $49,551,660;$109,526,118; $67,529,783; and $54,574,020$58,882,042; for 2016, 2015,2020, 2019, and 2014,2018, respectively.
7. 6.OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
|
| December 31, |
| December 31, | |||||||||||
|
| 2016 |
| 2015 |
| 2020 | 2019 | ||||||||
Prepayments from customers |
| $ | 692,922 |
| $ | 395,396 |
| $ | 1,686,868 | $ | 998,601 | ||||
Accrued professional fees |
| 266,747 |
| 274,252 |
| 331,204 | 263,757 | ||||||||
| Current portion – preferred stock repurchase | 1,092,282 | — | |||||||||||||
Other accrued expenses |
| 49,030 |
| 20,887 |
| 288,550 | 124,791 | ||||||||
|
| $ | 1,008,699 |
| $ | 690,535 |
| ||||||||
| Total | $ | 3,398,904 | $ | 1,387,149 | |||||||||||
7.LONG-TERM DEBT
Long-term debt consists of the following:
|
| December 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
Loan from American First National Bank. It has a 20 year amortization and 10 year maturity from December 10, 2009. The loan provided funding for the expansion of the warehouse, additional office space, and a new Controlled Environment. The loan is secured by the Company’s land and buildings. The interest rate is 5.968%. |
| $ | 3,269,397 |
| $ | 3,426,926 |
|
|
|
|
|
|
| ||
Note payable to Deutsche Leasing USA, Inc. The interest rate is 3.69%. The original amount of the note was $276,495 with a 36 month maturity ending in July 2018. Beginning August 2015, the loan became payable in equal installments of principal and interest of approximately $8,100. Collateralized by molding machines and ancillary equipment. |
| 149,727 |
| 239,894 |
| ||
|
|
|
|
|
| ||
Note payable to Deutsche Leasing USA, Inc. The interest rate is 4.25%. The original amount of the note was $525,017 with a 36 month maturity ending in November 2019. Beginning December 2016, the loan became payable in equal installments of principal and interest of approximately $15,500. Collateralized by molding machines and ancillary equipment. |
| 509,513 |
| — |
| ||
|
| 3,928,637 |
| 3,666,820 |
| ||
|
|
|
|
|
| ||
Less: current portion |
| (430,393 | ) | (249,349 | ) | ||
|
| $ | 3,498,244 |
| $ | 3,417,471 |
|
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Loan from American First National Bank. Maturity date is April 10, 2028. The loan, in the original amount of $4,209,608, provided funding for the expansion of the warehouse, additional office space, and a new Controlled Environment. The loan is secured by the Company’s land and buildings. The interest rate is equal to prime rate plus 0.25%. The interest rate was 5.0% at December 31, 2020. | $ | 2,378,100 | $ | 2,638,994 | ||||
| Loan from Independent Bank pursuant to the Paycheck Protection Program. Original maturity date is April 17, 2022. The interest rate is equal to 1.0% per annum. | 1,363,000 | — | ||||||
| 3,741,100 | 2,638,994 | |||||||
| Less: current portion | (1,030,763 | ) | (260,939 | ) | ||||
| $ | 2,710,337 | $ | 2,378,055 | |||||
The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values.
The aggregate maturities of long-term debt as of December 31, 2016,2020, are as follows:
2017 |
| $ | 430,393 |
|
2018 |
| 410,949 |
| |
2019 |
| 3,087,295 |
| |
|
| $ | 3,928,637 |
|
| 2021 | $ | 1,030,763 | |
| 2022 | 896,210 | ||
| 2023 | 304,120 | ||
| 2024 | 319,685 | ||
| 2025 | 336,488 | ||
| Thereafter | 853,834 | ||
| $ | 3,741,100 |
8.COMMITMENTS AND CONTINGENCIES
In May 2010,9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Technology Investment Agreement (TIA) | 22,444,324 | — | ||||||
| Stock repurchase | 2,034,373 | — | ||||||
| Total | $ | 24,478,697 | $ | — | ||||
The TIA provides for reimbursement to the Company for the purchase of equipment and an officer’s suitsupplies related to the expansion of the Company’s domestic production of needles and syringes. Under the TIA, reimbursable amounts will be reflected as a liability until the time its deferred income can be systematically amortized over a period matching the useful life of the purchased assets.
The stock repurchase liability represents the long-term portion, at net present value, of $3,303,330 gross payable by the Company to former preferred shareholders as a result of private stock purchases in 2020 of 320,333 shares of Class B Series IV preferred stock and 25,000 shares of Class B Series V preferred stock. The purchase price is payable in three annual installments of $1,101,110.
10. 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 U.S. DistrictCompany. The Company seeks actual and exemplary damages, disgorgement, costs, and interest. On October 6, 2020, the Court fordismissed Defendants’ motion to dismiss, which order was appealed by the EasternDefendants on October 9, 2020 to the Court of Appeals, Fifth District of Texas Marshall Division alleging violations of antitrust acts, false advertising, product disparagement, tortious interference, and unfair competition was reopened. The trial commenced on September 9, 2013, in the U.S. District Courtat Dallas. Oral argument for the Eastern District of Texas, Tyler Division, and the jury found that BD illegally engaged in anticompetitive conduct with the intent to acquire or maintain monopoly power in the safety syringe market and engaged in false advertising under the Lanham Act. The jury awarded the Company $113,508,014 in damages, which was trebled pursuant to statute. The Court granted injunctive relief to take effect January 15, 2015. In doing so, the Court found that BD’s business practices limited innovation, including false advertisements that suppressed sales of the VanishPoint®. The specific injunctive relief includes: (1) enjoining BD’s use of “World’s Sharpest Needle” or any similar assertion of superior sharpness; (2) requiring notification to all customers who purchased BD syringe products from July 2, 2004 to date that BD wrongfully claimed that its syringe needles were sharper and that its statement that it had “data on file” was false and misleading; (3) requiring notification to employees, customers, distributors, GPOs, and government agencies that the deadspace of the VanishPoint®appeal has been within ISO standards since 2004 and that BD overstated the deadspace of the VanishPoint® to represent that it was higher than some of BD’s syringes when it was actually less, and that BD’s statement that it had “data on file” was false and misleading, and, in addition, posting this notice on its websiteset for a period of three years; (4) enjoining BD from advertising that its syringe products save medication asApril 7, 2021
compared to VanishPoint® products for a period of three years; (5) requiring notification to all employees, customers, distributors, GPOs, and government agencies that BD’s website, cost calculator, printed materials, and oral representations alleging BD’s syringes save medication as compared to the VanishPoint® were based on false and inaccurate measurement of the VanishPoint®, and, in addition, posting this notice on its website for a period of three years; and (6) requiring the implementation of a comprehensive training program for BD employees and distributors that specifically instructs them not to use old marketing materials and not to make false representations regarding VanishPoint® syringes. Final judgment was entered on January 15, 2015, awarding the Company $340,524,042 in damages and $11,722,823 in attorneys’ fees, as well as granting injunctive relief consistent with the orders as indicated above. The parties stipulated that the amount of litigation costs recoverable by the Company is $295,000. On January 14, 2015, the District Court stayed the portion of the injunctive relief that requires BD to notify end-user customers but also ordered BD to comply with internal correction activities as well as mandatory disclosures as set out above to its employees, customers, distributors and Group Purchasing Organizations. BD filed an appeal of that ruling with the 5th Circuit Court of Appeals and that appeal was denied on February 3, 2015. On February 12, 2015, BD filed a motion to amend the judgment directed most specifically to the issue of award of prejudgment interest. On April 23, 2015, the Court entered an Amended Final Judgment that removed prejudgment interest but kept all other monetary and injunctive relief the same as was granted in the original Final Judgment. BD filed its brief in the appeal on July 20, 2015. Oral argument occurred on Monday, February 29, 2016. On December 2, 2016, the 5th Circuit Court of Appeals overturned the antitrust damages. The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which the Company is entitled. The Eastern District of Texas trial date is May 11, 2017. The Company’s petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.
In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued the Company in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that the Company is infringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seek injunctive relief and unspecified damages. The Company counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patents. The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and the Company subsequently dropped its counterclaims for unenforceability of the asserted patents. On June 30, 2015, the Court ordered that further proceedings in this matter be stayed and that this case remain administratively closed until resolution of all appeals in the case detailed in the preceding paragraph. The case remains stayed as a result of the ongoing proceedings regarding the Lanham Act claims in the separate proceeding described above.
Operating Leases
In 2010, the Company entered into a non-cancellable operating lease for additional office space. Rent expense under this lease for the years ended December 31, 2016, 2015, and 2014 was $74,772; $64,683; and $62,813, respectively. The Company renewed the lease in 2015. Future annual minimum rental payments as of December 31, 2016, are presented below:
2017 |
| $ | 77,015 |
|
2018 |
| 79,331 |
| |
2019 |
| 81,694 |
| |
2020 |
| 84,155 |
| |
Total |
| $ | 322,195 |
|
9.11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
|
| For the Years Ended December 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Current tax provision |
|
|
|
|
|
|
| |||
Federal |
| $ | — |
| $ | — |
| $ | — |
|
State |
| 1,132 |
| 7,877 |
| 8,177 |
| |||
Total current provision |
| 1,132 |
| 7,877 |
| 8,177 |
| |||
|
|
|
|
|
|
|
| |||
Deferred tax provision |
|
|
|
|
|
|
| |||
Federal |
| — |
| — |
| — |
| |||
State |
| — |
| — |
| — |
| |||
Total deferred tax provision |
| — |
| — |
| — |
| |||
Total income tax provision |
| $ | 1,132 |
| $ | 7,877 |
| $ | 8,177 |
|
| For the Years Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Current tax provision (benefit) | ||||||||||||
| Federal | $ | 4,431,590 | $ | — | $ | (13,318 | ) | |||||
| State | 2,049,850 | 7,875 | — | |||||||||
| Total current provision (benefit) | 6,481,440 | 7,875 | (13,318 | ) | ||||||||
| Deferred tax provision (benefit) | ||||||||||||
| Federal | (3,428,399 | ) | — | — | ||||||||
| State | (1,202,807 | ) | — | — | ||||||||
| Total deferred tax provision (benefit) | (4,631,206 | ) | — | — | ||||||||
| Total income tax provision (benefit) | $ | 1,850,234 | $ | 7,875 | $ | (13,318 | ) | |||||
The Company has $20.2had $23.3 million in tax benefits attributable to net operating losses for federal tax purposes.purposes as of December 31, 2019, which were fully utilized as of December 31, 2020. The loss carry forwardsCompany has state net operating losses of $3.6 million as of December 31, 2020 which will begin to expire in 2028 for federal tax purposes and began to expire for state tax purposes in 2013.2029. The Company also hashad credits for alternative minimum taxes (“AMT”) paid of $202$100 thousand as of December 31, 2019. The alternative minimum tax was repealed with the enactment of the Tax Cuts and Jobs Act. The Company recorded the AMT credit as a tax receivable on its financial statements as of December 31, 2019 rather than as a deferred tax asset, as this amount is a refundable credit. The AMT credit refund receivable at December 31, 2019 was claimed on the Company’s 2019 corporate income tax return and was received in 2020.
Utilization of the state net operating loss carry forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by state rules that are availablesimilar to offset future federal income taxes, excluding AMT. Such credits do not expire.the Internal Revenue Code of 1986, as amended.
Deferred taxes are provided for those items reported in different periods for income tax and financial reporting purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
|
| December 31, |
| December 31, | |||||||||||
|
| 2016 |
| 2015 |
| 2020 | 2019 | ||||||||
Deferred tax assets |
|
|
|
|
| ||||||||||
Net operating loss carry forwards |
| $ | 7,651,971 |
| $ | 5,979,717 |
| $ | 198,675 | $ | 5,748,724 | ||||
Credit for alternative minimum tax paid |
| 201,773 |
| 201,773 |
| ||||||||||
Accrued expenses and reserves |
| 1,348,032 |
| 1,383,461 |
| 824,920 | 573,382 | ||||||||
Employee stock option expense |
| 117,613 |
| 303,465 |
| 15,188 | 75,591 | ||||||||
Nonemployee stock option expense |
| 12,770 |
| 12,770 |
| 8,515 | 8,207 | ||||||||
Inventory |
| 361,437 |
| 356,170 |
| ||||||||||
| Inventories | 98,748 | 110,455 | |||||||||||||
Impairment |
| 172,983 |
| — |
| — | 111,178 | ||||||||
| Deferred income – TIA contract | 5,675,617 | — | |||||||||||||
| Unrealized gains/losses | — | 30,434 | |||||||||||||
Deferred tax assets |
| 9,866,579 |
| 8,237,356 |
| 6,821,663 | 6,657,971 | ||||||||
Deferred tax liabilities |
|
|
|
|
| ||||||||||
Property and equipment |
| (669,246 | ) | (485,384 | ) | ||||||||||
| Unrealized gains/losses | (508,197 | ) | — | ||||||||||||
| Property, plant, and equipment | (1,682,260 | ) | (1,628,133 | ) | |||||||||||
Deferred tax liabilities |
| (669,246 | ) | (485,384 | ) | (2,190,457 | ) | (1,628,133 | ) | ||||||
Net deferred assets |
| 9,197,333 |
| 7,751,972 |
| 4,631,206 | 5,029,838 | ||||||||
Valuation allowance |
| (9,197,333 | ) | (7,751,972 | ) | — | (5,029,838 | ) | |||||||
Net deferred tax assets |
| $ | — |
| $ | — |
| $ | 4,631,206 | $ | — | ||||
Deferred income tax calculations reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss carry forwards, and are stated at the U.S. tax rate of 21%. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.
Deferred tax assets are periodically reviewed for realizability. In prior periods, the Company established a valuation allowance for its net deferred tax asset as future taxable income which could not be reasonably assured. The valuation allowance was fully released during the year ended December 31, 2020. The valuation allowance was decreased by $5,029,838 for 2020 and decreased by $1,121,560 for 2019.
Under the Tax Cuts and Jobs Act, net operating losses incurred after December 31, 2017 can only offset 80% of taxable income. However, these net operating losses may be carried forward indefinitely instead of limited to twenty years under previous tax law. Carryback of these losses is no longer permitted.
The valuation allowance increased $1,445,361CARES Act temporarily removed the 80% of taxable income limitation to allow NOL carryforwards to fully offset income. For tax years beginning before 2021, the Company can take an NOL deduction equal to 100% of taxable income. For tax years beginning after 2021, the Company can take: (1) a 100% deduction of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80% of modified taxable income for 2016. The valuation allowance decreased $1,633,485 for 2015.NOLs arising in tax years after 2017.
