Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

 

For the transition period from        to        

 

Commission file number:    001-16465

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Texas

 

75-2599762

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

 Identification No.)

 

 

 

511 Lobo Lane

 

 

Little Elm, Texas

 

75068-0009

(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)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

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: 27,372,397 shares of Common Stock, no par value, outstanding as of August 1, 2014, excluding treasury shares.

 

 

 



Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2014

 

TABLE OF CONTENTS

 

 

PART I

 

 

 

Item 1.

Financial Statements

1

 

 

 

CONDENSED BALANCE SHEETS

1

CONDENSED STATEMENTS OF OPERATIONS

2

CONDENSED STATEMENTS OF CASH FLOWS

3

NOTES TO CONDENSED FINANCIAL STATEMENTS

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

 

 

 

Item 4.

Controls and Procedures

17

 

 

 

PART II

 

 

 

Item 1.

Legal Proceedings

17

 

 

 

Item 1A.

Risk Factors

17

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

 

 

 

Item 3.

Defaults Upon Senior Securities

18

 

 

 

Item 5.

Other Information

18

 

 

 

Item 6.

Exhibits

19

 

 

 

SIGNATURES

20

 



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.       Financial Statements.

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

 

 

 

June 30, 2014

 

 

 

 

 

 

(unaudited)

 

 

December 31, 2013

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

22,248,428

 

$

27,629,359

 

Restricted cash

 

600,000

 

 

 

Accounts receivable, net

 

4,083,189

 

 

3,476,718

 

Inventories, net

 

5,351,402

 

 

5,735,589

 

Other current assets

 

584,202

 

 

1,065,641

 

Total current assets

 

32,867,221

 

 

37,907,307

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

11,281,912

 

 

10,910,172

 

Intangible and other assets, net

 

275,329

 

 

279,965

 

Total assets

$

44,424,462

 

$

49,097,444

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

4,806,935

 

$

5,107,778

 

Litigation proceeds subject to stipulation

 

7,724,826

 

 

7,724,826

 

Current portion of long-term debt

 

176,129

 

 

247,064

 

Accrued compensation

 

704,198

 

 

815,044

 

Dividends payable

 

57,613

 

 

57,613

 

Accrued royalties to shareholders

 

601,295

 

 

602,209

 

Other accrued liabilities

 

1,313,046

 

 

1,975,018

 

Income taxes payable

 

6,682

 

 

90,972

 

Total current liabilities

 

15,390,724

 

 

16,620,524

 

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

3,502,110

 

 

3,576,932

 

Total liabilities

 

18,892,834

 

 

20,197,456

 

 

 

 

 

 

 

 

Commitments and contingencies — see Note 6

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock $1 par value:

 

 

 

 

 

 

Series I, Class B

 

103,500

 

 

103,500

 

Series II, Class B

 

178,700

 

 

178,700

 

Series III, Class B

 

130,245

 

 

130,245

 

Series IV, Class B

 

542,500

 

 

542,500

 

Series V, Class B

 

40,000

 

 

40,000

 

Common stock, no par value

 

 

 

 

Additional paid-in capital

 

59,043,021

 

 

58,983,166

 

Retained deficit

 

(33,409,729

)

 

(29,981,514

)

Common stock in treasury – at cost

 

(1,096,609

)

 

(1,096,609

)

Total stockholders’ equity

 

25,531,628

 

 

28,899,988

 

Total liabilities and stockholders’ equity

$

44,424,462

 

$

49,097,444

 

 

See accompanying notes to condensed financial statements

 

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RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

Three Months
Ended
June 30, 2014

 

 

Three Months
Ended
June 30, 2013

 

 

Six Months
Ended
June 30, 2014

 

 

Six Months
Ended
June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales, net

$

6,876,362

 

$

6,907,233

 

$

12,916,740

 

$

14,080,345

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

Cost of manufactured product

 

4,097,143

 

 

4,600,227

 

 

7,917,927

 

 

8,440,321

 

Royalty expense to shareholders

 

601,295

 

 

567,544

 

 

1,097,537

 

 

1,124,509

 

Total cost of sales

 

4,698,438

 

 

5,167,771

 

 

9,015,464

 

 

9,564,830

 

Gross profit

 

2,177,924

 

 

1,739,462

 

 

3,901,276

 

 

4,515,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,062,825

 

 

1,079,736

 

 

2,159,519

 

 

2,143,023

 

Research and development

 

192,237

 

 

199,385

 

 

376,961

 

 

380,233

 

General and administrative

 

2,263,211

 

 

2,845,720

 

 

4,694,889

 

 

5,744,672

 

Total operating expenses

 

3,518,273

 

 

4,124,841

 

 

7,231,369

 

 

8,267,928

 

