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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to

 

Commission file number 000-30885

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

511 Lobo Lane

Little Elm, Texas 75068-0009

(Address of principal executive offices)

 

(972) 294-1010

Registrant’s telephone number, including area code

 

 

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

 

 

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

 

Preferred Stock

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o   No  x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     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(Do not check if a smaller reporting company)		Smaller reporting company  x

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  The aggregate market value of the common equity held by non-affiliates as of June 30, 2008 was $15,047,254.72, assuming a price of $1.48 and volume of 10,167,064.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.  As of March 2, 2009, there were 23,800,064 shares of our Common Stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:  (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 

None except exhibits.

 

 

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RETRACTABLE TECHNOLOGIES, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2008

 

TABLE OF CONTENTS

 

PART I
Item 1. Business	1
Item 1A. Risk Factors	9
Item 1B. Unresolved Staff Comments	12
Item 2. Properties	12
Item 3. Legal Proceedings	13
Item 4. Submission of Matters to a Vote of Security Holders	14
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	14
Item 6. Selected Financial Data	16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation	17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	24
Item 8. Financial Statements and Supplementary Data	F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
Item 9A. Controls and Procedures	25
Item 9B. Other Information	25
PART III
Item 10. Directors, Executive Officers and Corporate Governance	26
Item 11. Executive Compensation	30
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
Item 13. Certain Relationships And Related Transactions, and Director Independence	44
Item 14. Principal Accounting Fees and Services	45
PART IV
Item 15. Exhibits, Financial Statement Schedules	45
SIGNATURES	48

 

 

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PART I

 

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 (as it affects our costs as well as market access and the viability of our patents), our ability to maintain favorable supplier arrangements and relationships, our receipt of royalties from Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”), the impact of dramatic increases in demand, our ability to quickly increase capacity, 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 increased interest of larger market players, specifically Becton Dickinson and Company (“BD”), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

 

Item 1. Business.

 

DESCRIPTION OF BUSINESS

 

General Description

 

On May 9, 1994, our company was incorporated in Texas to design, develop, manufacture, and market innovative patented safety medical products for the healthcare industry.

 

Our VanishPoint® safety needle products (consisting of 1cc tuberculin, insulin, and allergy antigen VanishPoint® syringes; 0.5cc, 3cc, 5cc, and 10cc VanishPoint® syringes; the VanishPoint® blood collection tube holder; autodisable syringe and the VanishPoint® IV safety catheter) utilize a unique friction ring mechanism patented by Thomas J. Shaw, our Founder, President, and Chief Executive Officer.  VanishPoint® safety needle products are designed specifically to prevent needlestick injuries and to prevent reuse.  The friction ring mechanism permits the automated retraction of the syringe needle into the barrel of the syringe, directly from the patient, after delivery of the medication is completed.  The VanishPoint® blood collection tube holder utilizes the same mechanism to retract the needle after blood has been drawn from the patient.  Closure of an attached end cap of the blood collection tube holder causes the needle to retract directly from the patient into the closed blood collection tube holder.  The IV catheter also operates with a friction ring mechanism whereby the needle is retracted after insertion of the catheter into the patient.  We also have a Patient Safe™ syringe which reduces the risk of infection resulting from IV line contamination.

 

Advantages of our VanishPoint® safety needle products include protection from needlestick injuries, prevention of cross contamination through reuse, and reduction of disposal and other associated costs.  Federal regulation now requires the use of safe needle devices.

 

We and Thomas J. Shaw entered into a Technology License Agreement dated effective as of the 23rd day of June 1995, whereby Mr. Shaw granted us a worldwide exclusive license to manufacture, market, sell, and distribute ‘Licensed Products’ and ‘Improvements’ until the expiration of the last ‘Licensed Patents’ unless sooner terminated under certain conditions without right to sublicense.  ‘Licensed Products’, ‘Improvements’, and ‘Licensed Patents’ are all terms that are extensively defined in the Technology License Agreement.  In exchange, we paid a $500,000 initial licensing fee and a five percent royalty on gross sales after returns of ‘Licensed Products’.  Mr. Shaw entered into an agreement whereby Ms. Suzanne August, his former spouse, is entitled to $100,000 per quarter payable out of any royalties.

 

 

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See “Patents, Trademarks, Licenses, and Proprietary Rights” for a more detailed discussion.  We and Thomas J. Shaw entered into the First Amendment to Technology Agreement July 3, 2008, whereby we amended the Technology License Agreement in order to include certain additional patent applications (addressing non-syringe patents) owned by Mr. Shaw in the definition of “Patent Properties” as set forth in the Technology License Agreement so that such additional patent applications would be covered by the license granted by Mr. Shaw to us.

 

Our goal is to become a leading provider of safety medical products.

 

Our products have been and continue to be distributed nationally through numerous distributors.  However, we have been blocked from access to the market by exclusive marketing practices engaged in by BD which dominates our market.  We initiated a lawsuit in 2007 against BD.  The suit is for patent infringement, antitrust practices, and false advertising.

 

We continue to attempt to gain access to the market through our sales efforts, our innovative technology, introduction of new products and, when necessary, litigation.  We are focusing on methods of upgrading our manufacturing capability and efficiency in order to enable us to offer our technology at a reduced price.  We believe our current capitalization provides the resources necessary to implement these changes and improve our manufacturing capacity and efficiency, thereby reducing our unit cost.

 

We are developing new safety medical products, some of which do not utilize our patented retraction technology.  The Patient Safe™ syringe is one such product.  This product reduces the risk of infection resulting from IV line contamination.

 

Financial Information

 

Please see the financial statements in Item 8 Financial Statements and Supplementary Data for information about our revenues, profits, and losses for the last three years, and total assets for the last two years.

 

Principal Products

 

Our products with Notice of Substantial Equivalence to the U.S. Food and Drug Administration (“FDA”) and which are currently sold include the 1cc tuberculin; insulin; allergy antigen VanishPoint® syringes; 0.5cc, 3cc, 5cc, and 10cc VanishPoint® syringes; the VanishPoint® blood collection tube holder; the VanishPoint® IV safety catheter; and a small diameter tube adapter.  We are also selling autodisable syringes in the international market.  We also received a Notice of Substantial Equivalence for our Patient Safe™ syringe, which reduces the risk of infection resulting from IV line contamination.

 

We began marketing the Patient Safe™ syringe in 2008.

 

In the September 2003 issue of Health Devices, ECRI listed three syringes with the highest possible rating: our VanishPoint® syringe, New Medical Technology’s (“NMT”) safety syringe, and BD’s Integra™ syringe.  In the August 2007 issue of Health Devices, ECRI listed two syringes with the highest possible rating: our VanishPoint® syringe and BD’s Integra™ syringe.

 

Syringe sales comprised 98.8%, 98.0%, and 98.6% of revenues in 2006, 2007, and 2008.

 

Principal Markets

 

Our products are sold to and used by healthcare providers primarily in the United States (with 16.7% of revenues in 2008 generated from sales outside the United States) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, convalescent hospitals, Veterans Administration facilities, military organizations, public health facilities, and prisons.