A reconciliation of income taxes based on the federal statutory rate and the effective income tax rate is summarized as follows:
|
| December 31, |
| ||||
|
| 2016 |
| 2015 |
| 2014 |
|
Income tax at the federal statutory rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
State tax, net of federal tax |
| 2.9 |
| 2.9 |
| 2.9 |
|
Change in valuation allowance |
| (39.1 | ) | (37.8 | ) | (34.3 | ) |
Permanent differences |
| 4.7 |
| 0.7 |
| (0.7 | ) |
Other |
| (3.5 | ) | (0.6 | ) | (3.2 | ) |
Effective tax rate |
| 0.0 | % | 0.2 | % | (0.3 | )% |
| December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Income tax at the federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State tax, net of federal tax | 4.2 | 2.0 | 3.5 | |||||||||
| Change in valuation allowance | (19.2 | ) | (35.6 | ) | (24.3 | ) | ||||||
| Permanent differences | (0.6 | ) | — | (0.3 | ) | |||||||
| Return-to-provision and other | 1.7 | 12.9 | (0.9 | ) | ||||||||
| Tax Reform and Jobs Act tax rate change | — | — | 0.1 | |||||||||
| Effective tax rate | 7.1 | % | 0.3 | % | (0.9 | )% | ||||||
The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. The Company’sCompany's federal income tax returns for all tax years ended on or after December 31, 2013,2017, remain subject to examination by the Internal Revenue Service. The Company’sCompany's state and local income
tax returns are subject to examination by the respective state and local authorities over various statutes of limitations, most ranging from three to five years from the date of filing.
10.12. DIVIDENDSSTOCK OPTION GRANTS
On September 9, 2016, the Compensation and Benefits Committee approved grants of incentive stock options to the Company’s employees under the First Amended 2008 Stock Option Plan with exercise prices at fair market value ($2.75 per share), a ten-year term, and one-year vesting period, except to the extent that such vesting period would violate the First Amended 2008 Stock Option Plan. In total, once vested, the stock options will be exercisable into 500,400 shares of Common Stock. The value of an option for the purchase of one underlying common share is valued at $1.783, using the Black Scholes Option Pricing Model using a risk-free rate of 1.51%, a volatility factor of 67.1%, and a 7.1 year expected life.
On December 27, 2016, the Compensation and Benefits Committee approved grants of stock options to the Company’s chief financial officer, general counsel, and all three independent directors for 50,000 shares each with ten-year terms under the First Amended 2008 Stock Option Plan with exercise prices at fair market value ($1.05 per share). The executive officers’ options vest in one year and the independent directors’ options vest immediately. The value of an option for the purchase of one underlying common share is valued at $0.728, using the Black Scholes Option Pricing Model using a risk-free rate of 2.37%, a volatility factor of 72.5%, and a 7.1 year expected life.
11.DIVIDENDS
The Board declared and the Company paid dividends to Series I and Series II Class B Preferred Stockholders in the amounts of $12,938 and $44,675, respectively, in each of the first two quarters of 2014. The Board declared and the Company paidcash dividends to Series I and Series II Class B Preferred Shareholders within one month of the end of each quarter in the following amounts: $37,8912018, 2019, and $132,926, respectively, on April 30, 2015,2020, resulting in cumulative annual payments of: $49,250, and paid such preferred shareholders $12,313 and $44,050, respectively, on July 20, 2015 and October 22, 2015; and paid such preferred shareholders $12,313 and $43,101, respectively, on February 1, 2016. The Board declared and the Company paid dividends$171,200 to Series I and Series II Class B Preferred Shareholderspreferred shareholders, respectively, in the following amounts: $12,3132018; $48,625, and $42,800,$171,200 to Series I and Series II preferred shareholders, respectively, on April 21, 2016, July 28, 2016, October 20, 2016,in 2019; $48,000, and January 6, 2017.$168,642 to Series I and Series II preferred shareholders, respectively, in 2020; and one payment of $10,041, and $39,050 to Series I and Series II preferred shareholders, respectively, in 2021.
12.13. STOCKHOLDERS’ EQUITYSTOCK OPTION EXERCISES
Stock options were exercised at various dates in 2016, 2015, and 2014 and, consequently, a total of 1,046,580 shares of Common Stock were issued in 2016, 272,477 shares of Common Stock were issued in 2015, and 418,195 shares of Common Stock in 2014 for an aggregate payment of $855,021 in 2016, $283,933 in 2015, and $398,328 in 2014 to exercise such options. These options were granted in 2008 and 2009 at exercise prices of $0.81 and $1.30.
13.STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock Class A with a par value of One Dollar ($1.00) per share; 5,000,000 shares of Preferred Stock Class B with a par value of One Dollar ($1.00) per share; and 5,000,000 shares of Preferred Stock Class C with a par value of One Dollar ($1.00) per share.
The Company has one class of Preferred Stock outstanding: Class B Convertible Preferred Stock (“Class B Stock”). The Class B Stock has fivetwo series: Series I,II and Series II,III. Series III,I, Series IV, and Series V.V were cancelled by Board resolution effective March 16, 2021.
The Class B Stock has been allocated among Series I, II and III IV,stock had 156,200 and V in the amounts of 98,500; 171,200; 129,245; 342,500; and 40,000106,745 shares outstanding, respectively, as ofat December 31, 2016.2020. The remaining 4,218,5554,737,055 authorized shares have not been assigned a series.
Series I Class B Stock
There were 98,5000 and 96,000 shares of $1 par value Series I Class B Stock outstanding at December 31, 20162020 and 2015.2019, respectively. Holders of Series I Class B Stock arewere entitled to receive a cumulative annual dividend of $0.50 per share, payable quarterly if declared by the Board of Directors. The Company paid dividends of $49,250; $62,516;$48,000 in 2020 and $38,814$48,625 in 2016, 2015, and 2014, respectively.2019. At December 31, 2016,2020, no dividends were in arrears.
Series I Class B Stock iswas redeemable after three years from the date of issuance at the option of the Company at a price of $7.50 per share, plus all unpaid dividends. Such a redemption took place effective December 31, 2020. Each share of Series I Class B Stock may,was, at the option of the stockholder, be convertedconvertible to one share of Common Stock. 81,700 shares of Series I Class B Stock after three years fromwas converted to Common Stock in 2020 and the date of issuance or in the eventremaining 14,300 shares were redeemed by the Company files an initial registration statement under the Securities Actas of 1933. NoDecember 31, 2020 for a total redemption price payable of $107,250. 2,500 shares of Series I Class B Stock were converted into Common Stock in 2016 or 2015.2019. In the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series I Class B Stock then outstanding arewould have been entitled to $6.25 per share, plus all unpaid dividends prior to any distributions to holders of Series II Class B Stock, Series III Class B Stock, Series IV Class B Stock, Series V Class B Stock, or Common Stock.
Series II Class B Stock
There were 156,200 and 171,200 shares of $1 par value Series II Class B Stock outstanding at December 31, 20162020 and 2015.2019, respectively. Holders of Series II Class B Stock are entitled to receive a cumulative annual dividend of $1.00 per share, payable quarterly if declared by the Board of Directors. Holders of Series II Class B Stock generally have no voting rights until dividends are in arrears and unpaid for twelve consecutive quarters. In such case, the holders of Series II Class B Stock have the right to elect one-third of the Board of Directors of the Company. The Company paid dividends of $171,200; $221,026;$168,642 in 2020 and $134,025$171,200 in 2016, 2015, and 2014, respectively.2019. At December 31, 2016,2020, no dividends were in arrears.
Series II Class B Stock is redeemable after three years from the date of issuance at the option of the Company at a price of $15.00 per share plus all unpaid dividends. Each share of Series II Class B Stock may, at the option of the stockholder, be converted to one share of Common Stock after three years from the date of issuance or in the event the Company files an initial registration statement under the Securities Act of 1933. Pursuant to these terms, 5,000Stock. 15,000 shares of Series II Class B Stock were converted into Common Stock in 2015.2020. No shares were converted in 2016.2019. In the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series II Class B Stock then outstanding are entitled to $12.50 per share, plus all unpaid dividends, after distribution obligations to holders of Series I Class B Stock have been satisfied and prior to any distributions to holders of Series III Class B Stock Series IV Class B Stock, Series V Class B Stock, or Common Stock.
Series III Class B Stock
There were 106,745 and 129,245 shares of $1 par value Series III Class B Stock outstanding at December 31, 20162020 and 2015.2019. Holders of Series III Class B Stock are entitled to receive a cumulative annual dividend of $1.00 per share, payable quarterly if declared by the Board of Directors. At December 31, 2016,2020, approximately $4,016,000$4,037,000 of dividends which have not been declared were in arrears.
Series III Class B Stock is redeemable after three years from the date of issuance at the option of the Company at a price of $15.00 per share, plus all unpaid dividends. Each share of Series III Class B Stock may, at the option of the stockholder, be converted to one share of Common Stock after three years from the date of issuance or in the event the Company files an initial registration statement under the Securities Act of 1933. Pursuant to these terms, 1,000 shares of Series III Class B Stock were converted into Common Stock in 2015.Stock. No shares were converted in 2016.2020 or 2019. 22,500 shares were exchanged for Common Stock in private transactions in 2020. Please see Note 19 for a description of private exchange transactions in 2020. In the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series III Class B Stock then outstanding are entitled to $12.50 per share, plus all unpaid dividends, after distribution obligations to Series I Class B Stock and Series II Class B Stock have been satisfied and prior to any distributions to holders of Common Stock.
Series IV Class B Stock Series V Class B Stock, or Common Stock.
Series IV Class B Stock
There were 0 and 342,500 shares of $1 par value Series IV Class B Stock outstanding at December 31, 20162020 and 2015.2019, respectively. Holders of Series IV Class B Stock arewere entitled to receive a cumulative annual dividend of $1.00 per share, payable quarterly, if declared by the Board of Directors. At December 31, 2016,2020, approximately $5,799,000$101,000 of dividends which have not been declared were in arrears.
Series IV Class B Stock iswas redeemable after three years from the date of issuance at the option of the Company at a price of $11.00 per share plus all unpaid dividends. Each share of Series IV Class B Stock may,was, at the option of the stockholder any time, subsequent to three years from date of issuance, be convertedconvertible into one share of Common Stock, or in the event the Company files an initial registration statement under the Securities Act of 1933.Stock. No shares of Series IV Class B Stock were converted into Common Stock in 20162020 or 2015. However, the Company did enter into an agreement which had the effect2019. 342,500 shares were exchanged for Common Stock in private transactions in 2020. Please see Note 19 for a description of cancelling 200,000 sharesprivate exchange transactions in 2015. See Note 19.2020. In the event of voluntary or involuntary liquidation, dissolution, or winding up of the Company, holders of Series IV Class B Stock then outstanding arewould have been entitled to receive liquidating distributions of $11.00 per share, plus all unpaid dividends after distribution obligations to Series I Class B Stock, Series II Class B Stock, and Series III Class B Stock have been satisfied and prior to any distribution to holders of Series V Class B Stock or Common Stock.
Series V Class B Stock
There were 40,0000 and 34,000 shares of $1 par value Series V Class B Stock outstanding at December 31, 20162020 and 2015.2019, respectively. Holders of Series V Class B Stock arewere entitled to receive a cumulative annual dividend of $0.32 per share, payable quarterly, if declared by the Board of Directors. At December 31, 2016,2020, approximately $983,000$830,000 of dividends which have not been declared were in arrears.
Series V Class B Stock iswas redeemable after two years from the date of issuance at the option of the Company at a price of $4.40 per share plus all unpaid dividends. Each share of Series V Class B Stock may,was, at the option of the stockholder any time, subsequent to the date of issuance, be convertedconvertible into Common Stock. No0 and 6,000 shares of Series V Class B Stock were converted into Common Stock in 2016 or 2015.2020 and 2019, respectively. 34,000 shares were exchanged for Common Stock in private transactions in 2020. Please see Note 19 for a description of private exchange transactions in 2020. In the event of voluntary or involuntary liquidation, dissolution, or winding up of the Company, holders of Series V Class B Stock then outstanding arewould have been entitled to receive liquidating distributions of $4.40 per share, plus all unpaid dividends after distribution obligations to Series I Class B Stock, Series II Class B Stock, Series III Class B
Stock, and Series IV Class B Stock have been satisfied and prior to any distribution to the holders of the Common Stock.
Common stock
The Company is authorized to issue 100,000,000 shares of no par value Common Stock, of which 29,666,45433,957,204 and 28,619,87432,674,954 shares were outstanding at December 31, 2016,2020 and 2015,2019, respectively. Additionally, as of December 31, 2020, a total of 462,395 shares of Common Stock were issuable upon the conversion of Preferred Stock and the exercise of stock options.
14.RELATED PARTY TRANSACTIONS
The Company has a license agreement with the Chief Executive Officer of the Company. See Note 5.
In 2016, the Company authorized three of its executive officers to purchase shares of Common Stock directly from the Company at market prices.
In November 2016, the Company granted a stock option to its Chief Executive Officer for the purchase of three million shares of Common Stock. Such stock option terminated by its terms before becoming exercisable in December 2016.
During 2014, the Company paid $38,693 to a family member of its Chief Executive Officer as an employee.6.
Table of Contents15. STOCK OPTIONS
15.STOCK OPTIONSStock options
Stock options
The Company has approved stock option plans for the granting of stock options to employees, Directors, and consultants. Options for the purchase of 3,649,508 shares of Common Stock have been issued under the 2008 Stock Option Plan, which, pursuant to a 2014 amendment, authorizes a total of 6,000,000 shares of Common Stock upon the exercise of stock options.Plan. Options for the purchase of 1,875,419199,450 shares under the 2008 Stock Option Plan were outstanding as of December 31, 2016 2,350,4922020. No shares are available for future issuance under the 2008 Stock Option Plan. A stock option for 3,000,000 shares granted to Thomas J. Shaw on November 2, 2016 terminated by its terms prior to becoming exercisable following a December 27, 2016 shareholder vote against such option.Plan, which expired July 25, 2018.
The Compensation and Benefits Committee administers all plansadministered the Company’s stock option plan prior to its termination.
Stock option exercises
Stock options were exercised by the Company’s employees and determines and/or recommendsdirectors during 2020, and, consequently, a total of 431,550 shares of Common Stock were issued for an aggregate payment to the BoardCompany of $922,512 to exercise prices at which options are granted. All executive compensation, including the granting of stock options, is determined by the Compensation and Benefits Committee. Shares issued upon exercise of options come from the Company’s authorized but unissued Common Stock. The options vested over periods up to three years from the date of grant and generally expire ten years after the date of grant. Unvested options issued under the 2008 Stock Option Plan expire immediately after termination of employment.such options.