Loss from operations

 

(1,340,349

)

 

(2,385,379

)

 

(3,330,093

)

 

(3,752,413

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

8,436

 

 

9,158

 

 

18,832

 

 

20,598

 

Interest expense, net

 

(56,035

)

 

(60,640

)

 

(113,203

)

 

(112,703

)

Loss before income taxes

 

(1,387,948

)

 

(2,436,861

)

 

(3,424,464

)

 

(3,844,518

)

Provision for income taxes

 

1,875

 

 

1,875

 

 

3,751

 

 

3,751

 

Net loss

 

(1,389,823

)

 

(2,438,736

)

 

(3,428,215

)

 

(3,848,269

)

Preferred stock dividend requirements

 

(228,999

)

 

(228,999

)

 

(457,998

)

 

(458,067

)

Loss applicable to common shareholders

$

(1,618,822

)

$

(2,667,735

)

$

(3,886,213

)

$

(4,306,336

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share

$

(0.06

)

$

(0.10

)

$

(0.14

)

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share

$

(0.06

)

$

(0.10

)

$

(0.14

)

$

(0.16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

27,332,483

 

 

27,042,370

 

 

27,295,586

 

 

27,140,433

 

Diluted

 

27,332,483

 

 

27,042,370

 

 

27,295,586

 

 

27,140,433

 

 

See accompanying notes to condensed financial statements

 

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RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

 

Six Months
Ended
June 30, 2014

 

 

Six Months
Ended
June 30, 2013

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

$

(3,428,215

)

$

(3,848,269

)

Adjustments to reconcile net loss to net cash provided by (used by) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

595,172

 

 

627,576

 

Share based compensation

 

 

 

52,775

 

Gain on disposal of assets

 

 

 

(1,000

)

(Increase) decrease in assets:

 

 

 

 

 

 

Inventories

 

384,187

 

 

(950,412

)

Accounts receivable

 

(606,471

)

 

(611,669

)

Other current assets

 

481,439

 

 

480,144

 

Increase (decrease) in liabilities:

 

 

 

 

 

 

Accounts payable

 

(300,843

)

 

(1,264,243

)

Other accrued liabilities

 

(773,732

)

 

112,011

 

Income taxes payable

 

(84,290

)

 

3,751

 

Net cash used by operating activities

 

(3,732,753

)

 

(5,399,336

)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of property, plant, and equipment

 

(962,279

)

 

(160,359

)

Changes in restricted cash

 

(600,000

)

 

 

Proceeds from sale of assets

 

 

 

1,000

 

Net cash used by investing activities

 

(1,562,279

)

 

(159,359

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayments of long-term debt and notes payable

 

(145,754

)

 

(156,403

)

Repurchase of Common Stock

 

 

 

(446,155

)

Proceeds from the exercise of stock options

 

175,081

 

 

 

Payment of Preferred Stock dividends

 

(115,226

)

 

(115,226

)

Net cash used by financing activities

 

(85,899

)

 

(717,784

)

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(5,380,931

)

 

(6,276,479

)

 

 

 

 

 

 

 

Cash and cash equivalents at:

 

 

 

 

 

 

Beginning of period

 

27,629,359

 

 

25,963,313

 

End of period

$

22,248,428

 

$

19,686,834

 

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

 

Interest paid

$

113,203

 

$

123,177

 

Income taxes paid

$

91,210

 

$

2,593

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

Preferred dividends declared, not paid

$

57,613

 

$

57,613

 

 

See accompanying notes to condensed financial statements

 

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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 primary products are the VanishPoint® 0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; the 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® syringe; the Patient Safe® Luer Cap; and the VanishPoint® Blood Collection Set.

 

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 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, 2014 for the year ended December 31, 2013.

 

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 unrestricted cash, the proceeds subject to a stipulation (discussed elsewhere herein), money market accounts, and investments with original maturities of three months or less.

 

Restricted cash

 

Amounts pledged as collateral for an underlying letter of credit for equipment is classified as restricted cash.  Changes in restricted cash have been presented as investing activities in the Consolidated Statements of Cash Flows.

 

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

 

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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 Condensed Balance Sheets and are shown in Note 5, 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.

 

Inventories

 

Inventories are valued at the lower of cost or market, with cost being determined using actual average cost.  The Company compares the average cost to the market price and records the lower value.  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.

 

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.

 

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

Automobiles

 

7 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 of the underlying assets.

 

The Company’s property, plant, and equipment primarily consist of buildings, land, assembly equipment for syringes, molding machines, molds, office equipment, furniture, and fixtures.

 

Intangible assets

 

Intangible assets are stated at cost and consist primarily of intellectual property which is amortized using the straight-line method over 17 years.

