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RVP Retractable

Filed: 17 May 21, 4:22pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

 

or

 

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

 

For the transition period from         to

 

Commission file number: 001-16465

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Texas75-2599762

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)
  
511 Lobo Lane 
Little Elm, Texas75068-5295
(Address of principal executive offices)(Zip Code)

 

(972) 294-1010

(Registrant’s telephone number, including area code)

 

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

 

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

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockRVPNYSE American

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ¨

 

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

 

Large accelerated filer  ¨Accelerated filer  ¨
  
Non-accelerated filer  þSmaller reporting company   þ
 Emerging growth company  ¨

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,004,104 shares of Common Stock, no par value, issued and outstanding on May 3, 2021.

 

 

 

 

 

 

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2021

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.      Financial Statements1
CONDENSED BALANCE SHEETS1
CONDENSED STATEMENTS OF OPERATIONS2
CONDENSED STATEMENTS OF CASH FLOWS3
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY4
NOTES TO CONDENSED FINANCIAL STATEMENTS5
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations16
Item 3.      Quantitative and Qualitative Disclosures About Market Risk21
Item 4.      Controls and Procedures21
  
PART II—OTHER INFORMATION
 
Item 1.      Legal Proceedings21
Item 1A.   Risk Factors21
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds21
Item 3.      Defaults Upon Senior Securities22
Item 6.      Exhibits22
SIGNATURES23

 

 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

 

  March 31, 2021 December 31, 2020 
ASSETS     
Current assets:     
Cash and cash equivalents$30,924,687$17,566,682 
Accounts receivable, net 34,364,259 32,910,919 
Investments in debt and equity securities, at fair value 13,763,887 8,081,833 
Inventories, net 8,946,051 10,234,646 
Other current assets 813,490 684,317 
Total current assets 88,812,374 69,478,397 
      
Property, plant, and equipment, net 43,216,851 30,816,504 
Deferred tax asset 6,370,001 4,631,206 
Other assets 31,723 44,567 
Total assets$138,430,949$104,970,674 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY     
Current liabilities:     
Accounts payable$14,303,586$16,256,444 
Current portion of long-term debt 1,489,318 1,030,763 
Accrued compensation 1,303,568 826,762 
Dividends payable 39,050 49,091 
Accrued royalties to shareholder 2,921,597 1,973,781 
Other accrued liabilities 3,266,909 3,398,904 
Income taxes payable 12,699,408 4,365,770 
Total current liabilities 36,023,436 27,901,515 
      
Other long-term liabilities 32,383,550 24,478,697 
Long-term debt, net of current maturities 2,183,654 2,710,337 
Total liabilities 70,590,640 55,090,549 
      
Commitments and contingencies — see Note 8     
      
Stockholders’ equity:     
Preferred stock, $1 par value:     
Series II, Class B 156,200 156,200 
Series III, Class B 101,745 106,745 
Common stock, no par value   
Additional paid-in capital 59,294,701 59,285,401 
Retained earnings 8,287,663 (9,668,221)
Total stockholders’ equity 67,840,309 49,880,125 
Total liabilities and stockholders’ equity$138,430,949$104,970,674 

 

See accompanying notes to condensed unaudited financial statements

 

1

 

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

  

Three Months

Ended

March 31, 2021

 

Three Months

Ended

March 31, 2020

 
      
Sales, net50,073,72511,202,217 
Cost of sales     
Cost of manufactured product 19,157,341 6,802,675 
Royalty expense to shareholder 2,921,597 869,108 
Total cost of sales 22,078,938 7,671,783 
Gross profit 27,994,787 3,530,434 
      
Operating expenses:     
Sales and marketing 931,231 1,135,980 
Research and development 149,283 138,537 
General and administrative 3,493,236 1,775,204��
Total operating expenses 4,573,750 3,049,721 
Income from operations 23,421,037 480,713 
      
Interest and other income (loss) 1,194,779 (141,417)
Interest expense (65,095)(33,849)
Income before income taxes 24,550,721 305,447 
Provision (benefit) for income taxes 6,594,837 (17,326)
Net income 17,955,884 322,773 
Preferred Stock dividend requirements (64,938)(174,143)
Income applicable to common shareholders17,890,946148,630 
      
Basic earnings per share0.530.00 
      
Diluted earnings per share0.520.00 
      
Weighted average common shares outstanding:     
Basic 33,967,771 32,681,204 
Diluted 34,378,683 32,745,972 

 

See accompanying notes to condensed unaudited financial statements

 