EmployeeDirector, officer, and employee options
A summary of Director, officer, and employee options granted and outstanding under the Plans2008 Stock Option Plan is presented below:
|
| Years Ended December 31, |
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||||
Outstanding at beginning of period |
| 2,125,069 |
| $ | 0.94 |
| 2,386,736 |
| $ | 0.95 |
| 2,820,631 |
| $ | 0.95 |
| 639,300 | $ | 2.12 | 1,300,303 | $ | 1.57 | 1,805,519 | $ | 1.51 | |||||||||||||||
Granted |
| 750,400 |
| $ | 2.18 |
| — |
| $ | — |
| — |
| $ | — |
| — | $ | — | — | $ | — | — | $ | — | |||||||||||||||
Exercised |
| (1,046,580 | ) | $ | (0.82 | ) | (259,977 | ) | $ | (1.05 | ) | (418,195 | ) | $ | (0.95 | ) | (431,550 | ) | $ | (2.14 | ) | — | $ | — | — | $ | — | |||||||||||||
Forfeited |
| (10,970 | ) | $ | (1.08 | ) | (1,690 | ) | $ | (1.30 | ) | (15,700 | ) | $ | (1.37 | ) | (8,300 | ) | $ | (2.75 | ) | (661,003 | ) | $ | (1.05 | ) | (505,216 | ) | $ | (1.36 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Outstanding at end of period |
| 1,817,919 |
| $ | 1.52 |
| 2,125,069 |
| $ | 0.94 |
| 2,386,736 |
| $ | 0.95 |
| 199,450 | $ | 2.05 | 639,300 | $ | 2.12 | 1,300,303 | $ | 1.57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Exercisable at end of period |
| 1,218,519 |
| $ | 1.06 |
| 2,125,069 |
| $ | 0.94 |
| 2,386,736 |
| $ | 0.95 |
| 199,450 | $ | 2.05 | 639,300 | $ | 2.12 | 1,300,303 | $ | 1.57 | |||||||||||||||
600,400 employeeNo options were issued in 2016. A grant of three million options2020, 2019, or 2018 to the Company’s chief executive officer terminated by its terms prior to becoming exercisable. The fair value of the September 2016 grants exercisable into 500,400 shares is $1.783 per share of underlying Common Stock and is estimated on the date of the grant using the Black Scholes pricing model with the following assumptions: expected volatility of 67.1%, risk free interest rate of 1.51%, and an expected life of 7.1 years. These options were issued under the First Amended 2008 Stock Option Plan. The fair value of the December 2016 grants exercisable into 100,000 shares is $0.728 per share of underlying Common Stock and is estimated on the date of the grant using the Black Scholes pricing model with the following assumptions: expected volatility of 72.5%, risk free interest rate of 2.37%, and an expected life of 7.1 years. These options were issued under the First Amended 2008 Stock Option Plan. No employee options were issued in 2015employees or 2014.
150,000 options were issued to non-employee directors in 2016. The fair value of the 2016 grants is $0.728 per share of underlying Common Stock and is estimated on the date of the grant using the Black Scholes
pricing model with the following assumptions: expected volatility of 72.5%, risk free interest rate of 2.37%, and an expected life of 7.1 years. These options were issued under the First Amended 2008 Stock Option Plan. No options were issued to non-employee directors in 2015 or 2014.
The following table summarizes information about Director, officer, and employee options outstanding under the aforementioned plansstock option plan at December 31, 2016:2020:
Exercise |
| Shares |
| Weighted |
| Shares |
|
1.30 |
| 478,416 |
| 1.88 |
| 478,416 |
|
1.46 |
| 50,000 |
| 6.37 |
| 50,000 |
|
0.81 |
| 540,103 |
| 2.54 |
| 540,103 |
|
1.05 |
| 250,000 |
| 9.99 |
| 150,000 |
|
2.75 |
| 499,400 |
| 9.70 |
| — |
|
| Exercise Prices | Shares Outstanding | Weighted Average Remaining Contractual Life | Shares Exercisable | |||||||||||
| $ | 1.05 | 82,500 | 5.99 | 82,500 | ||||||||||
| $ | 2.75 | 116,950 | 5.70 | 116,950 | ||||||||||
Non-employee options
A summary of options outstanding during the years ended December 31 and held by non-employees is as follows:
|
| Years Ended December 31, |
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Outstanding at beginning of period |
| 57,500 |
| $ | 0.81 |
| 70,000 |
| $ | 0.81 |
| 70,000 |
| $ | 0.81 |
| — | $ | — | 57,500 | $ | 0.81 | 57,500 | $ | 0.81 | |||||||||||||||
Granted |
| — |
| — |
| — |
| — |
| — |
| — |
| — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||
Exercised |
| — |
| — |
| (12,500 | ) | (0.81 | ) | — |
| — |
| — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||
Forfeited |
| — |
| $ | — |
| — |
| — |
| — |
| $ | — |
| — | $ | — | (57,500 | ) | $ | (0.81 | ) | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Outstanding at end of period |
| 57,500 |
| $ | 0.81 |
| 57,500 |
| $ | 0.81 |
| 70,000 |
| $ | 0.81 |
| — | $ | — | — | $ | — | 57,500 | $ | 0.81 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Exercisable at end of period |
| 57,500 |
| $ | 0.81 |
| 57,500 |
| $ | 0.81 |
| 70,000 |
| $ | 0.81 |
| — | $ | — | — | $ | — | 57,500 | $ | 0.81 | |||||||||||||||
The following table summarizes information about non-employee options outstanding under the aforementioned plans at December 31, 2016:
Exercise |
| Shares |
| Weighted Average |
| Shares |
|
0.81 |
| 57,500 |
| 2.54 |
| 57,500 |
|
The Company recorded $388 thousand of stock-based compensation expense in 2016. Unrecognized stock-based compensation expense of $684,794 will be fully recognized in 2017. The Company recorded no stock-based compensation expense in 20152018, 2019, or 2014. The total intrinsic value of2020. At December 31, 2020, there were 199,450 stock options exercised was $1,414,892; $856,269; and $1,157,615 in 2016, 2015, and 2014, respectively. The aggregate intrinsic value of options outstanding and exercisable with exercise prices lower than the closing market priceprice. The intrinsic value of these options at December 31, 2016,2020 was $71,712.$1,733,856.
Options Pricing Models —– Assumptions
The expected life is based on the Company’s historical experience with option exercise trends. The assumptions for expected volatility isare based on a calculation of volatility over the five-years preceding the grant date. Risk-free interest rates are set using grant-date U.S. Treasury yield curves. In its calculations, the Company assumed no dividends. The Company elected a policy to account for forfeitures as they occur, rather than on an estimated basis.
16.401(k) PLAN
The Company implemented an employee savings and retirement plan (the “401(k) Plan”) in 2005 that is intended to be a tax-qualified plan covering substantially all employees. The 401(k) Plan is available to all employees on the first day of the month after 90 days of service. Under the terms of the 401(k) Plan, employees may elect to contribute up to 88% of their compensation, or the statutory prescribed limit, if less. The Company may, at its discretion, match employee contributions. In the first quarter of 2016, the Company reinstituted a policy of matching. For 2016,2020, 2019, and 2018, the Company matched each participant’s elective deferrals up to 2% of the participant’s compensation for the pay period. The total match for 2016 was $122,369. The Company did not match contributions$162,008; $117,917; and $145,146 in 2015 or 2014.2020, 2019, and 2018, respectively.
17. BUSINESS SEGMENT
17.BUSINESS SEGMENTSThe following is a summary of the Company’s sales and long-lived assets by geography:
|
| 2016 |
| 2015 |
| 2014 |
| 2020 | 2019 | 2018 | ||||||||||||
U.S. sales |
| $ | 26,308,246 |
| $ | 23,029,976 |
| $ | 27,649,974 |
| $ | 73,803,806 | $ | 31,897,924 | $ | 28,646,574 | ||||||
North and South America sales (excluding U.S.) |
| 2,741,518 |
| 5,668,785 |
| 5,651,426 |
| 6,893,150 | 8,248,990 | 3,597,444 | ||||||||||||
Other international sales |
| 776,872 |
| 853,439 |
| 1,219,230 |
| 1,165,497 | 1,650,265 | 1,030,684 | ||||||||||||
Total sales |
| $ | 29,826,636 |
| $ | 29,552,200 |
| $ | 34,520,630 |
| $ | 81,862,453 | $ | 41,797,179 | $ | 33,274,702 | ||||||
|
|
|
|
|
|
|
| |||||||||||||||
Long-lived assets |
|
|
|
|
|
|
| |||||||||||||||
U.S. |
| $ | 11,930,293 |
| $ | 11,282,192 |
| $ | 10,642,859 |
| ||||||||||||
International |
| $ | 161,744 |
| $ | 185,869 |
| $ | 209,994 |
| ||||||||||||
| Long-lived assets | 2020 | 2019 | ||||||
| U.S. | $ | 30,751,259 | $ | 10,542,688 | ||||
| International | $ | 65,245 | $ | 89,369 | ||||
The Company does not operate in separate reportable segments. The Company has minimal long-lived assets in foreign countries. 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.
18. LEASESTREASURY SHARES
The Board of Directors of the Company cancelled all treasury shares effective August 11, 2015.
19.PREFERRED STOCK TRANSACTION
The Company exchanged 728,000has operating leases for a warehouse and equipment. The leases have a remaining lease term of less than one year. The Company currently has no finance leases. The 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 $103,312 and $80,648 for the years ended December 31, 2020 and 2019, respectively. The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $106,101 and $80,648 for the years ended December 31, 2020 and 2019, respectively.
Assets and liabilities associated with these leases included in the Balance Sheets are as follows:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| OPERATING LEASES | ||||||||
| Other assets | $ | 38,892 | $ | 82,359 | ||||
| Other accrued liabilities | $ | 38,892 | $ | 82,359 | ||||
| Other long-term liabilities | — | — | ||||||
| Total operating lease liabilities | $ | 38,892 | $ | 82,359 | ||||
19. PRIVATE EXCHANGES AND REDEMPTION
Private Exchanges of Preferred Stock for Common Stock
In 2020, the Company entered into several agreements with shareholders to purchase its outstanding Class B Convertible Preferred Stock. The consideration for these purchases consisted of both cash and Common Stock. In addition, in each such transaction, the preferred shareholder counterparty waived their rights to unpaid
dividends in arrears. In total, 22,500 shares of CommonSeries III Class B Convertible Preferred Stock, for 200,000342,500 shares of our Series IV Class B Convertible Preferred Stock, asand 34,000 shares of November 30, 2015, pursuant to an agreementSeries V Class B Convertible Preferred Stock were purchased by the Company. The aggregate cash consideration equaled $3,786,000, of which $482,670 was paid in 2020 with the rest payable over a shareholder. Such shareholder agreed to waive allthree-year period beginning February 2021. The aggregate stock consideration was 754,000 shares of Common Stock. As a result of the transactions, $7,642,049 in unpaid dividends in arrears associatedwere waived, as measured from the effective date of each transaction.
Redemption of Class B Series I Preferred Stock
The Company caused a redemption of its Class B Series I Preferred Stock on December 31, 2020 pursuant to the terms of the Certificate of Designation for such series of preferred stock which required a redemption price of $7.50 per share. Pursuant to such redemption, all shares of the Class B Series I Preferred Stock existing on December 31, 2020 (14,300 shares) were cancelled.
20. PAYCHECK PROTECTION PROGRAM LOAN
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 pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (“SBA”). The PPP Loan’s original maturity date is April 17, 2022 and bears interest at a rate of 1.0% per annum. 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. The Company has requested forgiveness for the PPP Loan but cannot be assured that such request will be granted.
Assuming the PPP Loan is not forgiven, the Company’s obligations thereunder are as follows at December 31, 2020:
| 2021 | $ | 755,907 | ||
| 2022 | 607,093 | |||
| $ | 1,363,000 |
21. 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. The Company continues to monitor the evolving situation and will work to further mitigate risks to staff and to customers. The Company is continuing to evaluate the ever-changing circumstances surrounding this pandemic as it relates to its ability to continue to source materials and products, maintain a workforce, and operate its business effectively and efficiently. Despite the global disruption of the coronavirus pandemic, the Company has not experienced a significant disruption to its supply chain. During 2020, the Company has experienced an increase in demand for its products and has been able to meet such demand with increased volumes despite the pandemic. The Company is unable to predict with certainty its ability to maintain its current operational functionality.
22. TECHNOLOGY INVESTMENT AGREEMENT
Effective July 1, 2020, the Company entered into the TIA with the tendered preferred stock, equaling $3,094,795.U.S. government. The fairprincipal purpose of the TIA is to fund the expansion of the Company’s manufacturing capacity for hypodermic safety needles and corresponding syringes in response to the worldwide COVID-19 global pandemic. The award is an expenditure-type TIA, whereby the U.S. government will make payments to the Company for the Company’s expenditures for equipment and supplies in carrying out the expansion of the Company’s domestic production. The Company’s contributions under the terms of the TIA to enhance domestic capacity of pandemic-essential
technology include providing facilities, technical expertise, labor, and maintenance of the TIA-funded equipment for a ten-year term.
As of December 31, 2020, the Company has negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $41.5 million. As of March 2021, the Company has substantially completed construction of expanded facilities consisting of approximately 27,800 square feet of additional controlled environment within existing properties and is expected to complete approximately 55,000 square feet of new warehouse space within the second quarter of 2021. The estimated cost of the controlled environment within existing properties is $6.4 million. The increase from the original $6 million estimate is due to change orders and an expedited completion date in order to receive certain manufacturing equipment at an earlier date. The new warehouse space is estimated to cost $5.8 million. The cost of the controlled environment will be funded by the U.S. government under the TIA, while the cost of the new warehouse will be funded by the Company.
23. SUBSEQUENT EVENTS
The Department of Health and Human Services entered into a contract with the Company on February 12, 2021 to supply low dead space safety syringes. The base price for the contract and purchase order is $54,217,800 for the five-month base period of performance from February 15, 2021 to July 14, 2021. Such price includes both the fixed price for the products as well as cost reimbursement for freight. The terms of the contract allow for extensions at the option of the U.S. government for up to seven additional one-month periods. If all option periods are exercised, the value of the common stock issued ($2,606,240) overcontract could increase by an additional $92,772,680, including the carrying valueprice of the preferred stock extinguished ($2,000,000) was $606,240. The excess of the dividend arrearage waived less the excess value of common stock issued, less the preferred dividend requirements for 2015 through the extinguishment date ($182,877) resulted in a deemed capital contribution of $2,305,678 for purposes of computing net income available to common shareholders. Future dividend requirements of $200,000 per year are avoided as a result of this transaction.products and freight reimbursement.