 

 

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The syringe and needle device market continues to be a market in transition.  The nature of the products comprising the market is slowly changing from standard to safety devices.  The impetus for the change to safety devices is the risk that is carried with each needlestick injury which includes the transmission of over 20 bloodborne pathogens, including the human immunodeficiency virus (“HIV,” which causes AIDS), hepatitis B, and hepatitis C.  Because of the occupational and public health hazards posed by conventional disposable syringes, public health policy makers, domestic organizations and government agencies have been involved in the effort to get more effective safety needle products to healthcare workers.  Federal legislation was signed into law on November 6, 2000, by former President William Jefferson Clinton.  This legislation, which became effective for most states on April 12, 2001, now requires safety needle products be used for the vast majority of procedures.  However, even with this requirement, many hospitals are neglecting to follow the law intended to protect healthcare workers.

 

Methods of Marketing and Distribution

 

Under the current supply chain system in the U.S. acute care market, the vast majority of decisions relating to the contracting for and purchasing of medical supplies are made by the representatives of group purchasing organizations (“GPOs”) rather than the end-users of the product (nurses, doctors, and testing personnel).  The GPOs and manufacturers often enter into long-term exclusive contracts which can prohibit entry in the marketplace by competitors.

 

We distribute our products throughout the U.S. and its territories through general line and specialty distributors.  We also utilize international distributors.  We have developed a national direct marketing network in order to market our products to health care customers and their purchaser representatives.  Our marketers make calls on target markets that are users of these products.  Our marketers make contact with all of the departments that affect the decision-making process for safety products, including the purchasing agents.  They call acute care and alternate care sites and speak directly with the decision-makers of these facilities.  We employ trained clinicians, including registered nurses and/or medical technologists that educate healthcare providers and healthcare workers on the use of safety devices through exhibits at related tradeshows and publications of relevant articles in trade journals and magazines.  These nurses provide clinical support to customers.  In addition to marketing our products, the network demonstrates the safety and cost effectiveness of the VanishPoint® automated retraction products to customers.

 

In the needle and syringe market, the market share leader, BD, has utilized, among other things, long-term exclusive contracts which have restricted our entry into the market.

 

We have numerous agreements with organizations for the distribution of our products in foreign markets.  Sales to these markets decreased from 18.4% to 16.7% of revenues due to lower volumes and lower average prices in 2007 and 2008, respectively.  The total population of Western Europe exceeds 310 million, and the recognition for the urgency of safe needle devices in parts of Europe has followed the United States model.  In France, England, Germany, and Italy, organized healthcare worker unions have taken action to force hospitals and government agencies to place safety as a priority.  Regions within Asia, South America, and Africa are also recognizing the need for our products.  Beginning in 2004, we were given an award (from PATH) to supply syringes to various African countries under the President’s Emergency Plan for AIDS relief (PEPFAR).  Awards increased significantly from 2004 to 2007.  The continuation of PEPFAR has been reauthorized by Congress through 2013.  However, funding for the procurement of safety syringes in this program is uncertain.

 

As a result of the introduction of VanishPoint® syringes through the PEPFAR initiative, African countries have begun to procure products outside of the US-funded program.  In 2007, the Director General of Nigeria’s National Agency for Food and Drug Administration and Control (NAFDAC), endorsed automated retraction syringes for use throughout Nigeria.  We are currently selling syringes to a Nigerian distributor for use in that country.  At the end of 2008, the Deputy Prime Minister of Namibia also publically endorsed automated retraction syringes as a public intervention that would “protect health workers and save their patient’s lives”.

 

Key components of our strategy to increase our market share are to: (a) defeat monopolistic practices through litigation; (b) focus on methods of upgrading our manufacturing capability and efficiency in order to enable us to reduce costs and improve profit margins; (c) continue marketing emphasis in the U.S.; (d) continue to add Veterans Administration facilities, health departments, emergency medical services, federal prisons, long-term care and home healthcare facilities as customers; (e) educate healthcare providers, insurers, healthcare workers, government agencies, government officials, and the general public on the reduction of risk and the cost effectiveness afforded by our products; (f) supply product through GPOs and Integrated Delivery Networks where possible; (g) consider possibilities for future licensing agreements and joint venture agreements for the manufacture and distribution of safety products in the

 

 

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United States and abroad; (h) introduce new products; and (i) increase international sales.

 

Status of Publicly Announced New Products

 

We have patented and are in the process of developing additional safety medical products.  We are producing catheters with a wide range of needle sizes and have an increased number of sizes available for the Patient Safe™ syringe.

 

Sources and Availability of Raw Materials

 

We purchase most of our product components from single suppliers, including needle adhesives and packaging materials.  There are multiple sources of these materials.  We own the molds that are used to manufacture the plastic components of our products in the U.S.  Our suppliers include Magor Mold, Inc., Helix Medical (formerly APEC), Channel Prime Alliance, Exacto Spring Corporation, Sterigenics, and ISPG.  Some suppliers increased their prices generally due to the higher costs of petroleum products in 2008.

 

Patents, Trademarks, Licenses, and Proprietary Rights

 

We and Thomas J. Shaw entered into a Technology License Agreement dated effective as of the 23rd day of June, 1995 (the “Technology License Agreement”), whereby Mr. Shaw granted us “… a worldwide exclusive license and right under the ‘Licensed Patents’ and ‘Information’, to manufacture, market, sell and distribute ‘Licensed Products’ and ‘Improvements’ without right to sublicense and subject to such nonexclusive rights as may be possessed by the Federal Government…”.  ‘Licensed Patents’, ‘Information’, ‘Licensed Products’, and ‘Improvements’ are all defined extensively in the Technology License Agreement.  We may enter into sublicensing arrangements with Mr. Shaw’s written approval of the terms and conditions of the licensing agreement.  The ‘Licensed Products’ include all retractable syringes and retractable fluid sampling devices and components thereof, assembled or unassembled, which comprise an invention described in ‘Licensed Patents’, and improvements thereto including any and all ‘Products’ which employ the inventive concept disclosed or claimed in the ‘Licensed Patents’.  We and Thomas J. Shaw entered into the First Amendment to Technology Agreement July 3, 2008, whereby we amended the Technology License Agreement in order to include certain additional patent applications (addressing non-syringe patents) owned by Mr. Shaw to the definition of “Patent Properties” as set forth in the Technology License Agreement so that such additional patent applications would be covered by the license granted by Mr. Shaw to us.

 

In exchange for the Technology License Agreement, we negotiated a licensing fee and agreed to pay a five percent royalty on gross sales after returns.  The license terminates upon expiration of the last licensed patents unless sooner terminated under certain circumstances.  The licensing fees have been paid in accordance with this agreement with the exception of $1,500,000 in fees which were waived by Mr. Shaw and his former wife.

 

We have the right and obligation to obtain protection of the invention, including prosecution of patent properties.  The license unilaterally changes to a nonexclusive license in the event of a hostile takeover.  Also, if Mr. Shaw involuntarily loses control of the Company, the license becomes a nonexclusive license and a right to information.