2

 

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

 

Three Months

Ended

March 31, 2021

 

Three Months

Ended

March 31, 2020

 
Cash flows from operating activities     
Net income17,955,884322,773 
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization 210,683 210,369 
Net unrealized (gain) loss on investments (1,103,972)164,342 
Accreted interest 32,277  
Deferred taxes (1,738,795) 
Provision for doubtful accounts 150,000 125,000 
(Increase) decrease in operating assets:     
Accounts receivable (7,904,815)1,245,531 
Inventories 1,288,595 1,077,460 
Other current assets (129,173)(34,566)
Other assets 12,844 20,483 
Increase (decrease) in operating liabilities:     
Accounts payable (1,952,858)(572,637)
Accrued liabilities 1,433,224 (466,610)
Income taxes payable 8,333,638  
Net cash provided by operating activities 16,587,532 2,092,145 
      
Cash flows from investing activities     
Purchase of property, plant, and equipment (12,611,028)(186,030)
Purchase of debt and equity securities (4,578,082)(41,763)
Net cash used by investing activities (17,189,110)(227,793)
      
Cash flows from financing activities     
Repayments of long-term debt (68,128)(64,167)
Proceeds from TIA 15,235,812  
Proceeds from the exercise of stock options 43,350  
Payment of preferred stock redemption price payable (101,250) 
Payment of preferred stock repurchase payable (1,101,110)(75,000)
Payment of preferred stock dividends (49,091)(54,800)
Net cash provided (used) by financing activities 13,959,583 (193,967)
      
Net increase in cash and cash equivalents 13,358,005 1,670,385 
Cash and cash equivalents at:     
Beginning of period 17,566,682 5,934,749 
End of period30,924,6877,605,134 
      
Supplemental schedule of cash flow information:     
Interest paid32,81833,851 
      
Supplemental schedule of noncash investing and financing activities:     
Preferred dividends declared, not paid39,05054,800 
Conversion of preferred stock to common stock5,000 
Amounts receivable under TIA5,477,603 

 

See accompanying notes to condensed unaudited financial statements

 

3

 

 

RETRACTABLE TECHNOLOGIES, INC.

 

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

The following shows the changes in stockholders’ equity for the three-month period ended March 31, 2021:

 

  Common
Stock
 Series II
Class B
Preferred
Stock
 Series III
Class B
Preferred
Stock
 Additional
Paid-In
Capital
 Retained
Earnings
 Total
Balance at December 31, 2020$156,200106,74559,285,401(9,668,22149,880,125
Conversion of Preferred Stock into Common Stock   (5,000)5,000  
Stock Option Exercises    43,350  43,350
Dividends    (39,050) (39,050)
Net Income     17,955,884 17,955,884
Balance at March 31, 2021156,200101,74559,294,7018,287,663 67,840,309

 

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

 

 Common
Stock
 Series I
Class B
Preferred
Stock
 Series II
Class B
Preferred
Stock
 Series III
Class B
Preferred
Stock
 Series IV
Class B
Preferred
Stock
 Series V
Class B
Preferred
Stock
 Additional
Paid-In
Capital
 Accumulated
Deficit
 Total
Balance at December 31, 2019           —96,000171,200129,245342,50034,00061,660,744(33,891,234)  $ 28,542,455
Exchange of Preferred Stock for Common Stock   (2,500)(5,000) (67,500) (75,000)
Dividends      (54,800) (54,800)
Net Income        322,773 322,773
Balance at March 31, 2020           —96,000171,200126,745337,50034,00061,538,444(33,568,461 $ 28,735,428

 

See accompanying notes to condensed unaudited financial statements

 

4

 

 

RETRACTABLE TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

1.BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION

 

Business of the Company

 

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

 

Basis of presentation

 

The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 31, 2021 for the year ended December 31, 2020.

 

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. The amount reported as a contractual allowance for rebates involves examination of past historical trends related to 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 the Company has an understanding of the relevant sales with respect to product categories, sales distribution channels, and the likelihood of contractual obligations being satisfied.

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

The Company records trade receivables when revenue is recognized. No product has been consigned to customers. The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables. Those accounts that are doubtful of collection are included in the allowance. This provision is reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. The Allowance for bad debt was $352,217 and $205,822 as of March 31, 2021 and December 31, 2020, respectively.

 

5

 

 

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 Condensed Balance Sheets and are shown in Note 6, Other Accrued Liabilities.