20.SUBSEQUENT EVENTS
Thomas J. Shaw purchased two millionOn March 16, 2021, the Company approved the 2021 Stock Option Plan (the “Plan”) and set aside and reserved 2,000,000 shares of Common Stock for issuance pursuant to the Plan. The Plan is subject to shareholder approval at the May 11, 2021 shareholder meeting. The Plan provides for the granting of incentive stock options and non-qualified stock options at a price equal to at least 100% of the fair market price fromvalue of the Company on January 12, 2017 for an aggregate purchase price of $1.78 million.
In February of 2017, Mr. Cowan and Ms. Larios were each granted cash bonuses of $250,000. AsCompany’s Common Stock as of the date of this report, Mr. Cowan’s bonus has not been paid.
Thegrant. Participants in the Plan may include employees, consultants, and non-employee Directors. On March 16, 2021, the Company has negotiated a reductionapproved option grants to purchase 1,000,000, 250,000, and 100,000 shares of its future litigation expensesCommon Stock to the Company’s chief executive officer, general counsel, and expects such expenses to be significantly lesschief financial officer, respectively. These shares will vest in 2017.
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
The selected quarterly financial data for the periods ended December 31, 2015, and 2014, have been derivedtheir entirety three years from the Company’s unaudited financial statementsgrant date. No award shall be exercisable unless and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation ofuntil the results of the interim periods.
|
| (In thousands, except for per share and outstanding stock amounts) |
| ||||||||||
|
| 2016 |
| ||||||||||
|
| Quarter 1 |
| Quarter 2 |
| Quarter 3 |
| Quarter 4 |
| ||||
Sales, net |
| $ | 5,922 |
| $ | 7,575 |
| $ | 8,840 |
| $ | 7,489 |
|
Cost of sales |
| 3,732 |
| 4,956 |
| 5,580 |
| 5,215 |
| ||||
Gross profit |
| 2,190 |
| 2,619 |
| 3,260 |
| 2,274 |
| ||||
Total operating expenses |
| 3,084 |
| 3,224 |
| 3,341 |
| 4,200 |
| ||||
Loss from operations |
| (894 | ) | (605 | ) | (81 | ) | (1,926 | ) | ||||
Interest and other income |
| 5 |
| 6 |
| 9 |
| 7 |
| ||||
Interest expense, net |
| (49 | ) | (57 | ) | (52 | ) | (55 | ) | ||||
Provision for income taxes |
| 1 |
| 1 |
| 1 |
| — |
| ||||
Net loss |
| (939 | ) | (657 | ) | (125 | ) | (1,974 | ) | ||||
Preferred stock dividend requirements |
| (176 | ) | (176 | ) | (176 | ) | (176 | ) | ||||
Loss applicable to common shareholders |
| $ | (1,115 | ) | $ | (833 | ) | $ | (301 | ) | $ | (2,150 | ) |
Basic loss per share |
| $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.07 | ) |
Diluted loss per share |
| $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.07 | ) |
Weighted average shares outstanding - basic |
| 28,624,874 |
| 29,483,207 |
| 29,649,874 |
| 29,659,791 |
| ||||
Weighted average shares outstanding - diluted |
| 28,624,874 |
| 29,483,207 |
| 29,649,874 |
| 29,659,791 |
| ||||
Gross profit margin |
| 37.0 | % | 34.6 | % | 36.9 | % | 30.4 | % | ||||
|
| (In thousands, except for per share and outstanding stock amounts) |
| ||||||||||
|
| 2015 |
| ||||||||||
|
| Quarter 1 |
| Quarter 2 |
| Quarter 3 |
| Quarter 4 |
| ||||
Sales, net |
| $ | 6,179 |
| $ | 6,715 |
| $ | 9,483 |
| $ | 7,175 |
|
Cost of sales |
| 3,781 |
| 4,114 |
| 6,259 |
| 4,833 |
| ||||
Gross profit |
| 2,398 |
| 2,601 |
| 3,224 |
| 2,342 |
| ||||
Total operating expenses |
| 3,293 |
| 3,841 |
| 3,423 |
| 3,215 |
| ||||
Loss from operations |
| (895 | ) | (1,240 | ) | (199 | ) | (873 | ) | ||||
Litigation proceeds |
| — |
| 7,725 |
| — |
| — |
| ||||
Interest and other income |
| 7 |
| 9 |
| 5 |
| 4 |
| ||||
Interest expense, net |
| (54 | ) | (53 | ) | (59 | ) | (54 | ) | ||||
Provision for income taxes |
| 2 |
| 2 |
| 2 |
| 2 |
| ||||
Net income (loss) |
| (944 | ) | 6,439 |
| (255 | ) | (925 | ) | ||||
Preferred stock dividend requirements |
| (228 | ) | (228 | ) | (227 | ) | (176 | ) | ||||
Deemed capital contribution on extinguishment of preferred stock |
| — |
| — |
| — |
| 2,455 |
| ||||
Income (loss) applicable to common shareholders |
| $ | (1,172 | ) | $ | 6,211 |
| $ | (482 | ) | $ | 1,354 |
|
Basic earnings (loss) per share |
| $ | (0.04 | ) | $ | 0.22 |
| $ | (0.02 | ) | $ | 0.05 |
|
Diluted earnings (loss) per share |
| $ | (0.04 | ) | $ | 0.21 |
| $ | (0.02 | ) | $ | 0.05 |
|
Weighted average shares outstanding - basic |
| 27,663,500 |
| 27,741,052 |
| 27,873,447 |
| 28,012,374 |
| ||||
Weighted average shares outstanding - diluted |
| 27,663,500 |
| 29,432,468 |
| 27,873,447 |
| 29,605,874 |
| ||||
Gross profit margin |
| 38.8 | % | 38.7 | % | 34.0 | % | 32.6 | % | ||||
Major variances for 2016 as compared to 2015 are due to stock option expense, asset impairment, and higher administrative fees. Additionally, the cost of sales were impacted by start-up costs for EasyPoint® needle production. The 2016 increases were mitigatedPlan has been approved by the Medical Device Excise Tax being suspended, lower severance pay costs, lower professional fees, and lower bonus expense. Certain quarterly amounts may not add to the annual totals due to rounding. A non-recurring recognition of $7,724,826 received from BD in the second quarter of 2015 pursuant to a patent infringement case had a significant impact on 2015 income.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There were no reportable disagreements with accountants on accounting and financial disclosures.
Effective June 30, 2016, our previous public accounting firm, CF & Co., LLP, announced that all of its partners and staff joined Moss Adams LLP. As a result, effective June 30, 2016, CF & Co., LLP resigned as our independent registered public accounting firm and our Audit Committee engaged Moss Adams LLP to serve as our independent registered public accounting firm.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”"Exchange Act"), 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, DouglasJohn W. CowanFort III (the “CFO”), acting in their capacities as our principal executive and financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. 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’sCommission's (the “SEC”) 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 December 31, 2016,2020, our disclosure controls and procedures were not effective, as discussed below.effective.
Management’sManagement's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The term internal control over financial reporting means a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, Management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets; (ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Management and Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Management used theInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting as required by paragraph (c) of Rule 13a-15 under the Exchange Act.
During the preparation of the Annual Report on Form 10-K for the year ended December 31, 2015, our auditors brought errors in the total amount of raw materials to the attention of Management. The errors resulted from an incorrect pricing of two individual inventory amounts in our detailed raw materials ledger, which is currently maintained in a spreadsheet. The errors arising from the underlying deficiency did not result in a revision to previously filed financial statements. However, in the absence of remedial efforts, this control deficiency could have resulted in future misstatements that would not be prevented or detected in a timely manner. Accordingly, Management, with the participation of our CEO and CFO, concluded that thereour internal control over financial reporting as of December 31, 2020, was aeffective. No material weaknessweaknesses in our internal control over financial reporting were identified by Management.
Our Management, including the CEO and CFO, does not expect that our disclosure controls and procedures andor our internal control over financial reporting werewill prevent or detect all errors and all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not effective as of December 31, 2015.absolute, assurance that the control system’s objectives will be met.
Also reported in the Annual Report on Form 10-K for the year ended December 31, 2015 and throughout the 2016 year in quarterly reports on Form 10-Q, we are transitioning to an improved Oracle inventory accounting system to correct material weaknesses. As we are still implementing this system, we cannot state that internal
controls over financial reporting or our disclosures controls and procedures are effective yet. We expect the Oracle system to be fully operational by June 30, 2017.
Changes in Internal Control Overover Financial Reporting
Except as noted above, thereThere has been no change in our internal control over financial reporting during the fourth quarter of 20162020 or subsequent to December 31, 2016,2020, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
17
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth information concerning our Directors, executives, and certainin the sections “Proposal – The Election of our significant employees as of the date of this report. Our Board of Directors currently consists of a total of five (5) members, two (2) members of which areThree Class 1 DirectorsDirectors” and three (3) of which are Class 2 Directors which serve for two-year terms.
Name |
| Age |
| Position |
| Term as |
EXECUTIVES |
|
|
|
|
|
|
Thomas J. Shaw |
| 66 |
| Chairman, President, Chief Executive Officer, and Class 2 Director |
| 2018 |
Douglas W. Cowan |
| 73 |
| Vice President, Chief Financial Officer, Treasurer, Principal Accounting Officer, and Class 2 Director |
| 2018 |
Russell B. Kuhlman |
| 63 |
| Vice President, Sales Development |
| N/A |
Michele M. Larios |
| 50 |
| Vice President, General Counsel, and Secretary |
| N/A |
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INDEPENDENT DIRECTORS |
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Marco Laterza |
| 69 |
| Class 1 Director |
| 2017 |
Amy Mack |
| 49 |
| Class 1 Director |
| 2017 |
Walter O. Bigby, Jr. |
| 52 |
| Class 2 Director |
| 2018 |
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SIGNIFICANT EMPLOYEES |
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Kathryn M. Duesman |
| 54 |
| Executive Director, Global Health |
| N/A |
Lawrence G. Salerno |
| 56 |
| Director of Operations |
| N/A |
Shayne Blythe |
| 48 |
| Director of Sales and Marketing Logistics |
| N/A |
John W. Fort III |
| 48 |
| Director of Accounting |
| N/A |
James A. Hoover |
| 69 |
| Director of Quality Assurance |
| N/A |
R. John Maday |
| 56 |
| Production Manager |
| N/A |
Judy Ni Zhu |
| 58 |
| Research and Development Manager |
| N/A |
Patti King |
| 59 |
| Director of National Accounts |
| N/A |
Executives
Thomas J. Shaw, our Founder, has served as Chairman of the Board, President, Chief Executive Officer, and Director since our inception. We believe it is appropriate for Mr. Shaw to continue to serve as a Director and as the Chairman of the Board because of his deep knowledge of the strengths and weaknesses of our products (as their primary inventor) and of the Company (as its Founder). Further, his strategic knowledge of the Company and its competitive environment arising from his ongoing services as its CEO is vital to the successful supervision of the Company by the Board of Directors. Finally, Mr. Shaw’s educational background in both Engineering and
Accounting is helpful to Board deliberations. In addition to his duties overseeing our Management, he continues to lead our design team in product development of other medical safety devices that utilize, among other things, his unique patented friction ring technology. Mr. Shaw has extensive experience in industrial product design and has developed several solutions to complicated mechanical engineering challenges.
Douglas W. Cowan is a Vice President and our Chief Financial Officer, Treasurer, Principal Accounting Officer, and a Director. Mr. Cowan joined us as Chief Financial Officer and was elected to the Board of Directors in 1999. We believe it is appropriate Mr. Cowan continue to serve as a Director due to his level of involvement“Corporate Governance” in the financial state of the Company (as its CFO) as well as his lead role in supervising all internal control and disclosure control procedures and statements. He also serves as the primary contact for investors which enables him to bring their concerns to the Board on appropriate topics as they arise. His expertise as a CPA and experience as the Company’s CFO allow him to guide the Board, upon request, with regard to financial matters. He is responsible for our financial, accounting, investor relations, information technology, risk management, and forecasting functions.
Russell B. Kuhlman joined us in February 1997 and is our Vice President, Sales Development. Mr. Kuhlman is responsible for development of national customers and liaison with GPOs and product training for our sales organization, as well as distribution. Mr. Kuhlman’s efforts with us have resulted in bringing onboard Specialty Distributors, influencing legislation, and educating influential healthcare representatives about the benefits of our product line. Mr. Kuhlman is respected throughout the industry and is a main contributor to the safety effort in this country.
Michele M. Larios joined us in February 1998 and currently serves as our Vice President, General Counsel, and Secretary. Ms. Larios is responsible for our legal and legislative, human resource, and regulatory functions. In addition to working on all legal matters, both internally and with outside counsel, Ms. Larios oversees work on any pertinent legislative issues and all relevant regulatory matters.
Independent Directors
Marco Laterza joined us as a Director effective as of March 22, 2005. We believe it is appropriate Mr. Laterza continue to serve as a Director because of his skills as a CPA as well as his decades of experience in advising individuals and entities with regard to corporate planning and financial issues. Such skills and experience provide a valuable contribution in his role as the designated financial expert on the Audit Committee as well as provide valuable independent accounting advice to the Board. Since 2015, Mr. Laterza has owned and operated an accounting practice and income tax consulting practice. From 1988 through 2014, Mr. Laterza owned and operated a public accounting practice. His practice included corporate, partnership and individual taxation, compilation/review of financial statements, financial planning, business consulting, and trusts and estates. Formerly, Mr. Laterza was employed in a number of positions from 1977 to 1985 with El Paso Natural Gas Company eventually serving as its Director of Accounting.
Amy Mack joined us as a Director on November 19, 2007. We believe it is appropriate that Ms. Mack continue as a Board member due both to her experience as a nurse (the primary retail user of our products) as well as her experience in running her own company. Since April of 2000, she has been the Secretary of EmergiStaff & Associates, a nursing agency, and she served as the Chief Nursing Officer of EmergiStaff & Associates from 2000 to 2010. From 2003 to 2010, she was the owner and Aesthetics Nurse Specialist for Spa O2 & Medical Aesthetics. Ms. Mack has served as an emergency room nurse in various emergency rooms throughout her career as a nurse.
Walter O. Bigby, Jr. has served on our Board of Directors since July 2012. We believe it is appropriate for Mr. Bigby to continue to serve as a Director due to his experience in owning and operating healthcare-related businesses. Mr. Bigby’s experience includes ownership of several small businesses, including hospitals, nursing homes, commercial real estate, and office equipment providers. Mr. Bigby has owned and operated Bastrop Rehabilitation Hospital, a rehabilitation hospital in Louisiana, since 2001. He is currently a minority interest owner in a nursing home in Louisiana. In 1995, Mr. Bigby sold his home health agency to Columbia HCA and remained a contract employee of the company (Hayden Health, Inc.) for three years developing other home health markets. Mr. Bigby has over a decade of experience operating healthcare businesses heavily regulated by Federal agencies and has experience with Medicare and Medicaid.