 

We seek foreign patent protection through the Patent Cooperation Treaty and have filed applications for regional and national patent protection in selective countries where we believe our products can be utilized most.

 

We hold numerous U.S. patents related to our automated retraction technology, including patents for IV safety catheters, winged IV sets, syringes, dental syringes, and blood collection tube holders.  In addition, we have multiple applications for patents currently pending.  The principal syringe patent in the U.S., as well as its foreign counterpart, will expire in May 2015.  We have also registered the following trade names and trademarks: VanishPoint, VanishPoint logos, RT with a circle mark, the Spiral Logo

 

 

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used in packaging our products, and the color coded spots on the ends of our syringes.  We also have trademark protection for the phrase “The New Standard for Safety.”  We have applied for a trademark for the Patient Safe syringe and Port Prep.

 

We have a patent infringement claim pending against BD involving four patents, a case involving two patents against Occupational and Medical Innovations Limited (“OMI”), and a case involving two patents against Safety Medical International (“SMI”).  There are also two patent infringement claims pending against us.  These claims are detailed in Item 3.  Legal Proceedings.  We have decided, on the advice of patent counsel, not to purchase patent insurance because it would require inappropriate disclosure of information that is currently proprietary and confidential.

 

We currently obtain roughly 74.0% of our finished products through Double Dove, a Chinese manufacturer.  We believe we could make up any long-term disruption in these supplies by utilizing more of the capacity at the Little Elm facility, except for 0.5cc, autodisable, 5cc and 10cc syringes which comprised about 4.6% of our  2008 revenues.

 

We had a Licensing Agreement with BTMD which expired on May 13, 2008.  Royalties that were expected in 2008 and 2007 were not received due to the time needed to build the factory, assembly equipment, and the related infrastructure as well as the need of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD is in the process of meeting Chinese government requirements.  We still continue to expect royalty payments although we are unable to predict the date we will begin to receive such royalties.  Royalties should begin once we have an effective agreement, Chinese government requirements are met, and BTMD is able to produce and sell products.

 

Seasonal Effect on Business

 

We have generally experienced higher syringe sales during the last half of the year which we believe is due to flu season.

 

Working Capital Practices

 

Cash and cash equivalents include unrestricted cash and investments with original maturities of three months or less.

 

We record trade receivables when revenue is recognized.  No product has been consigned to customers.  Our allowance for doubtful accounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful of collection are included in the allowance.  An additional allowance has been established based on a percentage of receivables outstanding.  These provisions are 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.

 

Inventories are valued at the lower of cost or market, with cost being determined using a standard cost method, which approximates average cost.  A reserve is established for any excess or obsolete inventories.

 

Receivables are established for federal and state taxes where we have determined we are entitled to a refund for overpayments of estimated taxes or loss carry backs.

 

Accounts payable and other short-term liabilities include amounts that we believe we have an obligation for at the end of year.  These included charges for goods or services received in 2008 but not billed to us at the end of the year.  It also included estimates of potential liabilities such as rebates and other fees.

 

Our domestic return policy is set forth in our standard Distribution Agreement, a copy of which was attached as exhibit no. 6.3 to our Form 10-SB filed on June 23, 2000.  This policy provides that a

 

 

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customer may return incorrect shipments within 10 days following arrival at the distributor’s facility.  In all such cases the distributor must obtain an authorization code from us and affix the code to the returned product.  We will not accept returned goods without a returned goods authorization number.  We may refund the customer’s money or replace the product.

 

Our international contracts do not provide for any returns.

 

Our return policy also provides that a customer may return product that is overstocked.  Overstocking returns are limited to two times in each 12 month period up to one percent of distributor’s total purchase of products for the prior 12 month period upon the following terms: i) an “overstocked” product is that portion of distributor’s inventory of the product which exceeds distributor’s sales volume for the product during the preceding four months; ii) distributor must not have taken delivery of the product which is overstocked during the preceding four months; iii) overstocked product held by distributor in excess of 12 months from the date of original invoice will not be eligible for return; iv) the overstocked product must be returned to us in our saleable case cartons which are unopened and untampered, with no broken or re-taped seals; v) distributor will be granted a credit which may be used only to purchase other products from us, the credit to be in the amount of the invoice price of the returned products less a 10% restocking fee which will be assessed against distributor’s subsequent purchase of product; vi) distributor must obtain an authorization code from our distribution department and affix the code to the returned product; and vii) distributor shall bear the cost of shipping the returned products to us.  All product overstocks and returns are subject to inspection and acceptance by manufacturer.

 

Dependence on Major Customers

 

One distributor, McKesson and its affiliates, accounted for an aggregate of 16.8% of our revenue in 2008.  We have numerous other distributors that sell our products in the U.S. and internationally.

 

Backlog Orders

 

Order backlog is not material to our business inasmuch as orders for our products generally are received and filled on a current basis, except for items temporarily out of stock.

 

Government Funding of Research and Right to License

 

Thomas J. Shaw developed his initial version of a safety syringe with the aid of grants by the National Institute of Drug Abuse, a subsidiary of the National Institutes of Health.  As a result, the federal government has the right, where the public interest justifies it, to disperse the technology to multiple manufacturers so that this early version of a safety syringe could be made widely available to the public.  However, the earlier design of 1991 was a bulkier, less effective, and more expensive version of the current VanishPoint® product.  Accordingly, Management believes that the risk of the government demanding manufacture of this alternative product is minimal.  The VanishPoint® syringe design was only partly funded with grant money and the product, as sold, incorporates technology for which the government has no rights.  Therefore the government has no right to allow others to manufacture the VanishPoint®.

 

Competitive Conditions

 

We believe our competitive advantages include but are not limited to our leadership in quality and innovation. We believe our products continue to be the most effective safety devices in today’s market.  Our syringe products include passive safety activation, require less disposal space, and are activated while in the patient.  Our price per unit is competitive or even lower than the competition once all the costs incurred during the life cycle of a syringe are considered. Such life cycle costs include disposal costs, testing and treatment costs for needlestick injuries, and treatment for contracted illnesses through needlestick injuries.

 

 

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We have three major competitors: BD, Covidien Ltd. (formerly known as Tyco Healthcare which was spun off from Tyco International) (“Covidien”), and Terumo Medical Corp. (“Terumo”).

 

Founded in 1897, BD is headquartered in New Jersey.  BD’s safety-engineered product sales accounted for approximately 22% of BD’s total 2008 sales.  BD currently manufactures the SafetyLok™, a syringe that utilizes a tubular plastic sheath that must be manually slid over the needle after an injection, and the SafetyGlide™, a needle which utilizes a hinged lever to cover the needle tip.  BD also manufactures a safety blood collection and hypodermic needle that utilizes the Eclipse™ needle cover.  BD also manufactures a 3cc and 1cc retracting needle product based on a license agreement with Specialized Health Products International, Inc. (formerly the Med-Design Corporation).  The Integra™, a retractable syringe offered by BD, does not offer a full product line and cannot be used with highly viscous medication due to leakage (as described on their labels).  The introduction of this syringe has had little impact on our sales due to BD’s historic market dominance.  BD’s “Vacutainer®” blood collection products are commonly used as industry jargon to refer to blood collection products in general.