 

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

 

Inventories

 

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

 

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 Condensed Balance Sheets. Net unrealized and realized gains or losses on investments in debt and equity securities are reflected as a component of Interest and other income (loss). Realized gains or losses on investments in debt and equity securities are recognized using the specific identification method.

 

Property, plant, and equipment

 

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

 

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

 

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

 

Long-lived assets

 

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

 

Fair value measurements

 

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

 

6

 

 

Financial instruments

 

The Company estimates the fair value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information. Judgment is required in interpreting data to develop estimates of fair value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange. Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management's estimates, equals their recorded values. Investments in equity securities consist primarily of 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 Company assesses market risk in debt and equity securities through consultation with its outside investment advisors. Management is responsible for directing investment activity based on current economic conditions. The majority of accounts receivable are due from companies which are well-established entities. In the first quarter of 2021, 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 significant customers for the first quarters of 2021 and 2020:

 

  

Three Months

Ended

March 31, 2021

 

Three Months

Ended

March 31, 2020

 
Number of significant customers 1   3   
Aggregate dollar amount of net sales to significant customers $37.8 million   $5.4 million   
Percentage of net sales to significant customers 75.5%   48.2%   

 

In the first quarter of 2021, approximately $37.8 million of the Company’s sales were to the Department of Health and Human Services of the United States. Management expects the U.S. government to remain a significant customer through at least September 2021. There were no sales to the Department of Health and Human Services in the first quarter of 2020.

 

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China. The Company obtained roughly 90.3% and 80.3% of its products in the first three months of 2021 and 2020, respectively, from its Chinese manufacturers. In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes, and would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

 

Revenue recognition

 

The Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of loss pass to the customer. Payments from customers with approved credit terms are typically due 30 days from the invoice date. Under certain contracts, revenue is recorded on the basis of sales

 

7

 

 

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. When rebates are issued, they are applied against the customer’s receivable balance. Distributors receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the distributor. One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is recognized in the period the related sales are recognized and is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report. Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted. The estimated contractual allowance is included in Accounts payable in the Condensed Balance Sheets and deducted from Revenues in the Condensed Statements of Operations. Accounts payable included estimated contractual allowances for $4,893,647 and $3,435,352 as of March 31, 2021 and December 31, 2020, respectively. The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors. Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company. End-users do not receive any contractual allowances on their purchases. Any product shipped or distributed for evaluation purposes is expensed.

 

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

 

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

 

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

 

The Company requires certain customers to pay in advance of product shipment. Such prepayments from customers are recorded in Other accrued liabilities and are generally recognized as revenue upon shipment of the product.

 

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

 

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

 

 

  For the three months ended March 31, 2021:
Geographic Segment Syringes Blood
Collection
Products
 EasyPoint®
Needles
 Other
Products
 Total
Product
Sales
U.S. sales (excluding U.S. government)$8,759,314$574,008$1,612,333$15,536$10,961,191
Sales to U.S. government 37,782,360    37,782,360
North and South America sales (excluding U.S.) 825,820  11,968 109,440 947,228

 

8

 

 

Geographic Segment Syringes Blood
Collection
Products
 EasyPoint®
Needles
 Other
Products
 Total
Product
Sales
Other international sales 199,316 37,350 144,780 1,500 382,946
Total$47,566,810$611,358$1,769,081$126,476$50,073,725

 

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

 

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. 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. 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 full.

 

Earnings per share

 

The Company computes basic earnings or loss per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock. At March 31, 2021, the calculation of diluted EPS under the treasury stock method included 152,967 shares of Common Stock underlying issued and outstanding stock options. Common stock issuable upon the conversion of 257,945 convertible preferred shares is included in the calculation of diluted EPS for the three months ended March 31, 2021. Preferred stock was excluded from the calculation of diluted EPS for the period ended March 31, 2020 because the effect was antidilutive. The potential dilution, if any, is shown on the following schedule:

 

   Three Months Ended
March 31, 2021
   Three Months Ended
March 31, 2020
 
Net income $17,955,884  $322,773 
Preferred stock dividend requirements  (64,938)  (174,143)
Income applicable to common shareholders $17,890,946  $148,630 
Average common shares outstanding  33,967,771   32,681,204 
Average common and common equivalent shares outstanding — assuming dilution  34,378,683   32,745,972 
Basic earnings per share $0.53  $0.00 
Diluted earnings per share $0.52  $0.00 

 

9

 

 

Shipping and handling costs

 

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

 

Research and development costs

 

Research and development costs are expensed as incurred.