Significant Employees
Kathryn M. Duesman, RN, joined us in 1996 and currently serves as the Executive Director, Global Health. She provides clinical expertise on existing products as well as those in development. She has been instrumental in developing training and marketing materials and has spoken and been published on safety sharps issues. Ms. Duesman works with international agencies to promote the use of safe technologies in developing countries.
Lawrence G. Salerno has been employed with us since 1995 and has served as Director of Operations for us since 1998. He is responsible for the manufacture of all our products, as well as all product development and process development projects. In addition, he supervises all aspects of the construction and expansion of our facilities in Little Elm, Texas. Mr. Salerno is the brother of a 5% shareholder who ceased to be a 10% shareholder in 2008.
Shayne Blythe has been with us since 2001 and is our Director of Sales and Marketing Logistics. She is responsible for developing and implementing strategic directions, objectives, comprehensive sales and marketing plans, and programs. In addition, she directs and oversees all aspects of the distribution process and customer service policies in order to monitor and maintain customer satisfaction.
John W. Fort III is our Director of Accounting. Mr. Fort joined us in March of 2000 as a Financial Analyst and has served as our Director of Accounting since October of 2002. His primary responsibilities include managing the day-to-day operations of the Accounting and Finance Department and coordination of the annual audits, and interim reviews by our independent accountants, as well as our cost accounting and forecasting functions.
James A. Hoover joined us in February 1996 and is our Director of Quality Assurance. Prior to his becoming Director of Quality Assurance he was Production Manager. He is responsible for our quality assurance functions. Mr. Hoover has also developed and implemented FDA required procedures and has been involved in the FDA inspection process.
R. John Maday joined us in July 1999 and is our Production Manager. He is responsible for supervision of the production of our products. Prior to becoming Production Manager on January 1, 2005, he served as our Production General Supervisor. Mr. Maday has extensive manufacturing experience in both class II and III medical devices.
Judy Ni Zhu joined us in 1995 and is our Research and Development Manager. Her primary focus is on new product development and improvement of current products. Prior to joining us, Ms. Zhu worked as a design engineer with Mr. Shaw on the original 3mL syringe and other SBIR grant projects.
Patti S. King joined us in 2006 and is our Director of National Accounts. Ms. King is responsible for managing all activities with healthcare group purchasing organizations (GPOs), which includes national contracting negotiations and contract implementation. She has over 30 years of healthcare experience, including patient care in respiratory therapy and cardiopulmonary technology, clinical data research, clinical software development, sales, sales and operations management, and national account (group purchasing) business development. In 2005 and 2006, Ms. King served on our Board of Directors.
FAMILY RELATIONSHIPS
There are no family relationships among the above persons except as set forth above.
DIRECTORSHIPS IN OTHER COMPANIES
No Directors hold directorships in reporting companies.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the above persons or any business in which such person was an executive officer have been involved in a bankruptcy petition, been subject to a criminal proceeding (excluding traffic violations and other minor
offenses), been subject to any order enjoining or suspending their involvement in any type of business, or been party to an alleged violation of a securities law, commodities law, law or regulation respecting financial institutions or insurance companies, law or regulation prohibiting mail or wire fraud, or rules of any organization that has disciplinary authority over its members.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Exchange Act requires our Directors, executive officers, and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of beneficial ownership (Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) of our Common Stock and our other equity securities. Officers, Directors, and greater than 10% shareholders are required by the SEC’s regulations to furnish us with copies of all Section 16(a) reports they file. Russell B. Kuhlman, an executive officer, filed a Form 4 five weeks late. Based on our review of the forms submitted to us during and with respect to its most recent fiscal year, all of our other executive officers filed all reports timely.
CODE OF ETHICS
Effective as of March 9, 2004, we adopted a code of ethics that applies to all employees, including, but not limited to, our principal executive and financial officers. Our Code of Business Conduct and Ethics is designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interests between personal and professional relationships;
2. Full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications;
3. Compliance with applicable governmental laws, rules, and regulations;
4. The prompt, internal reporting of violations of the code to an appropriate person or persons identified in the code; and
5. Accountability for adherence to the code.
A copy of the code2021 proxy statement is incorporated herein as Exhibit No. 14. We have posted a copy of the code on our website at www.retractable.com. Please follow the link to “Investors” then click “Governance” then click “Charters,” then select “RVP Corporate Code of Conduct.” Any amendment to this code or waiver of its application to the principal executive officer, principal financial officer, principal accounting officer, or controller or similar person shall be disclosed to investors by means of a Form 8-K filing with the SEC. We will provide to any person without charge, upon request, a copy of such code of ethics. Such requests should be submitted in writing to Mr. Douglas W. Cowan at 511 Lobo Lane, P.O. Box 9, Little Elm, Texas 75068-0009.reference.
AUDIT COMMITTEE
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act consisting of Marco Laterza and Walter O. Bigby, Jr. Each of the members of the Audit Committee is independent as determined by the NYSE MKT rules. During 2016, the Company relied on a provision of Section 801(h) allowing the Audit Committee to consist of only two members. Section 801(h) is applicable to the Company because it is a Smaller Reporting Company.
Audit Committee Financial Expert
The Board of Directors has determined that we have at least one financial expert serving on the Audit Committee. Mr. Marco Laterza serves as our designated Audit Committee Financial Expert. Mr. Laterza is independent as defined for Audit Committee members by the listing standards of the NYSE MKT.
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Consultant Reports
On October 13, 2016, the Company’s Compensation and Benefits Committee retained Longnecker Investment Group Inc., d/b/a Longnecker & Associates, a compensation consulting company. This engagement is the first time since 2003 that the Company has engaged such a consultant or engaged in a review of comparable compensation programs. The reason for the Company’s inactivity in the intervening years has been due to the Company’s unique market environment. Although the market conditions have not changed materially, the Company believes it owes its most loyal executive officers more competitive compensation.
The Compensation and Benefits Committee, after reviewing the factors set forth in Rule 10C-1(b)(4) under the Securities Exchange Act of 1934, determined that Longnecker & Associates was independent.
The Company’s Compensation and Benefits Committee received reports from Longnecker & Associates on the following matters in 2016:
· The competitiveness of the base salary, annual incentives, and long-term incentives paid to Mr. Shaw compared with the external market over his tenure;
· A base salary analysis and the competitiveness of base salaries, annual incentives, and long-term incentives paid to Mr. Cowan and Ms. Larios compared with the external market over their tenures and a calculation of the overall value of over/under-compensation; and
· A market competitive study of possible equity grants to certain officers and directors.
The results of the reports indicated that Mr. Shaw, Mr. Cowan, and Ms. Larios had been underpaid for the past fifteen years. In many cases, a large component of the under-compensation is the comparative size of equity grants and bonuses.
The Company initially proposed a sizable stock option grant for Mr. Shaw to compensate him for past years’ underpayments. However, following the grant of this stock option, the stock price dropped dramatically in December following the Fifth Circuit’s December 2 opinion which affirmed in part, reversed in part, and vacated and remanded the district court’s opinion in our case against BD. As such, the Company determined that it would be inappropriate to incur a stock option expense of $5.9 million relating to that option and announced a reversal of its opinion on the stock option’s approval. Consequently, the shareholders voted against the stock option, causing the option to terminate effective December 27.
One of the Longnecker & Associates reports indicated a range of appropriate annual equity grants for chief financial officers, general counsels, and independent directors. Consistent with such report, the Compensation and Benefits Committee granted stock options for the purchase of 50,000 shares of Common Stock to Mr. Cowan, Ms. Larios, and all three independent directors on December 27, 2016. The stock option expense associated with these grants was determined to be reasonable for the Company, in contrast to the stock option expense in connection with Mr. Shaw’s option grant discussed above.
Longnecker & Associates determined that Mr. Cowan’s and Ms. Larios’ base salaries are currently appropriate for their positions. However, as stated above, both officers were historically underpaid in terms of overall compensation. One report indicated that Ms. Larios’ underpayments over the last fifteen years aggregated $3.2 million. Another report indicated that Mr. Cowan’s aggregate underpayments for the same period was $1.8 million. In consideration of their loyalty, the Compensation and Benefits Committee issued to Mr. Cowan and Ms. Larios a special cash bonus of $250,000 each in February 2017. As of the date of this report, Mr. Cowan’s bonus has not yet been paid. The Longnecker & Associates reports supported an even higher bonus amount, but the Committee determined to be more conservative in its grant at this time.
For several of the reports, the benchmarking used by Longnecker & Associates was slightly different, as described below.
For the reports determining historical under-compensation for Ms. Larios and Mr. Cowan and evaluating cash bonuses, both officers’ compensation was compared to the 75th percentile of compensation data from the following published salary surveys: the 2015/2016 ERI Executive Compensation Assessor by the Economic Research Institute; the 2016 CompAnalyst Compensation Survey by Kenexa; the 2015 Top Management Compensation Survey by Towers Watson; and the 2015 General Executive Benchmark by Mercer. No individual companies were used because the report covered fifteen years of data.
These same surveys listedinformation in the foregoing paragraph were usedsection “Compensation” in the report created2021 proxy statement is incorporated herein by Longnecker & Associates in recommending the stock option grant to Mr. Shaw, which was also evaluated using the 75th percentile. As indicated above, this stock option terminated by its terms shortly after the Board of Directors determined to recommend that the shareholders reject it.reference.
For the report on annual long-term incentives, the following public peer companies were used in the comparisons: Cogentix Medical, Inc., BIOLASE, Inc., GenMark Diagnostics, Inc., Utah Medical Products, Inc., Allied Healthcare Products, Inc., IRadimed Corporation, Stereotaxis Inc., Bovie Medial Corporation, Misonix, Inc., CAS Medical Systems Inc., Electromed, Inc., Chembio Diagnostics, Inc., Miramar Labs, Inc., Sientra, Inc., Amedica Corporation, and ViewRay, Inc.
The Objectives of Our Compensation Plan
Our executive officer compensation program (the “Compensation Program”) is based on the belief that competitive compensation is essential to attract, retain, motivate, and reward highly qualified and industrious executive officers. Our Compensation Program is intended to accomplish the following:
· attract and retain highly talented and productive executive officers;
· provide incentives and rewards for superior performance by the executive officers; and
· align the interests of executive officers with the interests of our stockholders.
Our Compensation Program is designed to award both superior long-term performance by our executive officers and their loyalty.
Summary of Each Element of Compensation
To achieve these objectives, the Compensation and Benefits Committee has approved an executive officer compensation program that consists of four basic components:
· base salary;
· short-term incentive compensation in the form of cash bonuses;
· periodic long-term incentive compensation in the form of stock options; and
· medical, life, and benefit programs (which are generally available to all employees).
Why We Choose to Pay Each Element of Our Compensation Program
Base Salary
We choose to pay a significant component of our compensation in base salary due to the fact that our financial performance is constrained by the activities of BD. Until such time as we believe that we have access to the market, we believe that it is appropriate to weigh our Compensation Program heavily in favor of base salaries rather than incentive compensation.
Cash Bonuses
From time to time and when our cash reserves allow, we grant cash bonuses in order to reward significant efforts or the accomplishment of short term goals. The Compensation and Benefits Committee granted such bonuses in February 2017. Prior to 2017, the last bonuses were granted in 2010.
Long-Term Incentives: Stock Options
Long-term incentives are provided through grants of stock options. The grants are designed to align the interests of executive officers with those of stockholders and to provide each executive officer with a significant incentive to manage from the perspective of an owner with an equity stake in the Company.
How We Determine the Amount or Formula for Payment in Light of Our Objectives
Executive compensation remains the same until there is a review of such compensation by the Compensation and Benefits Committee. Compensation, other than that of the Chief Executive Officer, has generally not been reviewed annually. Under the terms of Mr. Shaw’s employment agreement, his compensation is reviewed annually.
Base Salary
The base salary for each of our executive officers is subjectively determined primarily on the basis of the following factors: experience, individual performance, contribution to our performance, level of responsibility, duties and functions, salary levels in effect for comparable positions within and without our industry, and internal base salary comparability considerations. However, salaries can also be affected by our long-term needs.
These base salaries are reviewed periodically and may be adjusted based upon the factors discussed in the previous paragraph, as well as upon individual performance during the previous fiscal year, changes in the duties, responsibilities and functions of the executive officer, and general changes in the compensation peer group in which we compete for executive talent. The relative weight given to each of these factors in the Compensation and Benefits Committee’s recommendation differs from individual to individual, as the Compensation and Benefits Committee deems appropriate.
A 10% reduction in executive officer salary occurred in July 2014, but the salaries were generally restored in January 2015. Executive officers were generally given a one-time payment in December 2014 to offset the 2014 reductions.
Mr. Shaw’s Employment Agreement provides that his salary is automatically increased by the percentage increase in the consumer price index (“CPI”) from the previous year. The Compensation and Benefits Committee decided to increase Mr. Shaw’s salary by the CPI percentage increase ($9,866 or 2.10%) over his 2016 salary for 2017.
Cash Bonuses
The bonuses, when paid, are paid on a discretionary basis as determined by the Compensation and Benefits Committee. Factors considered by the Compensation and Benefits Committee include personal performance, level of responsibility, and the factors used in determination of base salary as stated above, except with a greater focus on the prior fiscal year. The Compensation and Benefits Committee also considers our need to retain cash in deciding whether to grant cash bonuses.
In February of 2017, Mr. Cowan and Ms. Larios were each granted cash bonuses of $250,000.
Long-Term Incentive: Stock Options
We have issued stock options to our employees from time to time and may do so in the future. Effective September 9, 2016, we granted options for the purchase of 500,400 shares of Common Stock to our employees. Effective December 27, 2016, we granted options for the purchase of a total of 250,000 shares (50,000 shares each) to our chief financial officer, general counsel, and our three independent directors.
Generally, if stock options are to be issued, Management prepares a proposal to the Compensation and Benefits Committee. Considerations by Management in its initial proposal in determining a suitable aggregate fair market value of options to be granted include our financial condition, the number of options already outstanding, and the benefit to the non-officer employees. The proposal includes information relating to the expected expense of such grants to be recognized by us, the approximate number of options to be issued, the number of options currently outstanding, the employees to be included, the amount of stock currently outstanding, and the method under which the options would be awarded. If the recommendation is acceptable, the committee grants the options. If the committee feels changes are merited, it grants options on its own terms.