 

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Financial instruments

 

The Company estimates the fair market 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 market 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.  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, 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 which are well-established entities.  As a consequence, Management considers any exposure from concentrations of credit risks to be limited.

 

The following table reflects our significant customers for the first three and six months of 2014 and 2013:

 

 

 

Six Months
ended
June 30, 2014

 

Six Months
ended
June 30, 2013

 

Three Months
ended
June 30, 2014

 

Three Months
ended
June 30, 2013

 

Number of significant customers

 

1

 

2

 

1

 

2

 

Aggregate dollar amount of net sales to significant customers

 

$3.8 million

 

$4.7 million

 

$2.1 million

 

$3.0 million

 

Percentage of net sales to significant customers

 

29.7%

 

33.8%

 

30.6%

 

44.5%

 

 

The Company manufactures syringes in Little Elm, Texas as well as utilizing manufacturers in China.  The Company purchases most of its product components from single suppliers, including needle adhesives and packaging materials.  There are multiple sources of these materials.  The Company obtained roughly 63.0% and 71.7% of its finished products in the first six months of 2014 and 2013, respectively, from a Chinese manufacturer.  Purchases from a Chinese manufacturer aggregated 69.6% and 72.3% of finished products in the three month periods ended June 30, 2014 and 2013, respectively.  In the event that the Company becomes unable to purchase products from its Chinese manufacturer, the Company would need to find an alternate manufacturer for its 0.5mL insulin syringe, its 2mL, 5mL, and 10mL syringes and its autodisable syringe, and increase domestic production for 1mL and 3mL syringes.

 

Revenue recognition

 

Revenue is recognized for sales when title and risk of ownership passes to the customer, generally upon shipment.  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 that 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 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 and deducted from revenues

 

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in the Statements of Operations.  Accounts payable included estimated contractual allowances for $3,835,947 and $3,611,692 as of June 30, 2014 and December 31, 2013, 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.  Any product shipped or distributed for evaluation purposes is expensed.

 

Certain distributors have taken rebates to which they are not entitled, such as utilizing a rebate 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. 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.

 

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 provides that a distributor 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 do not provide for any returns.

 

Litigation proceeds and settlements

 

Proceeds from litigation are recognized when realizable.  Generally, realization is not reasonably assured and expected until proceeds are collected; however, see Note 6, COMMITMENTS AND CONTINGENCIES, for a discussion of proceeds received 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.

 

Income taxes

 

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

 

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

 

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Earnings per share

 

The Company computes basic earnings 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 and convertible debt.  The calculation of diluted EPS excluded 1.9 million and 0.5 million shares of Common Stock underlying issued and outstanding stock options at June 30, 2014 and June 30, 2013, respectively, as their effect was antidilutive.  The potential dilution, if any, is shown on the following schedule:

 

 

 

Three Months
Ended
June 30, 2014

 

 

Three Months
Ended
June 30, 2013

 

 

Six Months
Ended
June 30, 2014

 

 

Six Months
Ended
June 30, 2013

 

Net loss

$

(1,389,823

)

$

(2,438,736

)

$

(3,428,215

)

$

(3,848,269

)

Preferred dividend requirements

 

(228,999

)

 

(228,999

)

 

(457,998

)

 

(458,067

)

Loss applicable to common shareholders after assumed conversions

$

(1,618,822

)

$

(2,667,735

)

$

(3,886,213

)

$

(4,306,336

)

Average common shares outstanding

 

27,332,483

 

 

27,042,370

 

 

27,295,586

 

 

27,140,433

 

Average common and common equivalent shares outstanding - assuming dilution

 

27,332,483

 

 

27,042,370

 

 

27,295,586

 

 

27,140,433

 

Basic loss per share

$

(0.06

)

$

(0.10

)

$

(0.14

)

$

(0.16

)

Diluted loss per share

$

(0.06

)

$

(0.10

)

$

(0.14

)

$

(0.16

)

 

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.

 

Share-based compensation

 

The Company’s share-based payments are accounted for using the fair value method.  The Company records share-based compensation expense on a straight-line basis over the requisite service period.

 

Recent pronouncement

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition.  This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which 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.  The ASU will be effective commencing with the Company’s quarter ending March 31, 2017.  The Company is currently assessing the potential impact of this ASU on its financial statements.

 

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3.                INVENTORIES

 

Inventories consist of the following:

 

 

 

June 30, 2014

 

 

December 31, 2013

 

Raw materials

1,748,111

 

1,666,525

 

Finished goods

 

4,284,686

 

 

4,750,459

 

 

 

6,032,797

 

 

6,416,984

 

Inventory reserve

 

(681,395

)

 

(681,395

)

 

5,351,402

 

5,735,589

 

 

4.                INCOME TAXES

 

The Company’s effective tax rate on the net loss before income taxes was (0.1)% and (0.1)% for the six months ended June 30, 2014 and June 30, 2013, respectively.  For the three months ended June 30, 2014 and June 30, 2013, the Company’s effective tax rate on the net income (loss) before income taxes was (0.1)% and (0.1)%, respectively.