 

Leases

 

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

 

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

 

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 domestic production of needles and syringes. Pursuant to the terms of the TIA, the Company is expected to make significant additions to its facilities which should allow the Company 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 the related property, plant, and equipment as to offset the related depreciation expense of the assets acquired. The amortization will be presented separately from the depreciation expense on the Condensed Statements of Operations.

 

Recently Adopted Pronouncements

 

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

 

The Company adopted ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)” on January 1, 2020.  This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should

 

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be accounted for in accordance with ASC 350-40 Internal-Use Software.  Accordingly, costs incurred during the preliminary project and post-implementation stages are expensed and costs associated with the application development phase are capitalized.  The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.  The adoption of this ASU did not have a significant impact on the Company’s financial statements or disclosures.

 

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

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”. The new standard is intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within the annual period, with early adoption permitted. Adoption of the standard requires certain changes primarily be made prospectively, with some changes to be made retrospectively. The Company has determined that the adoption of ASU 2019-12 did not have a material impact on its financial statements.

 

Recently Issued Pronouncement

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients for contracts that reference LIBOR, if certain criteria are met, that can be applied through December 31, 2022. As reference rate reform is still an ongoing process, the Company will continue to evaluate the timing and potential impact of adoption for optional expedients when deemed necessary.

 

3.INVENTORIES

 

Inventories consist of the following:

 

   March 31, 2021   December 31, 2020 
Raw materials $1,576,376  $1,358,552 
Finished goods  7,666,883   9,173,302 
   9,243,259   10,531,854 
Inventory reserve  (297,208)  (297,208)
  $8,946,051  $10,234,646 

 

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

 

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

 

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

 

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

 

   March 31, 2021 
   Level 1   Level 2   Level 3   Total 
Equity securities $9,647,668  $  $  $9,647,668 
Mutual funds and exchange traded funds  4,039,440         4,039,440 
Certificates of deposit     76,779      76,779 
  $13,687,108  $76,779  $  $13,763,887 

 

   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 

 

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 Condensed 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:

 

   March 31, 2021 
      Gross Unrealized   Aggregate 
   Cost   Gains   Losses   Fair Value 
Equity securities $6,636,822  $3,010,846  $  $9,647,668 
Mutual funds and exchange traded funds  3,948,768   95,899   (5,227)  4,039,440 
Certificates of deposit  75,000   1,779      76,779 
  $10,660,590  $3,108,524  $(5,227) $13,763,887 

 

   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 

 

Unrealized gains (losses) on investments in debt and equity securities were $1,103,972 and $(164,342) for the three months ended March 31, 2021 and 2020, respectively.

 

5.INCOME TAXES

 

The Company’s effective tax rate on the net income before income taxes was 26.9% and 0.2% for the three months ended March 31, 2021 and March 31, 2020, respectively. For the three months ended March 31, 2021 and 2020, the Company’s effective tax rate was determined based on the estimated annual effective income tax rate.

 

A reconciliation of the federal statutory corporate tax rate to the Company’s effective tax rate is as follows:

 

  March 31, 2021 December 31, 2020 
U.S. statutory federal tax rate 21.0%21.0%
Valuation Allowance  (21.0%)
State taxes 5.9%0.2%
Effective tax rate 26.9%0.2%

 

The Company uses the recognition and measurement provisions of the FASB ASC Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance at March 31, 2021 and 2020.

 

The effective tax rate for the three months ended March 31,2021 was different from the federal statutory rate due primarily to the apportionment of earnings across various state jurisdictions. The Company determined that no valuation allowance should be recorded at March 31, 2021.

 

The effective tax rate for the three months ended March 31, 2020 was different from the federal statutory rate due primarily to the valuation allowance recorded on net operating losses.

 

6.OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consist of the following:

 

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   March 31, 2021   December 31, 2020 
Prepayments from customers $1,566,167  $1,686,868 
Accrued property taxes  112,847    
Accrued professional fees  368,995   331,204 
Current portion – preferred stock repurchase  1,058,935   1,092,282 
Other accrued expenses  159,965   288,550 
Total $3,266,909  $3,398,904 

 

7.OTHER LONG-TERM LIABILITIES

 

Other long-term liabilities consists of the following:

 

   March 31, 2021    December 31, 2020 
Technology Investment Agreement (TIA) $31,378,662   $22,444,324 
Stock repurchase  1,004,888    2,034,373 
Total $32,383,550   $24,478,697 

 

The TIA provides for reimbursement to the Company for the purchase of equipment and supplies 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 $2,057,823 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.