 

Sherwood Medical Co. (“Sherwood”), was acquired by Tyco International. Sherwood is now part of Covidien.  Covidien manufactures various safety syringes and needles.

 

Founded in 1974, Terumo was the first company to sell disposable syringes in Japan.  Today, Terumo manufactures standard syringes, blood collection tube holders, safety syringes, and blood collection devices.  It operates internationally and has sales in more than 150 countries.

 

Both BD’s SafetyLok™ and Covidien’s Monoject® safety syringes require the use of two hands and several extra steps to activate the tubular plastic shield which must be slid and locked into place to protect the needle.  These products must be removed from the patient in order for the safety mechanism to be activated.  In contrast, use of the VanishPoint® syringe is identical to that of a standard syringe until the end of an injection, when the automated retraction mechanism retracts the needle directly from the patient safely into the barrel of the syringe.  This allows both hands to remain safely out of harm’s way.  BD’s Integra™ operates in a similar way but may have to be removed from the patient in order to have retraction of the needle occur.

 

BD and Covidien have controlling U.S. market share; greater financial resources; larger and more established sales, marketing and distribution organizations; and greater market influence, including the long-term and/or exclusive contracts.  The current conditions have restricted competition in the needle and syringe market.  BD may be able to use its resources to improve its products through research or acquisitions or develop new products, which may compete more effectively with our products.

 

We continue to attempt to gain access to the market through our sales efforts, our innovative technology, introduction of new products and, when necessary, litigation.  We are focusing on methods of upgrading our manufacturing capability and efficiency in order to enable us to compete by offering our technology at a reduced price.  We believe our current capitalization provides the resources necessary to implement these changes and improve our manufacturing capacity and efficiency, thereby reducing our unit cost.

 

Our products have consistently received high quality ratings. In the September 2003 issue of Health Devices, ECRI Institute (“ECRI”) listed three syringes with the highest possible rating: our VanishPoint® syringe, NMT’s safety syringe, and BD’s Integra™ syringe.  In the August 2007 issue of Health Devices, ECRI listed two syringes with the highest possible rating: our VanishPoint® syringe and BD’s Integra™ syringe.

 

In the October 1999 issue of Health Devices, our VanishPoint® blood collection tube holder was one of the two blood collection devices that was given ECRI’s highest possible award.  The other was the Bio-Plexus Punctur-Guard (when used with a disposable holder).  ECRI listed the same two products for their highest rating in 2000 and in 2001.

 

 

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Our safety needle products also have an advantage over non-retracting safety needles because minimal training and changes to practitioners’ normal routines are required.  Use of our products also prohibits unfortunate and improper reuse.  Several factors could materially and beneficially affect the marketability of our products.  Demand could be increased by existing legislation and other legislative and investigative efforts.  Outsourcing arrangements such as our purchases from Double Dove have increased our manufacturing capacity with little or no capital outlay and provide a competitive cost.  Licensing agreements could provide entry into new markets and generate additional revenue.

 

Our competitive weaknesses include our current lack of market share because two well-established companies control most of the U.S. market.  Our competitive position is also weakened by the method that providers use for making purchasing decisions and the fact that our initial price per unit for our safety needle products may be higher.    Demand for our products could decrease due to the sale of the Integra™, a retractable syringe manufactured by BD, which dominates the market and has a wider range of product offerings and more capital resources.

 

Research and Development

 

We spent $958,798; $1,071,143; and $1,066,068 in fiscal 2006, 2007, and 2008 respectively, on research and development.  Costs in 2008 were primarily for validation testing and development work for the safety catheter as well as higher compensation costs.  Our ongoing research and development activities are performed by an internal research and development staff.  This team of engineers is developing process improvements for current and future automated machines.  Our limited access to the market has slowed the introduction of products.  Possible future products include needle medical devices to which the automated retraction mechanism can be applied as well as other safety medical devices.

 

Environmental Compliance

 

We believe that we do not incur material costs in connection with compliance with environmental laws.  We are considered a Conditionally Exempt Small Quantity Generator because we generate less than 100 kilograms (220 lbs.) of hazardous waste per month.  Therefore, we are exempt from the reporting requirements set forth by the Texas Commission on Environmental Quality.  The waste that is generated at our facility is primarily made up of flammable liquids and paint-related waste and is sent for fuel blending by Safety Kleen.  This fuel blending process completely destroys our waste and satisfies our “cradle-to-grave” responsibility.

 

Other nonhazardous production waste includes clean polypropylene regrind that is sold for recycling.  We also grind dirty plastics, syringes, and needles for disposal by Waste Management.  All other nonhazardous waste produced is considered municipal solid waste and sent to a sanitary landfill by Waste Management.

 

We also produce small amounts of regulated biohazardous waste from contaminated sharps and laboratory wastes.  This waste is sent for incineration by Stericycle.

 

Employees

 

As of March 2, 2009, we had 144 full-time employees, six part-time employees, and four independently contracted consultants.  Of the 144 full-time employees, six persons were engaged in research and development activities, 57 persons were engaged in manufacturing and engineering, 16 persons were engaged in quality assurance and regulatory affairs, 36 persons were engaged in sales and marketing, 28 persons were engaged in general and administrative functions, and one person in facilities.  No employees are covered by collective bargaining agreements.  We are dependent upon a number of management and technical personnel, and the loss of services of one or more of such employees could have a material adverse effect on us.  Our President and Chief Executive Officer, Thomas J. Shaw, has an employment contract that will end on December 31, 2010 which contains an automatic and continuous renewal provision for consecutive two-year periods.

 

 

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Financial Information About Geographic Areas

 

We have no long-lived assets in foreign countries.  Shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit.  We do extend credit to international customers on some occasions depending upon certain criteria, including, but not limited to, the credit worthiness of the customer, the stability of the country, banking restrictions, and the size of the order.  All transactions are in U.S. currency.  We attribute sales to countries based on the destination of shipment.

 

		2008			2007			2006
Domestic sales		$	23,244,370		$	21,461,717		$	22,240,347
International sales		4,654,948			4,828,003			3,084,172
Total sales		$	27,899,318		$	26,289,720		$	25,324,519
Long-lived assets
Domestic		$	14,435,667		$	11,483,423		$	12,212,140
Foreign		$	—		$	—		$	—

 

We have no sales in any foreign country that exceeds 3% of revenue.

 

Available Information

 

Our internet address is www.vanishpoint.com.  We make our filings with the U.S. Securities and Exchange Commission (the “SEC”) available via our website.  Upon request, we will be pleased to deliver written copies of our filings free of charge.

 

Item 1A. Risk Factors.

 

You should carefully consider the following material risks facing us.  If any of these risks occur, our business, results of operations or financial condition could be materially affected.