 

5.                OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consist of the following:

 

 

 

June 30, 2014

 

 

December 31, 2013

 

Prepayments from customers

$

826,072

 

$

1,720,896

 

Accrued property taxes

 

215,140

 

 

 

Accrued professional fees

 

169,197

 

 

169,125

 

Other accrued expenses

 

102,637

 

 

84,997

 

 

$

1,313,046

 

$

1,975,018

 

 

6.                COMMITMENTS AND CONTINGENCIES

 

On May 19, 2010, final judgment was entered in the U.S. District Court for the Eastern District of Texas, Marshall Division for the Company which ordered that the Company recover $5,000,000 plus prejudgment and post-judgment interest, and ordered a permanent injunction for BD’s 1mL and 3mL Integra syringes until the expiration of certain patents.  The permanent injunction was stayed for the longer of the exhaustion of the appeal of the district court’s case or twelve months from May 19, 2010.  In June 2010, BD filed an appeal in the U.S. Court of Appeals for the Federal Circuit appealing the final judgment entered on May 19, 2010.  In July 2011, a three-judge panel of the U.S. Court of Appeals for the Federal Circuit reversed the district court’s judgment that BD’s 3mL Integra infringed the Company’s ‘224 patent and ‘077 patent.  The U.S. Court of Appeals for the Federal Circuit affirmed the district court’s judgment that the 1mL Integra infringes the Company’s ‘244 and ‘733 patents.  The U.S. Court of Appeals for the Federal Circuit also affirmed the district court’s judgment that the ‘077 patent is not invalid for anticipation or obviousness.  The Company had petitioned for a rehearing by all the judges of the U.S. Court of Appeals for the Federal Circuit as to whether the three-judge panel properly construed the Company’s patent claim language in finding that the 3mL Integra did not infringe.  The Company’s petition for rehearing by all of the judges of the U.S. Court of Appeals for the Federal Circuit was denied with two dissents being issued.  The Company filed a petition for certiorari asking the Supreme Court to review the matter.  That petition was denied in January of 2013.  BD filed a Rule 60(b)(5) Motion to Conform Judgment to Federal Circuit Mandate in the U.S. District Court for the Eastern District of Texas which sought to modify the damages award.  On August 7, 2013, the U.S. District Court for the Eastern District of Texas issued an order adopting the Magistrate Judge’s Report and Recommendation and denying BD’s Rule 60(b)(5) motion.  On October 29, 2013, BD filed its Notice of Appeal of the U.S. District Court for the Eastern District of Texas August 7, 2013 order denying BD’s Rule 60(b)(5) motion to the U.S. Court of Appeals for the Federal Circuit.  Oral argument for this appeal occurred on May 9, 2014.  On July 7, 2014, the U.S. Court of Appeals for the Federal Circuit affirmed the U.S. District Court for the Eastern District of Texas decision denying BD’s Rule 60(b)(5) motion to modify the damages award.  On August 6, 2014, BD filed a combined petition for panel rehearing and rehearing en banc in the U.S. Court of Appeals for the Federal Circuit.  The Company will file its response to BD’s combined petition on or before August 21, 2014.  On September 30, 2013, the Company received payment of $7,724,826 (the “Judgment Amount”) from BD pursuant to a stipulation in this case.  The stipulation provides that if, as a result of BD’s appeal of the District Court’s denial of BD’s Rule 60(b)(5) motion, it is judicially determined that BD owes an amount less than the Judgment Amount, BD shall be entitled to restitution by the Company of any excess payment, with interest.  In the event that the Federal Circuit affirms the denial of BD’s Rule 60(b)(5) motion, the payment of the Judgment Amount shall constitute satisfaction of the patent infringement judgment and BD shall owe no further money damages to the Company in this case.  The Judgment Amount has been reflected as a current liability in the Balance Sheets since the proceeds are not yet realizable.