 

8.COMMITMENTS AND CONTINGENCIES

 

On November 7, 2019, the Company filed a lawsuit in the 44th District Court of Dallas County, Texas (No. DC-19-17946) against Locke Lord, LLP and Roy Hardin in connection with their legal representation of the Company in its previous litigation against Becton, Dickinson and Company (“BD”). The Company alleges that the defendants breached their fiduciary duties, committed malpractice, and were negligent in their representation of the Company. The Company seeks actual and exemplary damages, disgorgement, costs, and interest. On October 6, 2020, the Court dismissed BD’s motion to dismiss. Such order was affirmed on April 20, 2021 by the Court of Appeals, Fifth District of Texas at Dallas.

 

9.BUSINESS SEGMENT

 

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

 

Revenues by geography are as follows:

 

  Three Months Ended
March 31, 2021
  Three Months Ended
March 31, 2020
 
U.S. sales (excluding U.S. government) $10,961,191  $8,336,797 
Sales to U.S. government  37,782,360    
North and South America sales (excluding U.S.)  947,228   2,746,400 
Other international sales  382,946   119,020 
Total sales $50,073,725  $11,202,217 

 

Long-lived assets by geography are as follows:

 

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   March 31, 2021   December 31, 2020 
Long-lived assets        
U.S. $43,157,637  $30,751,259 
International  59,214   65,245 
Total $43,216,851  $30,816,504 

 

10.DIVIDENDS

 

The Board declared and the Company paid cash dividends to Series I and Series II Class B Preferred Shareholders within one month of the end of each quarter in 2020. Cumulatively, dividend payments of $48,000, and $168,642 were made to Series I and Series II preferred shareholders, respectively, in 2020 and one payment of $10,041, and $39,050 was made to Series I and Series II preferred shareholders, respectively, in January 2021. A cash dividend of $39,050 was paid in April 2021 to Series II preferred shareholders.

 

11.LEASES

 

The Company has 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 $12,843 for the three-month period ended March 31, 2021.  The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $12,843 for the three months ended March 31, 2021.  The operating lease cost component of the lease expense was $20,283 at March 31, 2020. The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $20,283 for the three months ended March 31, 2020.

 

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

 

   March 31, 2021   December 31, 2020 
OPERATING LEASES        
Other assets $26,049  $38,892 
Other accrued liabilities $26,049  $38,892 
Other long-term liabilities      
Total operating lease liabilities $26,049  $38,892 

 

The weighted average remaining lease term is 6 months and the weighted average discount rate is 3.75%.

 

Future minimum payments under non-cancelable operating leases and financing leases consist of the following at March 31, 2021:

 

Quarter ending March 31, 2021 $26,335 
Less imputed interest  (286)
Total $26,049 

  

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12.EXCHANGE OF COMMON STOCK FOR PREFERRED 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. The aggregate cash consideration equaled $3,786,000, of which $482,670 was paid in 2020 with the rest payable over a three-year period beginning February 2021.

 

13.STOCK OPTIONS

 

Stock options were exercised by the Company’s employees and directors at various dates during the three months ended March 31, 2021, and, consequently, a total of 20,400 shares of Common Stock were issued for an aggregate payment to the Company of $43,350 to exercise such options.

 

14.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 and 2021, 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.

 

15.TECHNOLOGY INVESTMENT AGREEMENT

 

Effective July 1, 2020, the Company entered into the TIA with the U.S. government. The principal 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 March 31, 2021, the Company had negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $50.6 million. 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 $6.5 million. 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.

   

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16.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 was April 17, 2022 with an interest rate of 1.0% per annum. The PPP Loan had a prepayment option with no prepayment penalties. The PPP Loan was unsecured and was a non-recourse obligation. On May 13, 2021, the Company was informed that the SBA granted its request for loan forgiveness for the entire original principal amount of $1,363,000.

 

Prior to loan forgiveness and as of March 31, 2021, the Company’s obligations under the PPP Loan were as follows:

 

2021 $755,907 
2022  607,093 
  $1,363,000 

 

17.SUBSEQUENT EVENTS

 

In April 2021, the Company received a preliminary notice from the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Preparedness & Response (“DHHS/ASPR”) expressing its intent to exercise at least the first two one-month options under the February 2021 contract between DHHS/ASPR and the Company. Such option exercises would extend the July 14, 2021 base period expiration date to September 14, 2021. The two one-month option periods referenced by the preliminary notice would relate to an overall purchase price of approximately $23.5 million, including freight costs.