 

We Compete in a Monopolistic Marketplace

 

We operate in an environment that is dominated by the major syringe manufacturer in the U.S., BD.  We believe that its monopolistic business practices continue despite its paying us $100 million to settle a prior lawsuit for anticompetitive practices, business disparagement, and tortious interference.  Although we have made limited progress in some areas, such as the alternate care and international markets, our volumes are not as high as they should be given the nature and quality of our products, and the federal and state legislation requiring use of safe needle devices.  In June 2007, we sued BD alleging infringement of three patents and violations by BD of the federal and state antitrust laws, and of the Lanham Act.  We subsequently dropped one patent claim from the lawsuit. In April 2008, we sued BD for infringement of a newly issued patent that was subsequently consolidated with the other patent case.

 

Our Cash Position Is Decreasing and Legal Expenses Are Increasing

 

Due to our operating losses and currently increasing legal fees, our cash position declined $7.2 million as of December 31, 2008.  Our litigation efforts will continue to require a significant amount of cash until the issues are resolved.  Our lawsuit against BD is currently scheduled for trial in October 2009.  After conclusion of the trial, legal expenses are expected to decrease significantly for the patent infringement cases.

 

In the event we continue to have only limited market access,  the cash provided by the prior litigation settlements and generated from operations becomes insufficient, and royalties from BTMD are not forthcoming, we would take cost cutting measures to reduce cash requirements.  Such measures could

 

 

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result in reduction of units being produced, reduction of workforce, reduction of salaries of officers and other nonhourly employees, and deferral of royalty payments.

 

We Have Generally Been Unable to Gain Sufficient Market Access to Achieve Profitable Operations

 

We have incurred net operating losses through all fiscal quarters of 2008.  We may experience operating losses in the future.  If we are unable to gain sufficient market access and market share, we may be unable to continue to finance research and development as well as support operations and expansion of production.

 

We Are Dependent On Our Aging Patent Protection

 

Our main competitive strength is our technology.  We are dependent on our patent rights, and if our patent rights are invalidated or circumvented, our business would be adversely affected.  Patent protection is considered, in the aggregate, to be of material importance in our marketing of products in the U.S. and in most major foreign markets.  Patents covering products that we have introduced normally provide market exclusivity, which is important for the successful marketing and sale of our products.

 

As our technology ages (and the associated patent life expires), our competitive position in the marketplace will weaken.  The initial patents protecting our revolutionary spring action syringe will expire beginning in May 2015.  Patent life may be extended, not through the original patents, but through related improvements.  Our ability to improve these patents is uncertain.  Eventually, however, our patent protection may decrease and we will be vulnerable to other competitors utilizing our technology.

 

Our Patents Are Subject to Litigation

 

We are currently involved in multiple patent disputes.  Patent litigation and challenges involving our patents are costly and unpredictable and may deprive us of market exclusivity for a patented product or, in some cases, third party patents may prevent us from marketing and selling a product in a particular geographic area.

 

We Are Vulnerable to New Technologies

 

Because we have a narrow focus on particular product lines and technology (currently predominantly retractable needle products), we are vulnerable to the development of superior competing products and to changes in technology which could eliminate or reduce the need for our products.  If a superior technology is created, the demand for our products could greatly diminish.

 

Our Competitors Have Greater Resources

 

The three leading manufacturers of hypodermic syringes and blood collection products are BD, Covidien, and Terumo.  All three companies offer both standard syringes and at least one safety syringe alternative.  BD also offers a retractable syringe.  These competitors have greater financial resources, larger and more established sales and marketing and distribution organizations, and greater market influence, including long-term contracts.  These competitors may be able to use these resources to improve their products through research and acquisitions or develop new products, which may compete more effectively with our products.  If our competitors choose to use their resources to create products superior to ours, we may be unable to sell our products and our ability to continue operations would be weakened.

 

 

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The Majority of Our International Sales Are Filled Using One Supplier

 

Most international sales are filled by production from Double Dove.  In the event that we become unable to purchase such product from Double Dove, we would need to find an alternate supplier for the 0.5cc insulin syringe and the 5cc and 10cc syringes and increase domestic production for the 1cc and 3cc syringes to avoid a disruption in supply.  As of December 31, 2008, approximately 74.0% of our production was provided by Double Dove.

 

Fluctuations in Supplies of Inventory Could Temporarily Increase Costs

 

Fluctuations in the cost and availability of raw materials and inventory and the ability to maintain favorable supplier arrangements and relationships could result in the need to manufacture all (as opposed to 26.0%) of the products in the U.S.  This could temporarily increase unit costs as we ramp up domestic production.

 

We Are Controlled by One Shareholder

 

Thomas J. Shaw, our President and Chairman of the Board, and Ms. Suzanne August own 35.7% and 11.8%, respectively, of the outstanding Common Stock as of March 2, 2009.  The shares held by Ms. August are controlled by Mr. Shaw pursuant to a Voting Agreement, which terminates upon sale of all the shares for value or if terminated by both parties in writing.  Mr. Shaw will, therefore, have the ability to direct our operations and financial affairs and to substantially influence the election of members of our Board of Directors.  His interests may not always coincide with our interests or the interests of other stockholders.  This concentration of ownership, for example, may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially adversely affect the market price of our Common Stock.  Of the 23,800,064 shares of Common Stock outstanding as of March 2, 2009, executive officers and Directors own or control 11,337,000 (47.6%) of the shares of outstanding Common Stock, not including Common Stock equivalents such as preferred shares and options.

 

We Have Limited Access to the Capital Markets

 

The volume of trading in our Common Stock on the NYSE Alternext US, LLC (“NYSE Alternext”) (formerly the American Stock Exchange) is low.  Accordingly, it is unclear if there is any significant market for our shares.  This may reduce our ability to raise cash through public or private offerings in the future.

 

Our Stock Price Sometimes Decreases Below NYSE Alternext Continued Listing Standards

 

Our stock price may be deemed to have been selling “for a substantial period of time at a low price per share” which may result in our receipt of a notification from the NYSE Alternext that a reverse split is necessary.  We have received no such notification.  When a company receives such a notification, failure to effect a reverse stock split may result in suspension or removal from trading on the NYSE Alternext.  The NYSE Alternext may initiate delisting procedures, in its discretion.  Delisting of our shares would greatly affect the liquidity of our shares and would reduce our ability to raise funds from the sale of equity in the future.  However, we believe such delisting application to be unlikely.  Furthermore, in the event that we receive a deficiency letter from the NYSE Alternext, we will have the right to appeal such determination.  In addition, entities that were given such notices under the American Stock Exchange standards were generally given up to 18 months to execute a plan to bring themselves into compliance with the listing standards.

 

 

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Oil Prices and Transportation Costs May Increase Our Costs

 

As our products are made from petroleum products, fluctuations in the costs of oil and transportation may have an impact on our costs.  Increases in costs may not be recoverable through price increases of our products.

 

Current Economic Conditions May Decrease Collectability of Accounts

 

Although we believe that we have granted credit to credit-worthy firms, current economic conditions may affect the timing and/or collectability of some accounts.  The Provision for doubtful accounts increased by $245,958 for 2008 which brings the balance to $499,966.

 

We Face Inherent Product Liability Risks

 

As a manufacturer and provider of safety needle products, we face an inherent business risk of exposure to product liability claims in the event of product failure or claim of harm caused by product operation.  Product failure could result in injury to the patient and could expose healthcare workers to the risk of blood borne pathogens.  If any of our products prove to be defective, we may be required to recall those products.  We do not have recall insurance.