 

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In May 2010, the Company and an officer’s suit against BD in 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 Company and an officer filed a Second Amended Complaint on July 23, 2010 setting forth additional detail regarding the allegations of BD’s illegal conduct.  BD filed a motion to dismiss and the U.S. District Court for the Eastern District of Texas, Marshall Division denied that motion in part and granted it in part, granting the Company the right to re-plead certain allegations by May 13, 2011.  The Company and an officer filed a Third Amended Complaint in May 2011, setting forth additional detail regarding the alleged illegal conduct by BD.  Trial was initially set for February 2012.  However, in January 2012 the parties agreed to a continuance to allow the petition for certiorari to be considered.  As stated above, the petition was denied in January of 2013.  A hearing to re-set a trial date in light of BD’s motion for continuance was held May 3, 2013.  The trial commenced on September 9, 2013 in the U.S. District Court for the Eastern District of Texas, Tyler, Division, and the jury returned its verdict on September 19, 2013, finding 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 for the antitrust claim, which is subject to being trebled pursuant to statute.  The Court conducted a hearing for post-trial motions in early 2014.  Orders have not yet issued and a final judgment has not yet been entered.  BD has stated that it plans to appeal the verdict.

 

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.  The United States District Court for the Eastern District of Texas, Texarkana Division conducted a claims construction hearing on September 25, 2008 and issued its claims construction order on November 14, 2008.  The case has been stayed pending resolution of the Company’s first filed case against BD described above.  There has been no activity in this case since the stay.

 

7.                BUSINESS SEGMENTS

 

 

 

Three Months
Ended

June 30, 2014

 

Three Months
Ended

June 30, 2013

 

Six Months
Ended

June 30, 2014

 

Six Months
Ended

June 30, 2013

 

U.S. sales

 

$

5,157,496

 

 $

4,769,084

 

  $

10,107,673

 

  $

10,505,314

 

North and South America sales
(excluding U.S.)

 

1,161,093

 

1,897,631

 

1,997,645

 

2,489,920

 

Other international sales

 

557,773

 

240,518

 

811,422

 

1,085,111

 

Total sales, net

 

$

6,876,362

 

 $

6,907,233

 

  $

12,916,740

 

  $

14,080,345

 

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

U.S.

 

$

11,061,092

 

$

10,676,053

 

International

 

$

220,820

 

$

234,119

 

 

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.

 

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8.                STOCK REPURCHASE PROGRAM

 

On July 10, 2012, the Company authorized a Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934.  Under the plan, the Company purchased 255,812 and 338,909 shares in the first three and six months ended June 30, 2013.  The plan was terminated effective August 30, 2013.

 

Pursuant to the Certificates of Designation, Preferences, Rights And Limitations of the Series I Class B and Series II Class B Convertible Preferred Stock, the Company would have been prohibited from purchasing its Common Stock while dividends were in arrears.  Therefore, to facilitate the Common Stock repurchase plan, the Company paid dividends on the Series I Class B Preferred Stock in the amount of $12,938 at each date on January 21, April 22, and July 22, 2013.  The Company paid dividends to Series II Class B Preferred Stockholders in the amount of $44,675 on each of the same dates listed in the preceding sentence.

 

9.                DIVIDENDS

 

On December 20, 2013, April 1, 2014, and June 25, 2014, the Board of Directors announced dividends on the Series I Class B Preferred Stock in the amount of $12,938 on each date which were paid on January 20, 2014, April 21, 2014, and July 21, 2014.  The Company also announced and paid dividends to Series II Class B Preferred Stockholders in the amount of $44,675 on the same dates.  See Note 8 for information about dividends paid during the term of the Stock Repurchase Program.

 

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, our ability to maintain liquidity, our maintenance of patent protection, the impact of current litigation, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, 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 continuing interest of larger market players, specifically BD, in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors in Part II.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

 

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We have been manufacturing and marketing our products since 1997.  Safety syringes comprised 96.0% of our sales in the first six months of 2014. We also manufacture and market the 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 resulting from catheter hub contamination.

 

On June 17, 2014, the Company received notice of substantial equivalence from the Food and Drug Administration for the EasyPointTM needle. The EasyPointTM is a retractable needle that can be used with Luer lock syringes, Luer slip syringes, and prefill syringes to give injections. The EasyPointTM needles can also be used to aspirate fluids and obtain blood collection.

 

Historically, unit sales have increased during the flu season.

 

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Our products have been and continue to be distributed nationally and internationally through numerous distributors.  Although we have made limited progress in some areas, such as the alternate care market, our volumes are not as high as they should be given the nature and quality of our products and the federal and state legislation requiring the use of safe needle devices. The alternate care market is composed of alternate care facilities that provide long-term nursing and out-patient surgery, emergency care, and physician services.

 

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

 

We have reported in the past that our progress is limited principally due to exclusive marketing practices engaged in by BD, the dominant maker and seller of disposable syringes.  On September 19, 2013, a Texas jury returned a verdict in our litigation against BD, finding 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 for the antitrust claim, which is subject to being trebled pursuant to statute.  The Court conducted a hearing for post-trial motions in early 2014.  Orders confirming or amending the damages have not yet issued.  BD has stated that it plans to appeal the verdict.  We have not received the $113,508,014 or any other amounts pursuant to the verdict in the aforementioned antitrust litigation against BD.