 

As discussed in Note 16, on May 13, 2021, the Company was informed that the SBA granted its request for loan forgiveness for the PPP Loan for the entire original principal amount of $1,363,000.

 

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

 

FORWARD-LOOKING STATEMENT WARNING

 

Certain statements included by reference in this filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, 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, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to access the market, production costs, the impact of larger market players, specifically Becton, Dickinson and Company, in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors in Part II. Given these uncertainties, undue reliance should not be placed on forward-looking statements.

 

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We have been manufacturing and marketing our products since 1997. VanishPoint® syringes comprised 95.0% of our sales in the first quarter of 2021. EasyPoint® products accounted for 3.5% of sales in the first quarter of 2021. We also manufacture and market a blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set.

 

Our products have been and continue to be distributed nationally and internationally through numerous distributors.

 

On May 1, 2020, we were awarded a delivery order under an existing contract by the Department of Health and Human Services of the United States to supply automated retraction safety syringes for COVID-19 vaccination efforts, which order was in the amount of $83.8 million plus $10 million in expedited freight costs.

 

The Department of Health and Human Services awarded us another contract on February 12, 2021 to supply low dead space safety syringes for COVID-19 vaccination efforts. Low dead space syringes reduce residual medication remaining in the syringe after the dose has been administered. In some instances, the low dead space allows for additional doses of medication to be obtained from the vials. 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 July 14, 2021). Such price includes both the fixed price for the products as well

 

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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 contract could increase by an additional $92,772,680, including the price of the products and freight reimbursement. For each period, the freight cost is estimated at approximately 25% of the overall price. In April 2021, we were notified that the Department of Health and Human Services intends to exercise at least the first two one-month options which would extend the base period expiration date to September 14, 2021. The July 14 to September 14 option periods would relate to an overall purchase price of approximately $23.5 million, including freight costs.

 

Our sales under both of the foregoing orders from the U.S. government were $37.8 million during the first quarter, representing 75.5% of our total first quarter sales. Both of the abovementioned orders as well as the TIA (as defined below) from the U.S. government are material events particular to the COVID-19 pandemic and may not be indicative of future operations. While the addition of manufacturing equipment and facilities will greatly increase our production capacity, we cannot be assured that there will be increased demand for our products once orders from the U.S. government have been filled. If future orders are not placed by the U.S. government and orders from new and existing customers do not materialize, we would have significant excess productive capabilities.

 

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. Additionally, the TIA provides for reimbursement for equipment and supplies. As of May 2021, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $50.8 million. As of May 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 cost of the controlled environment is approximately $6.5 million and will be funded by the U.S. government under the TIA, while the cost of the new warehouse is approximately $5.8 million and will be our financial obligation.

 

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”). On May 13, 2021, we were informed that the SBA granted our request for loan forgiveness for the entire original principal amount of $1,363,000.

 

As detailed in Note 4 to the financial statements, we held $13.8 million in debt and equity securities as of March 31, 2021, which represented 15.5% of our current assets. We continually monitor our invested balances. In late February 2021, we invested an additional $4.5 million in an individual transportation sector stock. The investment represented approximately 34% of our overall invested balance as of March 31, 2021. This additional investment, along with our existing equity investments, is highly liquid.

 

Subsequent to the first quarter of 2020, and in response to, among other factors, the global COVID-19 pandemic, our delivery orders from the U.S. government, and the TIA, employee headcount and related salary and benefits costs have increased significantly. As of March 31, 2021, the Company employed approximately 210 full-time, part-time, and temporary employees. This represents approximately a 40% increase in our workforce since March 2020.

 

On March 16, 2021, the Board 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 was approved by the shareholders 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 value of the Company’s Common Stock as of the date of grant. Participants in the Plan may include employees, consultants, and non-employee Directors. On March 16, 2021, the Compensation and Benefits Committee approved option grants to purchase 1,000,000, 250,000, and 100,000 shares of Common Stock to our chief executive officer, general counsel, and chief financial officer, respectively. These shares will vest in their entirety three years from the grant date.

 

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On March 16, 2021, the Compensation and Benefits Committee modified the annual salaries of our chief executive officer, general counsel, and chief financial officer to $1,000,000, $400,000, and $300,000, respectively. Such salaries are retroactively effective as of January 1, 2021. On March 16, 2021, the Compensation and Benefits Committee also approved issuances of cash bonuses of $300,000, $100,000, and $100,000 to our chief executive officer, general counsel, and chief financial officer, respectively.