 

If a product liability claim is made and damages are in excess of our product liability coverage, our competitive position could be weakened by the amount of money we could be required to pay to compensate those injured by our products.  We have products liability coverage with St. Paul Insurance Company covering up to $1,000,000 per occurrence, with coverage up to $2,000,000 in the aggregate.  Each claim is subject to a $25,000 deductible.  Additionally, we have additional product liability protection under an Umbrella Liability Policy.  This policy provides an additional $10,000,000 per occurrence and aggregate limits in the event claims exceed the primary commercial general liability policy limit.  We have not had any product liability claims.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable and none.

 

Item 2. Properties.

 

Our 22,500 square foot headquarters is located at 511 Lobo Lane, on 35 acres, which we own, overlooking Lake Lewisville in Little Elm, Texas.  The headquarters are in good condition and house our administrative offices and manufacturing facility.  The manufacturing facility produced approximately 26.0% of the units that were sold in 2008.  We placed a 47,250 square foot warehouse in service in March 2005 and expanded it (by an additional 47,250 feet) in 2009.  In the event of a disruption in service of our outside supplier, Double Dove, we believe we could produce quantities sufficient to meet demand under current circumstances except for demand for 0.5cc, 5cc, and 10cc syringes which are sold principally in the international market.  In that event, we would attempt to engage another manufacturer.  We are currently utilizing less than 25% of our current productive capacity.

 

We obtained a loan from 1st International Bank (“1st International”) for $2,500,000, secured by the land and existing buildings, which provided funding for the construction of the 47,250 square foot warehouse placed in service in 2005.  The proceeds from the loan were used to pay off the remaining $475,000 of the revolving credit agreement with 1st International in addition to funding the warehouse and related infrastructure.  The payments for the permanent funding are based on a twenty-year amortization with a five-year maturity.  Interest rates are based on the amount of funds kept on deposit with the bank.  Accordingly, interest will vary from the Wall Street Journal Prime Rate (the “WSJPR”) to the WSJPR plus one percent, with floors that may range from 4.25% to 6.50%. Compensating balances at 1st International affecting the interest rate will range from $0 to $500,000.

 

 

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On August 29, 2008, we obtained a $4,210,000 straight line of credit from Lewisville State Bank, a division of 1st International Bank.  The purpose of the line of credit was to expand the warehouse, including additional office space, and construct a new Controlled Environment.  The maturity date is February 28, 2010.  The interest rate is WSJPR plus 0.25%.  We may prepay the line of credit without penalty.  The construction project has been substantially completed.  We expect to replace our note with permanent financing in the second quarter.

 

In the opinion of Management, the property and equipment are suitable for their intended use and are adequately covered by an insurance policy.

 

Item 3. Legal Proceedings.

 

On August 12, 2005, we filed a lawsuit against Abbott Laboratories (“Abbott”) in the United States District Court in the Eastern District of Texas, Texarkana Division.  We are alleging fraud and breach of contract in connection with the National Marketing and Distribution Agreement dated as of May 4, 2000, which was terminated on October 15, 2003.  We are seeking damages which we estimate to be in millions of dollars of lost profits, out of pocket expenses, and other damages.  In addition, we are seeking punitive damages, pre- and post-judgment interest, and attorney’s fees.  Following Abbott’s unsuccessful attempt to get the case dismissed and ordered to arbitration, Abbott filed an answer and counterclaim on July 15, 2008, alleging several breaches of contract, breach of implied warranty of merchantability, and breach of express warranty, seeking in excess of $6,000,000 in compensatory damages as well as seeking attorneys’ fees.  We deny the validity of Abbott’s counterclaims.  Some discovery has already taken place (related to the hearings addressing the prior motion to compel arbitration) and additional discovery is underway.  The District Court has issued a scheduling order calling for trial in January 2010.

 

In August 2006, we were sued by OMI in Federal Court of Australia, alleging that two letters written to OMI by outside counsel contained unjustified threats of patent infringement, but seeking no damages.  OMI later amended its complaint to seek a declaratory judgment that OMI does not infringe Australian Patent No. 701878, again seeking no damages.  Following a one-day trial in June 2007, the Court held that one of the two letters written by outside counsel contained a threat of patent infringement, and awarded costs to OMI.  Following a one-day trial in June 2008, the Court issued a declaratory judgment in August 2008 stating that OMI’s syringe does not infringe our Australian patent no. 701878 but also awarding costs to us.  We and OMI subsequently agreed that each party will bear its own costs, and the matter was settled in October 2008.

 

In April 2008, we sued OMI in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that OMI has infringed two U.S. patents that are not at issue in the Australian litigation (6,572,584 and 7,351,224).  We also allege theft of confidential information, intentional interference with contracts and engaging in false advertising that wrongfully disparages and mischaracterizes our syringe products.  We further allege that OMI made false allegations regarding the source of origin of its safety syringe products being offered in the U.S. We seek injunctive relief, unspecified damages (including treble damages) and reimbursement of attorneys fees in the suit.  OMI has counterclaimed against us, seeking declaratory judgments of non-infringement and invalidity of our asserted patents.  OMI is not seeking monetary damages.  Trial is set for December 2009 and discovery is ongoing.

 

In June 2007, we sued BD in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement of three patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of the federal and state antitrust laws, and of the Lanham Act.  We subsequently dropped the 5,578,011 patent allegations from the lawsuit.  We and Thomas J. Shaw, a co-plaintiff, are seeking injunctive relief, unspecified monetary damages and reimbursement of attorneys fees in the suit.  BD counterclaimed for non-infringement and invalidity of the asserted patents.  In January 2008, the Court severed the patent claims from the other claims pending resolution of the patent dispute, which is set for trial in October 2009.  In April 2008, we and Thomas J. Shaw sued BD in the United States District Court

 

 

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for the Eastern District of Texas, Marshall Division, alleging infringement of another recently issued patent (7,351,224), and seeking injunctive relief, unspecified monetary damages (including treble damages) and reimbursement of attorneys fees.  BD counterclaimed for non-infringement and invalidity of the asserted patent.  We and Thomas J. Shaw moved to consolidate this case with the other patent case against BD that was pending in Marshall and the Court granted our motion, consolidating this case with our above-stated case filed in June 2007. The Court issued its claim construction order in this matter on January 4, 2009.

 

In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued us in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that 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.  We counterclaimed for declarations of non-infringement, invalidity and unenforceability of the asserted patents.  The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and we subsequently dropped our counterclaims for unenforceability of the asserted patents.  The Court conducted a claims construction hearing on September 25, 2008 and issued its claims construction order on November 14, 2008.  No trial date has been set.