 

On September 30, 2013, we received payment of $7,724,826 (the “Judgment Amount”) from 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 stipulation provides that if, as a result of BD’s appeal of the District Court’s denial of BD’s Rule 60(B)(5) motion, it is judicially determined that BD owes an amount less than the Judgment Amount, BD shall be entitled to restitution by us of any excess payment, with interest.  Otherwise, the payment of the Judgment Amount shall constitute satisfaction of the patent infringement judgment and BD shall owe no further money damages to us in the patent infringement case.  The Judgment Amount is included as cash on the balance sheet and shown as a liability on the balance sheet under “Litigation proceeds subject to stipulation”.  The Judgment Amount is only related to the patent infringement portion of the claims against BD.  We have determined not to use the Judgment Amount to fund operations yet.

 

In the first six months of 2014, we took steps to decrease our non-litigation legal costs.  We expect such costs to remain lower in the future.  For the first six months of 2014, our non-litigation legal costs were reduced by approximately $673 thousand.  Additionally, effective May 9, 2014, we reduced our workforce by 13.7% in an effort to cut costs.  We paid $191 thousand in severance costs in the second quarter of 2014.  In May and July of 2014, we reduced all executive officers’ salaries by at least 10%.  In the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, further reduce the workforce, further reduce the salaries of officers as well as other employees, and/or defer royalty payments.  To add non-cash compensation opportunities for our employees, we have recommended our shareholders increase our ability to grant awards under our stock option plan at our upcoming annual shareholders’ meeting.

 

Section 4191 of the Internal Revenue Code, enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act provides for an excise tax of 2.3% on medical devices.  At the present time the excise tax is applicable to domestic sales of our products, except those which are sold to exempt organizations.  The majority of our sales are domestic and not in the retail market.  The tax is imposed on sales, not profits.  There is no assurance this tax can be passed along to our customers.  We expect the impact of this tax to be approximately $750,000 in 2014.

 

On July 10, 2012, the Company authorized a Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934.  The plan was terminated effective August 30, 2013.  Under the plan, we purchased a total of 722,920 shares of our Common Stock.

 

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Pursuant to the Certificates of Designation, Preferences, Rights And Limitations of the Series I Class B and Series II Class B Convertible Preferred Stock, we would be prohibited from purchasing our Common Stock while dividends were in arrears.  Therefore, to facilitate the Common Stock repurchase plan, we paid quarterly dividends on the Series I Class B and Series II Class B Preferred Stock during the term of the repurchase plan.  Notwithstanding the termination of the repurchase plan, the Board of Directors have authorized dividends to be paid to the Series I Class B and Series II Class B Preferred Stockholders in successive quarters.  Dividends were paid on November 11, 2013, January 20, 2014, April 21, 2014, and July 21, 2014 each in the cumulative amount of $57,613.  These dividends may be suspended at any time by the Board of Directors.

 

Product purchases from our Chinese manufacturer have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost.  In the first six months of 2014, our Chinese manufacturer manufactured approximately 63.0% of the units we produced.  In the event that we become unable to purchase products from our Chinese manufacturer, we would need to find an alternate manufacturer for the 0.5mL insulin syringe and the 2mL, 5mL, and 10mL syringes, and we would increase domestic production for the 1mL and 3mL syringes.

 

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing automated retraction 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.

 

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.

 

The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties.  Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements.  Dollar amounts have been rounded for ease of reading.  All period references are to the periods ended June 30, 2014 or 2013.

 

RESULTS OF OPERATIONS

 

The following table contains selected information from our condensed statements of operations, expressed as a percentage of revenue:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Cost of sales

 

 

 

 

 

 

 

 

 

Cost of manufactured product

 

59.6

%

66.6

%

61.3

%

59.9

%

Gross profit

 

31.7

 

25.2

 

30.2

 

32.1

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

15.5

 

15.6

 

16.7

 

15.2

 

Research and development

 

2.8

 

2.9

 

2.9

 

2.7

 

General and administrative

 

32.9

 

41.2

 

36.3

 

40.8

 

Total operating expenses

 

51.2

 

59.7

 

55.9

 

58.7

 

Loss from operations

 

(19.5

)

(34.5

)

(25.7

)

(26.6

)

Net interest expense

 

0.7

 

0.7

 

0.7

 

0.7

 

Provision for income taxes

 

 

 

 

 

Net loss

 

(20.2

)%

(35.2

)%

(26.4

)%

(27.3

)%

 

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Comparison of Three Months Ended June 30, 2014 and June 30, 2013

 

Sales

 

Domestic sales accounted for 75.0% and 69.0% of the revenues for the three months ended June 30, 2014 and 2013, respectively.  Domestic revenues increased 8.1% principally due to higher sales volume mitigated by lower average sales prices.  Domestic unit sales increased 13.4%.  Domestic unit sales were 66.3% of total unit sales for the three months ended June 30, 2014.  International revenue and unit sales decreased 19.6% and 27.7%, respectively, due to lower sales volume mitigated by higher average sales prices.  Overall unit sales decreased 4.8%.