 

Historically, unit sales have increased during the flu season. Seasonal trends in 2020 and the first quarter of 2021 have been less pronounced due to demand related to the 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 the first quarter of 2021, our Chinese manufacturers produced approximately 90.3% of our products. In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

 

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales of products subject to the license and he receives fifty percent (50%) of the royalties paid to the Company by certain sublicensees of the technology subject to the license.

 

Increases in costs of some raw materials have been largely offset by recent decreases in transportation costs. 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 periods ended March 31, 2021 or 2020. Dollar amounts have been rounded for ease of reading.

 

Comparison of Three Months Ended March 31, 2021 and March 31, 2020

 

Domestic sales, including sales to the U.S. government, accounted for 97.3% and 74.4% of the revenues for the three months ended March 31, 2021 and 2020, respectively. Domestic revenues increased 484.7% principally due to increased volumes primarily attributable to orders from the U.S. government. Domestic unit sales increased 460.8%. Domestic unit sales were 95.6% of total unit sales for the three months ended March 31, 2021. Domestic unit sales excluding the U.S. government rose approximately 43.6%. International revenues decreased approximately $1.5 million. Our international orders may be subject to significant fluctuation over time and may not be reflective of the full year’s sales. Overall unit sales increased 282.6%. Other than the U.S. government, our increased sales are predominantly attributable to existing customers as well as several new smaller customers who do not operate as distributors.

 

Cost of manufactured product increased 181.6% principally due to an increase in units sold. Royalty expense increased 236.2% due to increased gross sales.

 

Operating expenses increased 50.0% from the prior year due substantially to increased headcount and other employee-related expenses and consulting expenses attributable to a larger volume of orders and the expansion activities required by the TIA. Included in the increased employee expenses were bonuses and retroactive salary increases for the named executive officers of approximately $650,000. Sales and marketing expenses, however, decreased due to less travel and entertainment expense during the COVID-19 pandemic and some loss of sales personnel.

 

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Income from operations was $23.4 million compared to income from operations of $481 thousand last year. The increase was due to the increase in net revenues and resulting gross profit.

 

Interest and other income increased $1.3 million for the quarter ended March 31, 2021 compared to the same period last year principally due to unrealized gains from our investments.  Interest expense for the first quarter of 2021 increased by approximately $31,000 from the same period in the prior year. The increase is primarily attributable to imputed interest associated with amounts payable for the repurchase of preferred stock from former shareholders. See Note 7 to the financial statements for further discussion of the repurchase terms.

 

Discussion of Balance Sheet and Cash Flow Items

 

Cash comprises 22.3% of total assets. Cash flow from operations was $16.6 million for the three months ended March 31, 2021, principally due to our net income. The increase in cash was offset by an increase in accounts receivable. Additionally, we have recorded a deferred tax asset of $6.4 million which is material to the adjustments to total cash flow from operations. The deferred tax asset represents amounts available to reduce income taxes payable on taxable income in future years.

 

During 2020, we engaged in private purchase agreements to purchase shares of outstanding preferred stock in exchange for cash consideration and the issuance of new common stock. In addition to payment in Common Stock, we paid cash consideration equaling $3,786,000, of which $482,670 was paid in 2020 with the remainder payable over a three-year period beginning in February 2021. Amounts payable as the result of our purchase of preferred stock comprises a small portion of the long-term liabilities set forth on our Balance Sheets. Amounts related to reimbursements from the U.S. government in connection with the TIA make up most of the long-term liabilities of $32.4 million.

 

Cash used by investing activities was $17.2 million for the three months ended March 31, 2021 due primarily to the purchase of property, plant and equipment. The $12.6 million impact to cash from the purchase of such fixed assets reflects down payments on orders for certain assets as discussed in Note 15 to the financial statements.

 

Cash provided by financing activities was $14.0 million for the three months ended March 31, 2021. This was primarily due to proceeds from the government under the TIA for down payments on our orders for fixed assets but offset by payments under the preferred stock repurchase agreements from 2020.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The mix of domestic and international sales affects the average sales price of our products. Generally, the higher the ratio of domestic sales to international sales, the higher the average sales price will be. Some international sales of our products are shipped directly from China to the customer. The number of units produced by us versus manufactured in China can have a significant effect on the carrying costs of Inventory as well as Cost of sales. 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.

 

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Cash Requirements

 

We have sufficient cash reserves, received a PPP Loan, and have begun to realize income from operations. We also have access to our investments which may be liquidated in the event that we need to access the funds for operations.