With regard to many past grants, after the aggregate number of shares underlying the options to be granted was determined, we allocated the options to our various departments using a factor based on their annual compensation times their performance rating. The individual employee’s allocation factor was the numerator of a fraction. The denominator was the department’s sum of all factors (annual compensation times performance ratings of all the eligible employees). The resulting fraction was multiplied by the stock options to be awarded to determine the employee’s individual portion of the aggregate approved options. Future grants may be based on the value of contributions to the Company and not necessarily pursuant to any formula. The allocation may be further reviewed by each department’s management if they believed certain employees were not awarded an appropriate number of options. Management would consider any suggestions.
Each stock option grant to employees allows the employee to acquire shares of Common Stock at a fixed price per share (never less than the closing stock price of the Common Stock on the date of grant or the prior trading day, as applicable) for a fixed period (usually ten years). Options granted in 2016 vested in one year for employees and vested immediately for independent directors. Accordingly, generally stock option grants will provide a return to the employee only if the employee remains employed by us during the vesting period, and then only if the market price of the underlying Common Stock appreciates. Future grants may vest over a shorter or longer period.
How Each Compensation Element and Decision Fits Into Overall Compensation Objectives
Our Compensation Program is intended to accomplish the following objectives: 1) attract and retain highly talented and productive executive officers; 2) provide incentives and rewards for superior performance by the executive officers; and 3) align the interests of executive officers with the interests of our stockholders.
We generally pay the bulk of our compensation in the form of cash compensation due to the fact that competing in a market environment in which results will not always be commensurate with performance. We believe that the performance of our executives has been outstanding. We believe this is especially true given the market environment in which we operate. Bonuses are granted occasionally to recognize extraordinary performance and/or extraordinary job requirements.
Periodically, we grant stock options with the intent to provide both an incentive and reward to executive officers for long-term performance and to align the interests of our employees with that of the shareholders.
Shareholder Advisory Votes
A majority of the votes cast in 2016 on the say-on-pay proposal were voted in favor of the proposal. The Compensation and Benefits Committee will continue to take into account the outcome of say-on-pay votes when making compensation decisions for the named executive officers. However, we have determined that it is not appropriate to continue to keep the compensation of the executive officers static in light of the fact that we have received analyses that our executive officers have been historically undercompensated.
Allocation between Long-Term/Current and Between Cash/Non-Cash Compensation
All of our long-term compensation consists of non-cash compensation in the form of stock options. We believe that the granting of stock options incentivizes executives to maximize our long-term strengths as well as our stock price. However, because our stock price has little relationship with our performance, the most significant component of compensation is base salary and not stock options. Management is incentivized to maximize shareholder value and will be rewarded if they do so.
How Determinations Are Made as to When Awards Are Granted
Generally, option awards to executive officers are granted by the Compensation and Benefits Committee and for others are granted at the discretion of the Board after recommendation of the Compensation and Benefits Committee or on the committee’s own initiative. No awards are granted if the Compensation and Benefits Committee does not support a recommendation.
Unfortunately, our stock price does not always react as expected to our achievements. Accordingly, at times, options have been granted to aid in retaining competent and experienced executives without regard to the then current stock price. However, such options always have exercise prices that are at or above fair market value on the date of grant.
In addition, there is no relationship between the date of grant of options and our possession of material non-public information (i.e., we grant options without regard to whether or not we are in possession of material non-public information). Furthermore, it is our policy with regard to options that (although the options could be exercised) the underlying shares could not be sold into the market while the executive was in possession of material non-public information. Accordingly, we believe that there is minimal risk of the executive profiting from such material nonpublic information.
What Specific Items of Corporate Performance Are Taken Into Account in Setting Compensation Policies and Making Compensation Decisions
Generally, cash reserves as well as trends in sales and costs are taken into account when considering the advisability of increasing base salaries or granting cash bonuses. However, no specific items of corporate performance are taken into account in setting executive compensation due to the fact that we compete in a market environment where significant achievement or performance is not always correlated with corporate results. At such times that any of these factors make it inadvisable to increase salaries or grant bonuses, then consideration is given to increasing option awards taking into account the value of prior option awards.
Awards are granted on the basis of historical performance. Accordingly, there is no discretion to change the awards once granted.
How Compensation Reflects Individual Performance
Executive compensation is not based on the individual’s contribution to specific, quantitative corporate objectives due to factors mentioned above regarding our market environment. However, the individual’s contribution to our performance is determined pursuant to qualitative factors as discussed above under “How We Determine the Amount or Formula for Payment in Light of Our Objectives.”
Factors We Consider in Determining to Change Compensation Materially
We consider our cash position, current liquidity trends, and the short-term and long-term needs for cash reserves when evaluating whether we can change compensation materially at a given time.
On an individual-by-individual basis, we also consider the value of past option compensation, the competitiveness of that individual’s base salary, and that individual’s contribution to our goals.
The Impact of the Accounting and Tax Treatments of Our Types of Compensation
Stock options granted to executives and other employees are expensed for accounting purposes under the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification. We expense all of our option costs as we do the costs of salaries and any periodic bonuses. Accordingly, the impact of tax treatment of various compensation forms does not impact our compensation decisions. Stock option expense is not recognized for tax purposes, except in the case of non-qualified stock options. For non-qualified stock options, the intrinsic value of the option is recognized when the option is exercised.
Our Policy Regarding Stock Ownership and Hedging
We do not have a policy regarding stock ownership by executive officers. We prohibit certain stock transactions by employees and Directors, including:
1. Purchases and sales of our stock within a six month period;
2. Short sales of our stock; and
3. Transactions in puts, calls, or other derivative securities involving our stock.
Furthermore, employees and Directors are required to pre-clear any hedging transactions.
The Role of Our Executives and Directors in Determining Compensation
Management establishes the initial recommendations regarding compensation for all employees, including themselves. The Compensation and Benefits Committee reviews executive compensation changes.
Compensation Pursuant to Employment Agreement
We have an Employment Agreement with Mr. Thomas J. Shaw (the “Employment Agreement”) which was modified effective January 1, 2008 to avoid adverse tax consequences to Mr. Shaw created by the passage of the American Jobs Creation Act of 2004. No other executives or Directors are compensated pursuant to employment agreements.
The Employment Agreement provides for an initial period of three years which ended December 31, 2010 and automatically and continuously renews for consecutive two-year periods. The Employment Agreement is terminable either by us or Mr. Shaw upon 30 days’ written notice or upon Mr. Shaw’s death.
The Employment Agreement provides for an annual salary of at least $416,400 with an annual salary increase equal to no less than the percentage increase in the CPI over the prior year. The Employment Agreement requires that Mr. Shaw’s salary be reviewed by the Compensation and Benefits Committee annually, which shall make such increases as it considers appropriate. Accordingly, the Compensation and Benefits Committee increased his 2017 salary by $9,866 (2.10%) over his 2016 salary in accordance with the percentage increase in the CPI over the prior year.
Under the Employment Agreement, we are obligated to provide certain benefits, including, but not limited to, participation in qualified pension plan and profit-sharing plans, participation in the Company’s Cafeteria Plan and other such insurance benefits provided to other executives, paid vacation, and sick leave. We are also obligated to furnish him with a cellular telephone and suitable office space as well as reimburse him for any reasonable and necessary out of pocket travel and entertainment expenses incurred by him in carrying out his duties and responsibilities, membership dues to professional organizations, and any business-related seminars and conferences.
Pursuant to the Employment Agreement, we are obligated to indemnify Mr. Shaw for all legal expenses, court costs, and all liabilities incurred in connection with any proceeding involving him by reason of his being an officer, employee, or agent of the Company. We are further obligated to pay reasonable attorney fees and expenses
and court and other costs associated with his defense in the event that, in Mr. Shaw’s sole judgment, he needs to retain counsel or otherwise expend his personal funds for his defense.
Upon his death, Mr. Shaw’s estate shall be entitled to his salary through the date of death, applicable benefits, and reimbursement of expenses.
We have the right to terminate the Employment Agreement if Mr. Shaw incurs a permanent disability during the term of his employment. A permanent disability means that Mr. Shaw is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months or is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company. Mr. Shaw shall also be deemed to be disabled if he is determined to be totally disabled by the Social Security Administration. In such event, Mr. Shaw is entitled to his salary through the date of termination, reimbursement of expenses, and salary for a period of 24 months as well as applicable benefits.
Mr. Shaw’s employment may be terminated for cause which is defined to be conviction of a felony which is materially detrimental to the Company, proof, as determined finally by a court of competent jurisdiction of the gross negligence or willful misconduct which is materially detrimental to the Company, or proof, as determined finally by a court of competent jurisdiction, of a breach of a fiduciary duty which is materially detrimental to the Company. In such event, he shall be entitled to his salary through the date of termination plus reimbursement of expenses.
If Mr. Shaw is terminated without cause and not at his implicit request, Mr. Shaw shall be entitled to his salary through the date of termination, reimbursement of expenses, his salary for 24 months, as well as applicable benefits.
If Mr. Shaw resigns (other than because of a change in control), he is entitled to his salary through the date of termination, reimbursement of expenses, salary for 90 days, and applicable benefits.
Mr. Shaw has the right under this agreement to resign in the event that there is a change in control. A “Change of Control” shall be deemed to have occurred on either of the following dates: (i) the date any one person (other than Mr. Shaw), or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 30% or more of the total possible voting power of the stock of the Company (assuming the immediate conversion of all then outstanding convertible preferred stock) or (ii) the date a majority of members of the Board of Directors is replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election. Mr. Shaw further has the right to resign if there is a change in ownership. A change in ownership is defined to have occurred on the date that any one person (other than Mr. Shaw) or more than one person acting as a group acquires ownership of the Company’s stock that, together with the stock previously held by such person or group, constitutes more than 50% of the total fair market value or total voting power (assuming the immediate conversion of all then outstanding convertible preferred stock) of the Company. In such event Mr. Shaw is entitled to salary through the date of termination, salary for 24 months, reimbursement of expenses, and applicable benefits.
Mr. Shaw’s commitment to the Company may not be construed as preventing him from participating in other businesses or from investing his personal assets as may require occasional or incidental time in the management, conservation, and protection of such investments provided such investments or businesses cannot be construed as being competitive or in conflict with the business of the Company.
Mr. Shaw has agreed to a one-year non-compete, not to hire or attempt to hire employees for one year, and not make known our customers or accounts or to call on or solicit our accounts or customers in the event of termination of his employment for one year unless the termination is without cause or pursuant to a change of control or ownership.
Compensation Committee Report
The Compensation and Benefits Committee has reviewed and discussed the COMPENSATION DISCUSSION AND ANALYSIS required by Item 402(b) of Regulation S-K with Management, and, based on the review and discussions referred to in paragraph (e)(5)(i)(A) of Item 407 of Regulation S-K, has recommended to the Board of Directors that the COMPENSATION DISCUSSION AND ANALYSIS be included in this report on Form 10-K.
| |
| |
|
The following Summary Compensation Table sets forth the total compensation paid or accrued by us over the past three fiscal years to or for the account of the named executive officers:
SUMMARY COMPENSATION TABLE FOR 2014-2016
Name and Principal Position |
| Year |
| Salary |
| Option |
| All Other |
| Total |
|
Thomas J. Shaw |
| 2014 |
| 464,454 | (1) | — |
| — |
| 464,454 |
|
President and CEO |
| 2015 |
| 484,506 |
| — |
| — |
| 484,506 |
|
(principal executive officer) |
| 2016 |
| 469,827 |
| — |
| 1,350,000 | (2) | 1,819,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michele M. Larios |
| 2014 |
| 351,346 | (1) | — |
| — |
| 351,346 |
|
Vice President, |
| 2015 |
| 363,462 |
| — |
| — |
| 363,462 |
|
General Counsel |
| 2016 |
| 350,000 |
| 36,400 | (3) | — |
| 386,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas W. Cowan |
| 2014 |
| 291,115 | (1) | — |
| — |
| 291,115 |
|
Vice President, CFO |
| 2015 |
| 301,154 |
| — |
| — |
| 301,154 |
|
(principal financial officer, principal accounting officer) |
| 2016 |
| 290,000 |
| 36,400 | (3) | — |
| 326,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell B. Kuhlman |
| 2014 |
| 146,117 | (1) | — |
| 112,600 | (5) | 258,717 |
|
Vice President, Sales |
| 2015 |
| 151,351 |
| — |
| — |
| 151,351 |
|
Development |
| 2016 |
| 153,522 |
| 23,357 | (3) | — |
| 176,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathryn M. Duesman(4) |
| 2014 |
| 171,519 |
| — |
| — |
| 171,519 |
|
Executive Director, |
| 2015 |
| 178,214 |
| — |
| — |
| 178,214 |
|
Global Health |
| 2016 |
| 184,749 |
| 36,908 | (3) | — |
| 221,657 |
|
(1) The following amounts included in the Salary column for 2014 represent nonrecurring payments made to offset salary reductions: for Thomas J. Shaw, $23,143; for Michele M. Larios, $17,500; for Douglas W. Cowan, $14,500; and for Russell B. Kuhlman, $7,069.
(2) This amount is the result of Mr. Shaw’s gain on exercising a portion of his stock option for 1,000,000 shares of Common Stock. This gain had no effect on our financial statements. The expense related to the stock options was recognized in previous years.
(3) Assumptions for Ms. Larios and Mr. Cowan’s stock option awards include: 50,000 underlying shares each, exercise price of $1.05 per share, a ten-year term, a 7.1 year expected life, a risk-free rate of 2.37%, and a volatility factor of 72.5%. These options vest in December 2017.
Mr. Kuhlman was granted an option for 13,100 underlying shares. Ms. Duesman was granted an option for 20,700 underlying shares. Assumptions for Mr. Kuhlman’s and Ms. Duesman’s stock option awards include: exercise price of $2.75 per share, a ten-year term, a 7.1 year expected life, a risk-free rate of 1.51%, and a volatility factor of 67.16%. These options vest in September 2017.
(4) Ms. Duesman is not an executive officer, but qualifies as a “named executive officer” by virtue of Item 402(m)(2)(iii).
(5) This amount is the result of Mr. Kuhlman’s gain on exercising a portion of his stock option for 45,000 shares of Common Stock. This gain had no effect on our financial statements. The expense related to the stock options was recognized in previous years.
GRANTS OF PLAN-BASED AWARDS
The following Grants of Plan-Based Awards for 2016 table sets forth information regarding grants of awards made under any plan to each named executive officer in the last completed fiscal year.