 

Gross Profit and Cost of Sales

 

Gross profit increased 25.2% primarily due to lower cost of manufacturing.  Gross profit as a percentage of net sales was 31.7% in the three months ended June 30, 2014 as compared to 25.2% in 2013 due to lower cost of manufacturing per unit.

 

The average cost of manufactured products sold per unit decreased by 6.4% due to variations in production levels.  Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix.  The cost of manufactured products as a percentage of net sales was 59.6% in the three months ended June 30, 2014 as compared to 66.6% in 2013 due to lower cost of manufactured product.  Royalty expense increased 5.9% due to higher gross sales.

 

Operating Expenses

 

Operating expenses decreased 14.7% or $607 thousand.  The decrease was due to decreases in legal costs other than litigation, compensation costs, office expenses, consulting, and taxes other than income taxes.

 

Loss from Operations

 

Our operating loss was $1.3 million compared to an operating loss for the same period last year of $2.4 million due primarily to improved gross profit and lower operating expenses.

 

Income Taxes

 

Our effective tax rate on the net loss before income taxes was (0.1)% and (0.1)% for the three months ended June 30, 2014 and June 30, 2013, respectively.

 

Comparison of Six Months Ended June 30, 2014 and June 30, 2013

 

Sales

 

Domestic sales accounted for 78.3% and 74.6% of the revenues for the six months ended June 30, 2014 and 2013, respectively.  Domestic revenues decreased 3.8%.  Domestic unit sales increased 0.2%.  Domestic unit sales were 71.8% of total unit sales for the six months ended June 30, 2014.  International revenue and unit sales decreased 21.4% and 33.0%, respectively, due to lower volumes mitigated by higher average sales prices.  Overall unit sales decreased 12.1%.

 

Gross Profit and Cost of Sales

 

Gross profit decreased 13.6% primarily due to lower revenues.  Gross profit as a percentage of net sales was 30.2% in the six months ended June 30, 2014 as compared to 32.1% in 2013 due to lower sales volume mitigated by higher unit cost of manufacture.

 

The average cost of manufactured products sold per unit increased by 6.7% due to variations in the production schedule.  Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix.  The cost of manufactured products as a percentage of net sales was 61.3% in the six months ended June 30, 2014 as compared to 59.9% in 2013 due to higher cost of manufacturing.  Royalty expense decreased 2.4% due to lower gross sales.

 

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Operating Expenses

 

Operating expenses decreased 12.5% or $1.0 million.  The decrease was due to decreases in legal expense other than litigation costs, consulting fees, Medical Device excise tax, and donations.

 

Loss from Operations

 

Our operating loss was $3.3 million compared to an operating loss for the same period last year of $3.8 million due primarily to reduced operating expenses.

 

Income Taxes

 

Our effective tax rate on the net loss before income taxes was (0.1)% and (0.1)% for the six months ended June 30, 2014 and June 30, 2013, respectively.

 

Discussion of Balance Sheet and Statement of Cash Flow Items

 

Our balance sheet remains strong with cash making up 50.1% of total assets.  Working capital was $17.5 million at June 30, 2014, a decrease of $3.8 million from December 31, 2013.

 

Approximately $3.7 million in cash flow in the six months ended June 30, 2014 was used by operating activities.  Changes in working capital comprised $900 thousand of the cash used by operating activities.  Our cash balance was positively affected in the third quarter of 2013 by the receipt of litigation proceeds subject to a stipulation (discussed elsewhere herein).

 

LIQUIDITY

 

At the present time, Management does not intend to raise equity capital.  Due to the funds received from prior litigation settlements, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing as the primary ongoing sources of cash.

 

The note payable to Deutsche Leasing USA, Inc. in the original principal amount of $327,726 was paid in full in April 2014 and the note payable to Deutsche Leasing USA, Inc. in the original principal amount of $207,260 will be paid in full in November 2014.  The monthly payment for the loan which matured in April was $9,900 and the monthly payment for the loan maturing in November is $6,300.

 

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 break even quarters, we need minimal 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.

 

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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 32.1%) 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 international sales are shipped directly from China to the customer.  Purchases of product manufactured in China, if available, 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 inventory as well as Cost of sales.  We will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in China to achieve economic benefits as well as to maintain our domestic manufacturing capability.