 

Contracts with the U.S. Government

 

As discussed above, we were awarded a material delivery order by the Department of Health and Human Services of the United States in the total amount of approximately $83.8 million, plus certain expedited freight expenses. In February 2021, we received 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. We have received a notice that at least two of the one-month renewal periods will likely be exercised.

 

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 May 4, 2021, we have received approximately $25.9 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 May 4, 2021, we have paid a total of approximately $3.5 million in progress payments for the new warehouse.

 

Option Exercises

 

Stock options were exercised by our employees and directors during the first quarter of 2021, and, consequently, we received approximately $43 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. On May 13, 2021, we were informed that the entire original principal amount of $1,363,000 would be forgiven.

 

We consider our investment portfolio a source of liquidity as well. As of March 31, 2021, $13.8 million was invested in third party securities.

 

Capital Resources

 

Since the execution of the TIA on July 1, 2020, we have begun construction for significant expansion to our facilities. As of May 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. As of May 2021, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $50.8 million. To fund the purchase of the automated assembly equipment, auxiliary equipment, and construction of the controlled environment, we are reimbursed by the U.S. government according to the terms in the TIA. The TIA also allows us to request an advance of funds for larger purchases when necessary. The expenditures which are not reimbursable from the U.S. government under the TIA are funded with cash from operations. The cost of the controlled environment is approximately $6.5 million and will be funded by the U.S. government under the TIA, while the cost of the new warehouse is approximately $5.8 million and will be our financial obligation.

 

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CRITICAL ACCOUNTING ESTIMATES

 

We are responsible for developing estimates for amounts reported as assets and liabilities, and revenues and expenses in conformity with U.S. generally accepted accounting principles (“GAAP”).  Those estimates require that we develop assumptions of future events based on past experience and expectations of economic factors.  Among the more critical estimates management makes is the estimate for customer rebates.  The amount reported as a contractual allowance for rebates involves examination of past historical trends related 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 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.Controls and Procedures.

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, Management, with the participation of our President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”), and our Vice President and Chief Financial Officer, John W. Fort III (the “CFO”), acting in their capacities as our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in our periodic reports is: i) recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms; and ii) accumulated and communicated to our Management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of March 31, 2021, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes during the first quarter of 2021 or subsequent to March 31, 2021 in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

Please refer to Note 8 to the financial statements for a complete description of all legal proceedings.

 

Item 1A.Risk Factors.

 

There were no material changes in our Risk Factors as set forth in our most recent annual report which is available on EDGAR.

 

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

 

None.

 

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Item 3.Defaults Upon Senior Securities.

 

Working Capital Restrictions and Limitations on the Payment of Dividends

 

We declared a dividend to the Series II Class B Convertible Preferred Shareholders in the aggregate amount of $39,050. This dividend was paid on April 22, 2021.

 

The certificates of designation for both of the outstanding series of Class B Convertible Preferred Stock each currently provide that, if a dividend upon any shares of Preferred Stock is in arrears, no dividends may be paid or declared upon any stock ranking junior to such stock. If Series II Class B preferred stock dividends are in arrears, Common Stock may generally not be purchased by the Company. If Series III Class B preferred stock dividends are in arrears, the Company may generally purchase Common Stock if the funds used to purchase stock do not exceed 25% of the value of the prior period’s cash assets.

 

For the three months ended March 31, 2021, the amount of dividends in arrears payable to Series III preferred shareholders was $25,888 and the total arrearage payable to Series III preferred shareholders was approximately $4,063,000 as of March 31, 2021. The total dividend arrearage payable to former preferred shareholders as of March 31, 2021 was $930,000.

 

Item 6.Exhibits.

 

Exhibit No. 

Description of Document

 

31.1 Certification of Principal Executive Officer
   
31.2 Certification of Principal Financial Officer
   
32 Certification Pursuant to 18 U.S.C. Section 1350
   
101 The following materials from Retractable Technologies, Inc.’s Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2021 and December 31, 2020, (ii) Condensed Statements of Operations for the three months ended March 31, 2021 and 2020, (iii) Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020, (iv) Condensed Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020; and (v) Notes to Condensed Financial Statements

 

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SIGNATURES

 

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

 

 DATE:   May 17, 2021 RETRACTABLE TECHNOLOGIES, INC.
 (Registrant)
   
   
 By:/s/ JOHN W. FORT III 

  JOHN W. FORT III
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
AND CHIEF ACCOUNTING OFFICER

  

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