 

In March 2008, MedSafe Technologies LLC (“MedSafe”) initially sued us and BD in the United States District Court for the District of South Carolina, Greenville Division, alleging infringement of a MedSafe patent (6,074,370) and seeking injunctive relief and unspecified monetary damages.  We counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patent.  BD subsequently settled with MedSafe.  Effective December 22, 2008, we resolved our litigation with MedSafe by entering into a PATENT LICENSE/ASSIGNMENT AND SETTLEMENT AGREEMENT with MedSafe and Syringe Development Partners, LLC; William B.S. Pressly, Sr.; Charles A Vaughn, Sr.; G. Samuel Brockway; and Thomas R. Ellis (collectively, the “MedSafe Plaintiffs”) (the “MedSafe Settlement Agreement”).  This MedSafe Settlement Agreement ends the patent infringement litigation between us and MedSafe.

 

In September 2008, we and Thomas J. Shaw sued SMI in the United States District Court for the Eastern District of Texas, Tyler Division, alleging infringement of U.S. patent nos. 6,572,584 and 7,351,224, and seeking injunctive relief, unspecified monetary damages and reimbursement of attorneys fees.  SMI has counterclaimed against us, seeking declaratory judgments of non-infringement and invalidity of the asserted patents.  SMI is not seeking monetary damages.  No trial date has been set and discovery has not yet commenced.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote during the fourth quarter of 2008.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

 

MARKET INFORMATION

 

Our Common Stock has been listed on the NYSE Alternext under the symbol “RVP” since May 4, 2001.  Shown below are the high and low sales prices of our Common Stock as reported by the NYSE Alternext for each quarter of the last two fiscal years:

 

 

 

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SHAREHOLDERS

 

As of March 2, 2009, there were 23,800,064 shares of Common Stock held by 261 shareholders of record not including shareholders who beneficially own Common Stock held in nominee or “street name.”

 

DIVIDENDS

 

We have not ever declared or paid any dividends on the Common Stock.  We have no current plans to pay any cash dividends on the Common Stock.  We intend to retain all earnings, except those required to be paid to the holders of the Preferred Stock as resources allow, to support operations and future growth.  Dividends on Common Stock cannot be paid so long as preferred dividends are unpaid.  As of December 31, 2008, an aggregate of $13,883,000 in preferred dividends were in arrears.

 

EQUITY COMPENSATION PLAN INFORMATION

 

See Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a chart describing compensation plans under which equity securities are authorized.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

In the first quarter of 2008, three accredited investors converted 44,650 shares of Preferred Stock into Common Stock on a one for one basis for no additional consideration, as reported in our Form 10-Q quarterly report filed with the SEC which is available on EDGAR.  There were no sales of unregistered securities in the second, third, or fourth quarters of 2008.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

The following table shows purchases of equity securities by the issuer in 2008.  No purchases were made by affiliated purchasers in 2008.

 

 

(1)           We offered, pursuant to Section 3(a)(9) of the Securities Act of 1933 to exchange certain outstanding eligible options for new options.  Such new options were granted under our 2008 Stock Option Plan.  The offer was made on the terms and subject to the conditions described in the Offer to Exchange Stock Options dated October 17, 2008 (the “Exchange Offer”).  The Exchange Offer expired at 5:00 p.m., Central Standard Time, on November 18, 2008.  Eligible participants (totaling 103 persons) tendered, and

 

 

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we accepted for cancellation, eligible options to purchase an aggregate of 1,925,365 shares of our Common Stock representing 99.4% of the total shares of Common Stock underlying options eligible to exchange in the Exchange Offer.  We issued new options to purchase an aggregate of 962,683 shares of Common Stock in exchange for the cancellation of the tendered options.

 

Item 6. Selected Financial Data.

 

The following selected financial data are qualified by reference to, and should be read in conjunction with, our audited financial statements and the notes to those statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein.  The selected Statements of Operations data presented below for the years ended December 31, 2005 and 2004 and the Balance Sheet data as of December 31, 2006, 2005, and 2004 have been derived from our audited financial statements, which are not included herein.

 

(In thousands except for earnings per share, shares, and percentages)*

 

		As of and for the Years Ended December 31,
		2008			2007			2006			2005			2004
Sales, net		$	27,899		$	26,290		$	20,897		$	21,157		$	21,136
Reimbursed discounts		—			—			4,427			3,078			386
Total sales		27,899			26,290			25,324			24,235			21,522
Cost of sales		19,673			18,300			17,778			15,429			16,411
Gross profit		8,226			7,990			7,546			8,806			5,111
Total operating expenses		18,671			17,936			14,261			11,683			13,110
Loss from operations		(10,445		)	(9,946		)	(6,715		)	(2,877		)	(7,999		)
Interest income		855			1,870			1,976			1,373			475
Interest expense, net		(54		)	(326		)	(411		)	(340		)	(243		)
Litigation settlements, net		—			—			—			—			74,635
Net income (loss) before income taxes		(9,644		)	(8,402		)	(5,150		)	(1,844		)	66,868
Provision (benefit) for income taxes		—			(1,454		)	(1,280		)	(606		)	12,177
Net income (loss)		(9,644		)	(6,948		)	(3,870		)	(1,238		)	54,691
Preferred Stock dividend requirements		(1,373		)	(1,399		)	(1,451		)	(1,503		)	(1,993		)
Earnings (loss) applicable to common shareholders		$	(11,017	)	$	(8,347	)	$	(5,321	)	$	(2,741	)	$	52,698
Earnings (loss) per share — basic		$	(0.46	)	$	(0.35	)	$	(0.23	)	$	(0.12	)	$	2.33
Earnings (loss) per share — diluted		$	(0.46	)	$	(0.35	)	$	(0.23	)	$	(0.12	)	$	2.08
Weighted average shares outstanding		23,794,566			23,727,029			23,591,999			23,332,277			22,600,166

 

 

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		As of and for the Years Ended December 31,
		2008			2007			2006			2005			2004
Current assets		$	43,614		$	51,916		$	57,781		$	61,485		$	64,674
Current liabilities		$	10,238		$	8,786		$	6,891		$	5,458		$	7,852
Property, plant, and equipment, net		$	14,436		$	11,483		$	12,212		$	11,926		$	11,057
Total assets		$	58,539		$	64,330		$	70,795		$	73,756		$	76,123
Long-term debt, net of current maturities		$	6,096		$	3,747		$	4,137		$	4,351		$	3,535
Stockholders’ equity		$	42,206		$	51,761		$	59,710		$	63,235		$	63,665
Redeemable Preferred Stock (in shares)		2,285,266			2,329,916			2,441,166			2,498,666			2,572,116
Cash dividends per common share		$	—		$	—		$	—		$	—		$	—
Gross profit margin		29.5		%	30.4		%	29.8		%	36.3		%	23.7		%

 

*              Events that could positively affect the trends indicated above include receipt of royalties from BTMD, continued reductions in manufactured costs, continued increasing average sales prices, and the gaining of market access.  Future interest income trends may negatively affect the trends indicated above due to possibly continuing low interest rates, lower cash balances, as will our investment of our cash in U.S. Treasury bills and other U.S. government backed securities.  Furthermore, as our products are made from petroleum products, the changing cost of oil and transportation may have an impact on our costs to the extent increases may not be recoverable through price increases of our products and reductions in oil prices may not quickly affect petroleum product prices.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

FORWARD-LOOKING STATEMENT WARNING

 

Certain statements included by reference in this filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, our ability to maintain liquidity, our maintenance of patent protection, the impact of current litigation (as it affects our costs as well as market access and the viability of our patents), our ability to maintain favorable supplier arrangements and relationships, receive royalties from BTMD, the impact of dramatic increases in demand, our ability to quickly increase capacity, 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 increased interest of larger market players, specifically BD, in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

 

OVERVIEW

 

We have been manufacturing and marketing our products into the marketplace since 1997.  We currently provide other safety medical products in addition to safety syringe products.  One such product, the Patient Safe™ syringe, which reduces the risk of infection resulting from IV line contamination, entered the market in 2008. Safety syringes comprised 98.6% of our sales in 2008.