 

Fluctuations in the cost of oil (since our products are petroleum based) and transportation and the volume of units purchased from our Chinese manufacturer 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.

 

Seasonality

 

Historically, unit sales have increased during the flu season.

 

Cash Requirements

 

Due to funds received from prior litigation settlements, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing as the primary ongoing sources of cash.  In the first six months of 2014, we took steps to decrease our non-litigation legal costs and we expect such costs to remain lower in the future.  Additionally, effective May 9, 2014, we reduced our workforce by 13.7% in an effort to cut costs.  In May and July of 2014, we also reduced all executive officers’ salaries by at least 10%.  In the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, further reduce the workforce, further reduce the salaries of officers and other employees, and/or defer royalty payments.

 

External Sources of Liquidity

 

We have obtained several loans from our inception, which have, together with the proceeds from the sales of equities and litigation efforts, enabled us to pursue development and production of our products.  Given the current economic conditions, our ability to obtain additional funds through loans is uncertain.  Furthermore, the shareholders previously authorized an additional 5,000,000 shares of a Class C Preferred Stock that could, if necessary, be designated and used to raise funds through the sale of equity.  Due to the current market price of our Common Stock, it is unlikely we would choose to raise funds by the sale of equity.

 

On September 30, 2013, we received payment of $7,724,826 from BD pursuant to a stipulation (discussed elsewhere herein) 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.  Such amount is included as cash on the balance sheet and shown as a liability on the balance sheet under “Litigation proceeds subject to stipulation”.

 

On September 19, 2013, a Texas jury returned a verdict in our litigation against BD, finding 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 for the antitrust claim, which is subject to being trebled pursuant to statute.  The Court conducted a hearing for post-trial motions in early 2014.  Orders have not yet issued confirming or amending the damages.  BD has stated that it plans to appeal the verdict.  We have not received the $113,508,014 or any other amounts pursuant to the verdict in the aforementioned antitrust litigation against BD.

 

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CAPITAL RESOURCES

 

Repurchase of Common Stock

 

On July 10, 2012, the Company authorized a Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934.  The plan was terminated effective August 30, 2013.  Under the plan, we purchased a total of 722,920 shares of our Common Stock.

 

Purchase of Equipment

 

We are still in the process of purchasing manufacturing equipment and molds in the amount of $1.5 million.  We are funding the purchase with existing funds.

 

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.

 

No update.

 

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, Douglas W. Cowan (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 June 30, 2014, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes during the second quarter of 2014 or subsequent to June 30, 2014 in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.                     Legal Proceedings.

 

Please refer to Note 6 to the financial statements for a complete description of all legal proceedings.

 

Item 1A.            Risk Factors.

 

There were no material changes in the Risk Factors applicable to the Company as set forth in our Form 10-K annual report for 2013 which was filed on March 31, 2014, and which is available on EDGAR.

 

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

 

Working Capital Restrictions and Limitations on the Payment of Dividends

 

As of June 25, 2014, the Board of Directors declared a dividend to the Series I Class B and Series II Class B Convertible Preferred Shareholders in the aggregate amount of $57,613.  This dividend was paid on July 21, 2014.

 

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

 

Item 3.                     Defaults Upon Senior Securities.

 

Series I Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2014, the amount of dividends in arrears was $13,000 and the total arrearage was $13,000.

 

Series II Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2014, the amount of dividends in arrears was $45,000 and the total arrearage was $45,000.

 

Series III Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2014, the amount of dividends in arrears was $66,000 and the total arrearage was $3,692,000.

 

Series IV Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2014, the amount of dividends in arrears was $272,000 and the total arrearage was $7,695,000.

 

Series V Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2014, the amount of dividends in arrears was $6,000 and the total arrearage was $949,000.

 

Item 5.                     Other Information.

 

Our annual meeting of shareholders will be held on September 5, 2014 at 10:00 a.m. Central time and we are soliciting the vote of shareholders of Common Stock with regard to the election of Class 2 Directors as well as amendments to the 2008 Stock Option Plan.  The Proxy Statement has been delivered via the notice and access method, meaning most Common Stockholders will generally only receive a short notice notifying them of where they can download copies of the proxy materials.  Shareholders desiring paper copies of the proxy materials may request them.

 

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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 June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) Condensed Statements of Operations for the six months and three months ended June 30, 2014 and 2013, (iii) Condensed Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (iv) 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:

August 14, 2014

 

RETRACTABLE TECHNOLOGIES, INC.

 

 

 

                            (Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BY:

/S/ DOUGLAS W. COWAN

 

 

 

 

DOUGLAS W. COWAN

VICE PRESIDENT,

CHIEF FINANCIAL OFFICER, AND
CHIEF ACCOUNTING OFFICER

 

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