Grants of Plan-Based Awards for 2016
Name |
| Grant |
| Estimated |
| Exercise |
| Grant date |
| ||
Thomas J. Shaw |
| — |
| — |
| — |
| — |
| ||
President and CEO |
|
|
|
|
|
|
|
|
| ||
(principal executive officer) |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Douglas W. Cowan |
| 12/27/2016 |
| 50,000 |
| $ | 1.05 |
| $ | 36,400 |
|
Vice President, CFO |
|
|
|
|
|
|
|
|
| ||
(principal financial officer) |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Michele M. Larios |
| 12/27/2016 |
| 50,000 |
| $ | 1.05 |
| $ | 36,400 |
|
Vice President, |
|
|
|
|
|
|
|
|
| ||
General Counsel |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Russell B. Kuhlman |
| 9/9/2016 |
| 13,100 |
| $ | 2.75 |
| $ | 23,357 |
|
Vice President, Sales |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Kathryn M. Duesman |
| 9/9/2016 |
| 20,700 |
| $ | 2.75 |
| $ | 36,908 |
|
Executive Director, |
|
|
|
|
|
|
|
|
| ||
Global Health |
|
|
|
|
|
|
|
|
| ||
(1) These options were granted under the First Amended 2008 Stock Option Plan.
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Please see Compensation Pursuant to Employment Agreement above and POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL below for terms of our only employment agreement in effect.
Salary represents a substantial portion of the total compensation for all named executive officers. This form of payment is favored by the Company over equity awards due to the market environment in which the Company operates.
The vesting schedule for each of the officers’ option grants is one year from the date of grant. Other than continued employment, there are no performance-based conditions to the awards. All computations assume that the officer will continue employment for the requisite one-year period.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following Outstanding Equity Awards at Fiscal Year-End Table sets forth information regarding unexercised options held by the named executive officers as of December 31, 2016.
OUTSTANDING EQUITY AWARDS AT 2016 FISCAL YEAR END
|
| Option Awards |
| |||||||
Name |
| Number of |
| Number of |
| Option |
| Option |
| |
Thomas J. Shaw |
| — |
| — |
| — |
| — |
| |
President, CEO |
|
|
|
|
|
|
|
|
| |
(principal executive officer) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Michele M. Larios |
| — |
| 50,000 |
| $ | 1.05 |
| 12/27/2026 |
|
Vice President, |
| 152,950 |
| — |
| $ | 0.81 |
| 07/15/2019 |
|
General Counsel |
| 97,050 |
| — |
| $ | 1.30 |
| 11/18/2018 |
|
|
|
|
|
|
|
|
|
|
| |
Douglas W. Cowan |
| — |
| 50,000 |
| $ | 1.05 |
| 12/27/2026 |
|
Vice President, CFO |
| 98,000 |
| — |
| $ | 0.81 |
| 07/15/2019 |
|
(principal financial officer, principal accounting officer) |
| 102,000 |
| — |
| $ | 1.30 |
| 11/18/2018 |
|
|
|
|
|
|
|
|
|
|
| |
Russell B. Kuhlman |
| — |
| 13,100 |
| $ | 2.75 |
| 09/09/2026 |
|
Vice President, Sales Development |
| 43,450 |
| — |
| $ | 1.30 |
| 11/18/2018 |
|
|
|
|
|
|
|
|
|
|
| |
Kathryn M. Duesman |
| — |
| 20,700 |
| $ | 2.75 |
| 09/09/2026 |
|
Executive Director, Global Health |
| 53,550 |
| — |
| $ | 0.81 |
| 07/15/2019 |
|
|
| 66,450 |
| — |
| $ | 1.30 |
| 11/18/2018 |
|
(1) The vesting schedule for each of the officers’ unearned option grants is one year from the date of grant (i.e., December 27, 2017 for Ms. Larios and Mr. Cowan and September 9, 2017 for Mr. Kuhlman and Ms. Duesman).
OPTION EXERCISES
The following table sets forth information concerning the exercise of stock options during the last completed fiscal year for the named executive officers.
OPTION EXERCISES FOR 2016
|
| Option awards |
| |||
Name |
| Number of |
| Intrinsic |
| |
Thomas J. Shaw |
| 1,000,000 |
| $ | 1,350,000 |
|
President, CEO |
|
|
|
|
| |
(principal executive officer) |
|
|
|
|
| |
Mr. Shaw exercised a stock option for the purchase of 1,000,000 shares with an exercise price of $0.81 per shares on April 5, 2016, a date on which the Company’s stock price closed at $2.16 per share.
PENSION BENEFITS
We do not have a pension plan other than the 401(k) plan which is available to all employees on the first day of the month after 90 days of service.
401(k) Plan
We implemented an employee savings and retirement plan (the “401(k) Plan”) in 2005 that is intended to be a tax-qualified plan covering substantially all employees. Under the terms of the 401(k) Plan, employees may elect to contribute up to 88% of their compensation, or the statutory prescribed limit, if less. We may, at our discretion, match employee contributions. For 2016, we matched each participant’s elective deferrals up to 2% of the participant’s compensation for the pay period. We made matching contributions of approximately $122,369 in 2016, of which $15,062 were to named executive officers. There were no matching contributions in 2015 or 2014.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Other than the information set forth below for Mr. Shaw, no other named executive officer has a contract in place for termination or change in control payments.
The following table identifies the types and amounts of payments that shall be made to Thomas J. Shaw, our CEO, in the event of a termination of his employment or a change in control per his Employment Agreement. Such payments shall be made by us and shall be one-time, lump sum payments except as indicated below. In 2016, no other contract existed for payments upon termination or change in control.
SUMMARY OF PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
ASSUMING OCCURRENCE AS OF DECEMBER 31, 2016(1)
Payment Triggering Event |
| Salary |
| Amounts |
| Reimbursement |
| Undiscounted |
| Payment |
| Value of |
|
Death |
| x |
| x |
| x |
| — |
| �� |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability |
| x |
| x |
| x |
| 939,654 |
| — |
| 939,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination With Cause |
| x |
| — |
| x |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination Without Cause |
| x |
| x |
| x |
| 939,654 |
| — |
| 939,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resignation (Other Than After a Change in Control) |
| x |
| x |
| x |
| — |
| 116,164 |
| 116,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resignation (After a Change in Control) |
| x |
| x |
| x |
| 939,654 |
| — |
| 939,654 |
|
(1) The above payments would be paid under Mr. Shaw’s agreement at certain times. Any payments arising as a result of disability or resignation would be paid no sooner than six months and one day from the termination date but no later than seven months from the termination date. Any payments arising as a result of death would be paid no later than the 90th day following the death. Payments arising as a result of termination with cause or termination without cause would be paid no later than the 30th day following the date of termination, except that any amount due in excess of an amount equal to the lesser of: i) two times annual compensation or ii) two times the limit on compensation under section 401(17) of the Internal Revenue Code of 1986 shall be paid no earlier than six months and one day after the date of termination but in no event later than seven months after the date of termination. Under Mr. Shaw’s agreement, Mr. Shaw has agreed to a one-year non-compete, not to hire or attempt to hire
employees for one year, and not make known our customers or accounts or to call on or solicit our accounts or customers in the event of termination of his employment for one year unless the termination is without cause or pursuant to a change of control. However, it is not clear that the above payments are conditioned on the performance of these contractual obligations.
(2) Mr. Shaw is paid every two weeks. Therefore, the maximum value for this column in the event the triggering event took place immediately prior to a scheduled payment date is two weeks’ salary ($18,070).
(3) Mr. Shaw participates in our benefit plans which do not discriminate in scope, terms, or operation in favor of executive officers. Such plans are generally available to all salaried employees. Accordingly, the value of such payments is not included in the “Value of Payments” column.
(4) This value does not include payments under our benefit plans for reasons set forth in footnote 3 above. In addition, this value assumes that the triggering event occurred on December 31, 2016. Authorized payments under the Employment Agreement are also capped to one dollar less than the amount that would cause Mr. Shaw to be the recipient of a parachute payment under Section 280G(b) of the Internal Revenue Code.
COMPENSATION OF DIRECTORS
The following table identifies the types and amounts of compensation earned by our current and former Directors (with the exception of those that are named executive officers as described in footnote 1 to the table) in the last Fiscal Year:
DIRECTOR COMPENSATION TABLE FOR 2016
Name(1) |
| Fees Earned |
| Option Awards |
| Total |
| |||
Marco Laterza |
| $ | 3,500 |
| $ | 36,400 |
| $ | 39,900 |
|
Amy Mack |
| $ | 3,500 |
| $ | 36,400 |
| $ | 39,900 |
|
Walter O. Bigby, Jr. |
| $ | 3,500 |
| $ | 36,400 |
| $ | 39,900 |
|
(1) Thomas J. Shaw and Douglas W. Cowan are named executive officers who were also Directors in 2016. Their compensation is reflected in the Summary Compensation and other tables presented earlier.
(2) On December 27, 2016, the Compensation and Benefits Committee approved grants of stock options to all three independent directors for 50,000 shares each with ten-year terms under the First Amended 2008 Stock Option Plan with exercise prices at fair market value ($1.05 per share). The options vested immediately. The value of an option for the purchase of one underlying common share is valued at $0.728, using the Black Scholes Option Pricing Model using a risk-free rate of 2.37%, a volatility factor of 72.5%, and an expected life of 7.1 years.
Narrative Explanation of Director Compensation Table for 2016
In 2016, we paid each non-employee Director a fee of $500 per meeting and reimbursed travel expenses, if airfare, hotel, and other reasonable travel-related expenses were incurred to attend Board meetings. We do not pay any additional amounts for committee participation or special assignment.
Generally, employee Directors are compensated on an at-will basis as discussed in the COMPENSATION DISCUSSION AND ANALYSIS. However, one employee, Mr. Thomas J. Shaw, our President and CEO, is compensated pursuant to an Employment Agreement. Please see “Compensation Pursuant to Employment Agreement”, set forth above for an in depth summary of the terms of such agreement.
Compensation Committee Interlocks and Insider Participation
The Compensation and Benefits Committee is currently composed of Walter O. Bigby, Jr., Amy Mack, and Marco Laterza. Each of these members of this committee is an independent Board member and none have ever been employees of the Company.
There are no interlocking Directors or executive officers between us and any other company. Accordingly, none of our executive officers or Directors served as a Director or executive officer for another entity whose executive officers or Directors served on our Board of Directors.
COMPENSATION POLICIES AND PRACTICES AS THEY RELATE TO RISK MANAGEMENT
We do not believe that risk-taking incentives are created by our compensation policies. We do not have business units. We believe that our compensation expense is a reasonable percentage of revenues overall. We have not set specific performance criteria for the award of bonuses. Salaries and bonuses, if any, are awarded based on skill, experience, and our overall revenues. Non-cash awards to employees are made periodically in the form of stock options, which we believe align the employees’ interests with those of stockholders. We review our compensation policies and practices as they relate to risk management objectives if compensation amounts are materially amended or if our risk profile changes. No changes to our compensation policies and practices have been implemented as a result of changes to our risk profile.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information relating to our equity compensation plans as of December 31, 2016:
Equity Compensation Plan Information
|
| Number of securities |
| Weighted |
| Number of securities |
|
Plan category |
| (a) |
| (b) |
| (c) |
|
Equity compensation plans approved by security holders |
| 1,875,419 |
| 1.50 |
| 2,350,492 |
|
Total |
| 1,875,419 |
| 1.50 |
| 2,350,492 |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial ownership as of March 1, 2017, for each person known by us to own beneficially 5% or more of our Common Stock. Except pursuant to applicable community property laws, each shareholder identified in the table possesses sole voting and investment power with respect to his or her shares, except as noted below.
Title of Class |
| Name and Address of Beneficial Owner |
| Amount and |
| Percent of |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thomas J. Shaw(2) |
| 16,335,642 |
| 51.6 | % |
|
|
|
|
|
|
|
|
|
| Suzanne M. August(3) |
| 3,800,000 |
| 12.0 | % |
|
|
|
|
|
|
|
|
|
| Lillian E. Salerno(4) |
| 1,646,000 |
| 5.2 | % |
(1) The Percent of Class is calculated for the Common Stock class by dividing each beneficial owner’s Amount of Beneficial Ownership, as shown in the table above,2021 proxy statement is incorporated herein by the sumreference. See also Item 5 of the total outstanding Common Stock (31,666,454 shares) plus that beneficial owner’s stock equivalents (options), if any.Part II of this Annual Report for Equity Compensation Plan Information.
(2) 2,770,000 of the shares are owned by the August 2010 Family Trust and the August Gifting Trust but are controlled by Mr. Shaw pursuant to a Voting Agreement. These shares are permanently controlled by Mr. Shaw until such time as they are sold. These shares are included in the share amounts and percentages for both Mr. Shaw and Ms. August in the above table. Mr. Shaw has investment power over 1,500,000 shares of Common Stock as Trustee pursuant to trust agreements for the benefit of family members. Ms. August has voting control over 1,000,000 of such shares as Special Trustee. These 1,000,000 shares are included in the share amounts and percentages for both Mr. Shaw and Ms. August in the above table.
(3) 2,770,000 shares of these shares are controlled by Mr. Thomas J. Shaw pursuant to a Voting Agreement and are held by the August 2010 Family Trust and August Gifting Trust, for which Ms. August serves as Trustee. These shares are included in the share amounts and percentages for both Mr. Shaw and Ms. August in the above table. Ms. August has voting control over 1,000,000 shares of Common Stock as Special Trustee pursuant to trust agreements for the benefit of family members. Mr. Shaw has investment power over such 1,000,000 shares as Trustee. These shares are included in the share amounts and percentages for both Mr. Shaw and Ms. August in the above table.
(4) 25,000 shares identified as Common Stock are shares which are obtainable by the exercise of a stock option. 500,000 shares identified as Common Stock are owned by a trust for which Ms. Salerno serves as trustee.
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth certain information regarding the beneficial ownership of our capital stock as of March 1, 2017, for each named executive officer specified by Item 402 of Regulation S-K (i.e., our CEO, CFO, and three other highest paid officers) and Director of the Company. Except pursuant to applicable community property laws or as otherwise discussed below, each shareholder identified in the table possesses sole voting and investment power with respect to his or her shares.
Title of Class |
| Name of |
| Amount and |
| Percent |
|
Common Stock |
|
|
|
|
|
|
|
As a Group |
| Named Executive Officers and Directors |
| 17,494,920 |
| 55.2 | % |
As Individuals |
| Thomas J. Shaw(2) |
| 16,335,642 |
| 51.6 | % |
|
| Michele M. Larios(3) |
| 561,000 |
| 1.8 | % |
|
| Douglas W. Cowan(4) |
| 200,000 |
| <1 | % |
|
| Russell B. Kuhlman(5) |
| 89,450 |
| <1 | % |
|
| Marco Laterza(6) |
| 110,000 |
| <1 | % |
|
| Walter O. Bigby, Jr.(7) |
| 105,000 |
| <1 | % |
|
| Amy Mack(8) |
| 93,828 |
| <1 | % |
(1) The Percent of Class is calculated for the individuals holding Common Stock by dividing each beneficial owner’s Amount of Beneficial Ownership, as shown in the table above, by the sum of the total outstanding Common Stock (31,666,454 shares) plus that beneficial owner’s stock equivalents (options), if any. The Percent of Class is calculated for the “As a Group” row by totaling all of the Percent of Class percentages appearing in the chart. The executive officers’ shares do not include options which do not vest until September and December of 2017.
(2) 2,770,000 of the shares are owned by the August 2010 Family Trust and the August Gifting Trust but are controlled by Mr. Shaw pursuant to a Voting Agreement. These shares are permanently controlled by Mr. Shaw until such time as they are sold. Mr. Shaw has investment power over 1,500,000 shares of Common Stock as Trustee pursuant to trust agreements for the benefit of family members.
(3) 250,000 of these shares are acquirable by the exercise of stock options. 1,000 of these shares are owned by Ms. Larios’ children. 300,000 of these shares are owned by trusts for the benefit of non-family members for which Ms. Larios serves as trustee. The chart does not reflect a grant of an option for 50,000 shares which does not vest until December 2017.
(4) These shares are acquirable by the exercise of stock options. The chart does not reflect a grant of an option for 50,000 shares which does not vest until December 2017.
(5) 43,450 of these shares are acquirable by the exercise of stock options. This does not include 13,100 shares underlying an option which becomes exercisable in September 2017.
(6) 65,000 of these shares are acquirable by the exercise of stock options.
(7) 100,000 of these shares are acquirable by the exercise of stock options.
(8) These shares are acquirable by the exercise of stock options.
There are no arrangements, the operation of which would result in a change in control of the Company, other than:
1. The 2,770,000 shares owned by the August 2010 Family Trust and August Gifting Trust shall cease to be controlled by Mr. Shaw under the Voting Agreement upon their sale to a third party for value; and
2. Mr. Shaw has voting control over 14,835,642 of the currently outstanding shares of the Common Stock (46.8%) and investment power over 13,565,642 shares (42.8%) for a total beneficial ownership of 51.6% of the currently outstanding shares of the Common Stock. Assuming the exercise of all vested options and conversion of all outstanding preferred shares, Mr. Shaw would have beneficial ownership of 48.4% of the Common Stock. This calculation does not include the potential dilution from the unvested 2016 stock option grants to employees for 600,400 shares or the two million shares authorized for private sale to insiders, including Mr. Shaw who may purchase one million additional shares directly from the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
We believe that all of the transactions set forth below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. In accordance with our Audit Committee Charter, the Audit Committee has reviewed and approved all related party transactions. In particular, the Audit Committee reviews all proposed transactions where the amount involved meets or exceeds $120,000.
A royalty of 5% of gross sales of all licensed products sold to customers over the life of the Technology Licensing Agreement is paid (See Item 1 — Patents, Trademarks, Licenses, and Proprietary Rights). Of this royalty, Ms. Suzanne August, the former spouse of Mr. Shaw, was entitled to $100,000 per quarter until May 11, 2015, when such royalty payments ceased being paid to Ms. August. A royalty of $2,499,210 and $2,388,817 was paid to Thomas J. Shaw in 2016 and 2015, respectively. Ms. August received $245,055 in 2015.
We also approved three of our executive officers to purchase shares directly from the Company. Thomas J. Shaw exercised a portion of such right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million. Mr. Shaw has one million additional shares authorized for purchase at market price any time prior to September 9, 2018. Mr. Cowan and Ms. Larios are authorized to purchase 500,000 shares each at market price any time prior to September 9, 2018. The approximate dollar value of these potential future purchases cannot be predicted.
In November 2016, the Compensation and Benefits Committee granted a stock option to Mr. Shaw for the purchase of three million shares of Common Stock. Such stock option terminated by its terms before becoming exercisable in December 2016.
Director Independence
The Board of Directors has the responsibility for establishing corporate policies and for our overall performance, although it is not involved in day-to-day operations. Currently, a majority of the Directors serving on our Board of Directors are independent Directors as definedinformation in the listing standards ofsection “Corporate Governance” in the NYSE MKT. Our current independent Directors are Marco Laterza, Amy Mack, and Walter O. Bigby, Jr. Each of our committees2021 proxy statement is constituted solelyincorporated herein by independent Directors.reference.
Item 14. Principal Accounting Fees and Services.
AUDIT FEES
The aggregate fees billedinformation in the section “Accounting Matters” in the 2021 proxy statement is incorporated herein by CF & Co., L.L.P. for professional services rendered for the audit of our annual financial statements for 2015 and the reviews of the financial statements included in our Forms 10-Q for 2015 and the first quarter of 2016 or services normally provided by the accountant in connection with statutory and regulatory filings for these periods were $30,000.
The aggregate fees billed Moss Adams LLP for professional services rendered for the audit of our annual financial statements for 2016 and the reviews of the financial statements included in our Forms 10-Q for the second and third quarters of 2016 or services normally provided by the accountant in connection with statutory and regulatory filings for these periods were $176,876.
AUDIT RELATED FEES
The aggregate fees billed by CF & Co., L.L.P. for professional services rendered for the audit of our 401(k) plan for 2015 was $13,000. Audit-related fees for Form S-8 were $1,800 in 2015.
The aggregate fees billed by Moss Adams LLP for professional services rendered for the audit of our 401(k) plan for 2016 was $14,000.
TAX FEES
The aggregate fees billed by CF & Co., L.L.P. for preparation of federal and state income tax returns and tax consulting costs related to notices from taxing authorities for 2015 was $19,325.
The aggregate fees billed by Moss Adams LLP for preparation of federal and state income tax returns and tax consulting costs related to notices from taxing authorities for 2016 was $52,980.
PRE-APPROVAL POLICIES AND PROCEDURES
The engagement of the independent accountants was entered into pursuant to the approval policies and procedures of the Audit Committee. Before any independent accountant was engaged to render services, the engagement was approved by the Audit Committee. The engagements for audit and tax services were detailed separately. The Audit Committee implemented its approval procedures, i.e., they were not delegated to any other party. All of the services provided were pre-approved by the Audit Committee.reference.
Item 15. Exhibits, Financial Statement Schedules.
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| Balance at |
| Additions |
| Deductions |
| Balance at |
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Provision for Inventories |
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Fiscal year ended 2014 |
| $ | 681,395 |
| $ | — |
| $ | — |
| $ | 681,395 |
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Fiscal year ended 2015 |
| $ | 681,395 |
| $ | — |
| $ | — |
| $ | 681,395 |
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Fiscal year ended 2016 |
| $ | 681,395 |
| $ | 176,424 |
| $ | 262,296 |
| $ | 595,523 |
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Provision for Accounts Receivable |
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Fiscal year ended 2014 |
| $ | 1,698,506 |
| $ | 27,300 |
| $ | — |
| $ | 1,725,806 |
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Fiscal year ended 2015 |
| $ | 1,725,806 |
| $ | 116,395 |
| $ | 46,720 |
| $ | 1,795,481 |
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Fiscal year ended 2016 |
| $ | 1,795,481 |
| $ | 92,000 |
| $ | 155,496 |
| $ | 1,731,985 |
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Deferred Tax Valuation |
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Fiscal year ended 2014 |
| $ | 8,577,666 |
| $ | 807,790 |
| $ | — |
| $ | 9,385,456 |
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Fiscal year ended 2015 |
| $ | 9,385,456 |
| $ | — |
| $ | 1,633,484 |
| $ | 7,751,972 |
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Fiscal year ended 2016 |
| $ | 7,751,972 |
| $ | 1,445,361 |
| $ | — |
| $ | 9,197,333 |
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Provision for Rebates |
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| (B) |
| (C) |
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Fiscal year ended 2014 |
| $ | 26,793,666 |
| $ | 19,115,643 |
| $ | 12,070,529 |
| $ | 33,838,780 |
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Fiscal year ended 2015 |
| $ | 33,838,780 |
| $ | 19,488,956 |
| $ | 12,155,856 |
| $ | 41,171,880 |
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Fiscal year ended 2016 |
| $ | 41,171,880 |
| $ | 19,693,872 |
| $ | 21,882,467 |
| $ | 38,983,285 |
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Balance at beginning of period | Additions | Deductions | Balance at end of period | ||||||||||
| Provision for Inventories | |||||||||||||
| Fiscal year ended 2018 | $ | 594,939 | $ | — | $ | 297,731 | $ | 297,208 | |||||
| Fiscal year ended 2019 | $ | 297,208 | $ | — | $ | — | $ | 297,208 | |||||
| Fiscal year ended 2020 | $ | 297,208 | $ | — | $ | — | $ | 297,208 | |||||
| Provision for Accounts Receivable | |||||||||||||
| Fiscal year ended 2018 | $ | 101,872 | $ | 47,793 | $ | — | $ | 149,665 | |||||
| Fiscal year ended 2019 | $ | 149,665 | $ | — | $ | 3,283 | $ | 146,382 | |||||
| Fiscal year ended 2020 | $ | 146,382 | $ | 125,000 | $ | 65,560 | $ | 205,822 | |||||
| Deferred Tax Valuation | |||||||||||||
| Fiscal year ended 2018 | $ | 5,825,954 | $ | 325,444 | $ | — | $ | 6,151,398 | |||||
| Fiscal year ended 2019 | $ | 6,151,398 | $ | — | $ | 1,121,560 | $ | 5,029,838 | |||||
| Fiscal year ended 2020 | $ | 5,029,838 | $ | — | $ | 5,029,838 | $ | — | |||||
(A) Represents estimated rebates deducted from gross revenues
Balance at beginning of period | Additions | Deductions | Balance at end of period | ||||||||||
| Provision for Rebates | (A) | (B) | (C) | ||||||||||
| Fiscal year ended 2018 | $ | 4,794,193 | $ | 24,372,111 | $ | 24,579,457 | $ | 4,586,847 | |||||
| Fiscal year ended 2019 | $ | 4,586,847 | $ | 24,212,830 | $ | 24,526,108 | $ | 4,273,569 | |||||
| Fiscal year ended 2020 | $ | 4,273,569 | $ | 26,104,612 | $ | 26,566,256 | $ | 3,811,925 | |||||
(B) Represents rebates credited to the distributor and charge offs against the allowance
(C) Includes $3,591,534; $3,733,199; and $4,160,099 in Accounts payable for 2016, 2015, and 2014, respectively.
| (A) | Represents estimated rebates deducted from gross revenues. |
| (B) | Represents rebates credited to the distributor and charge offs against the allowance. |
| (C) | Includes $3,435,352; $3,586,726; and $3,896,341 in Accounts payable for 2020, 2019, and 2018, respectively. |
(3) Exhibits:
| (3) | Exhibits: |
The following exhibits are filed herewith or incorporated herein by reference to exhibits previously filed with the SEC.
(b) Exhibits
| (b) | Exhibits |
Exhibit | Description of Document | |
| (1) | ||
| RTI(2) | ||
| (3) | |
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| 10.1 | Sample United States Distribution | |
| Agreement(6) | ||
| (7) | ||
Technology License Agreement between Thomas J. Shaw and RTI dated the 23rd day of June, | ||
| 2008(9) | ||
| 2012(10) | ||
Retractable Technologies, Inc. First Amended 2008 Stock Option | ||
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| Voting Agreement Between Thomas J. Shaw and Suzanne August dated November 8, 2006(12) | |
| Technology Investment Agreement between RTI and U.S. Department of Defense dated July 1, 2020 (13) |
| Exhibit No. | Description of Document | |
| 10.10 | Agreement for the Purchase | |
| U.S. Small Business Administration Note dated April 17, 2020(15) | |
| 10.12 | 2021 Stock Option Plan(16) | |
| 14 | Retractable Technologies, Inc. Code of Business Conduct and Ethics(17) | |
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| 101 | The following materials from this report, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets as of December 31, |
(1) Filed herewith (2) Incorporated herein by reference to RTI’s Form 8-K filed on May 13, 2010 (3) Filed herewith (4) Filed herewith (5) Incorporated herein by reference to RTI’s Registration Statement on Form 10-SB filed on June 23, 2000 (6) Incorporated herein by reference to RTI’s Registration Statement on Form 10-SB filed on June 23, 2000 (7) Incorporated herein by reference to RTI's Form 10-Q filed on November 14, 2008 (8) Incorporated herein by reference to RTI’s Registration Statement on Form 10-SB filed on June 23, 2000 (9) Incorporated herein by reference to RTI’s Form 10-K filed on March 31, 2009 (10) Incorporated herein by reference to RTI's Form 10-Q filed on November 14, 2012 (11) Incorporated herein by reference to RTI's Form 10-Q filed on November 14, 2014 (12) Incorporated herein by reference to RTI’s Schedule TO filed on October 17, 2008 (13) Incorporated herein by reference to RTI’s Form 10-Q filed on November 16, 2020 (14) Incorporated herein by reference to RTI’s Form 8-K filed October 5, 2020 (15) Incorporated herein by reference to RTI’s Form 8-K filed April 22, 2020 (16) Incorporated herein by reference to RTI’s Schedule 14A filed March 31, 2021 (17) Incorporated herein by reference to RTI’s Form 8-K filed on August 17, 2020 (18) Filed herewith (19) Filed herewith (20) Filed herewith (21) Filed herewith (c) Excluded Financial Statement Schedules: None |
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Item 16. Form 10-K Summary.
None.
Pursuant to the requirements of Section 13 or 15(d) 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.
RETRACTABLE TECHNOLOGIES, INC. | |||
(Registrant) | |||
| By: | |||
| /s/ Thomas J. Shaw | ||
THOMAS J. SHAW | |||
CHAIRMAN, PRESIDENT, AND | |||
CHIEF EXECUTIVE OFFICER | |||
| March 31, |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ | |
| |
VICE PRESIDENT, CHIEF FINANCIAL OFFICER, PRINCIPAL ACCOUNTING OFFICER, TREASURER, AND DIRECTOR | |
March 31, | |
/s/ Amy Mack | |
AMY MACK | |
DIRECTOR | |
March 31, | |
/s/ Marco Laterza | |
MARCO LATERZA | |
DIRECTOR | |
March 31, | |
/s/ Walter O. Bigby, Jr. | |
WALTER O. BIGBY, JR. | |
DIRECTOR | |
March 31, | |
| /s/ Darren E. Findley | |
| DARREN E. FINDLEY | |
| DIRECTOR | |
| March 31, 2021 |