 

Our products have been and continue to be distributed nationally through numerous distributors.  However, we have been blocked from access to the market by exclusive marketing practices engaged in by BD, who dominates the market.  We believe that its monopolistic business practices continue despite its paying $100 million in 2004 to settle a prior lawsuit with us for anticompetitive practices, business disparagement, and tortious interference.  Although we have made limited progress in some areas, such as the alternate care and international markets, our volumes are not as high as they should be given the nature and quality of our products, the federal and state legislation requiring the use of safe needle devices, and various Senate Subcommittee hearings on Group Purchasing Organizations.

 

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 are also marketing more

 

 

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product internationally.  Beginning in 2004, we were given an award (from PATH) to supply syringes to various African countries under the President’s Emergency Plan for AIDS relief (PEPFAR).  Awards increased significantly from 2004 to 2007.  The continuation of PEPFAR has been reauthorized by Congress through 2013.  However, funding for the procurement of safety syringes in this program is uncertain.

 

As a result of the introduction of VanishPoint® syringes through the PEPFAR initiative, African countries have begun to procure products outside of the US-funded program.  In 2007, the Director General of Nigeria’s National Agency for Food and Drug Administration and Control (NAFDAC), endorsed automated retraction syringes for use throughout Nigeria.  We are currently selling syringes to a Nigerian distributor for use in that country.  At the end of 2008, the Deputy Prime Minister of Namibia also publically endorsed automated retraction syringes as a public intervention that would “protect health workers and save their patient’s lives”.

 

Additionally, an Australian distributor was awarded a one-year contract in March 2007 to supply our VanishPoint® automated retraction syringes to all of Queensland Health’s 202 acute care facilities.  Queensland Health is a department within the government of Queensland, Australia.  The contract was renewed for an additional two years.  VanishPoint® products are distributed in Australia by Brisbane-based Scientific Educational Supplies Pty Ltd.  The number of international distributors continues to increase.

 

In the event we continue to have only limited market access, the cash provided by the litigation settlements and generated from operations becomes insufficient and royalties from BTMD are not forthcoming, we would take cost cutting measures to reduce cash requirements.  Such measures could result in the reduction of units being produced, the reduction of workforce, the reduction of salaries of officers and other nonhourly employees, and the deferral of royalty payments.

 

We are focusing on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.  We believe our current capitalization provides the resources necessary to implement some of these changes and improve our manufacturing capacity and efficiency, thereby reducing our unit cost.

 

Product purchases from Double Dove, a Chinese manufacturer, have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufactured cost.  Double Dove manufactured, in 2008, approximately 74.0% of the units we produced.  These purchases have improved profit margins in spite of limited revenues.  The cost of production per unit has generally declined as volumes increased.  Double Dove increased the prices in the fourth quarter of 2008 to us by $0.005 per unit.  Product cost reductions could be adversely affected by increased material and transportation costs.  We believe we could make up any long-term disruption in these supplies by utilizing more of the capacity at the Little Elm facility, except for the 0.5cc insulin syringe, the 5cc and 10cc syringes and the autodisable syringe which altogether comprised about 4.6% of our 2008 revenues.

 

We had a Licensing Agreement with BTMD which expired on May 13, 2008.  As a result of the expiration of the contract, we recognized $100,000 of prepaid royalty income in the second quarter of 2008 as other income.  Royalties that were expected in 2008 and 2007 were not received due to the time needed to build the factory, assembly equipment, and the related infrastructure as well as the need of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD is in the process of meeting Chinese government requirements.  We still continue to expect royalty payments although we are unable to predict the date we will begin to receive such royalties.  We should begin earning royalties once we have an effective agreement, Chinese government requirements are met, and BTMD is able to produce and sell products.

 

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.

 

With increased volumes, our manufacturing unit costs have generally tended to decline.  Factors that could affect our unit costs, in addition to Double Dove’s recent increase in unit costs of $0.005, include changing production volumes, costs of petroleum products, and transportation costs.  Increases in such costs may not be recoverable through price increases of our products.

 

We have substantially completed the expansion of an existing warehouse.  This expansion will increase our warehouse area, provide for additional office space, and add a second Controlled Environment.

 

 

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LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS

 

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.

 

Historical Sources of Liquidity

 

We have historically funded operations primarily from the proceeds from private placements, loans, and litigation settlements.  We were capitalized with approximately $52,600,000 raised from six separate private placement offerings.  We raised $47,375,600 in cash from the private sales of an aggregate of 11,710,221 shares of Convertible Preferred Stock.  In addition, we obtained a cancellation of $3,679,284 in debt and $1,550,000 in Accounts payable in exchange for Series V Class B Convertible Preferred Stock.

 

We obtained $3,910,000 in 2000 from bank loans of which $3,435,000 has been repaid and $475,000 was refinanced with a new note for $2,500,000 with Lewisville State Bank, a division of 1st International Bank.  Additionally, we received a Small Business Administration loan of $1,000,000 in 1996 to pay for portions of automated assembly equipment, multi-cavity molds, and other equipment.  This loan has been repaid.  Furthermore, we borrowed $5,000,000 in 2000 under our Credit Agreement with Abbott.  In October 2002 we repaid the Abbott note with proceeds from a new note from Katie Petroleum, Inc. for $3,000,000 and a portion of the proceeds from a private placement.  In 2008, we received a construction line of credit for up to $4,210,000 to fund an expansion of our warehouse.

 

Internal Sources of Liquidity

 

Margins and Market Access

 

To achieve break even quarters, we need minimal access to hospital markets which has been difficult to obtain due to the monopolistic marketplace which was the subject of our initial lawsuit and now also included in our second lawsuit against BD.  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 are focusing on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.  We believe our current capitalization provides the resources necessary to implement some of these changes and improve our manufacturing capacity and efficiency, thereby reducing our unit cost.

 

Beginning in early 2004, we began to receive shipment of product from Double Dove which enabled us to lower our unit costs.  Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable supplier arrangements and relationships could result in the need to manufacture all (as opposed to 26.0%) 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 as domestic costs, such as indirect labor and overhead, remain relatively constant.  Double Dove increased their prices to us by $0.005 per unit in the fourth quarter of 2008.  The number of units produced by the Company 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.  Currently, approximately 26.0% of our products are produced domestically.

 

Fluctuations in the cost of oil (since our products are petroleum based) and transportation and the volume of units purchased from Double Dove may have an impact on the unit costs of our product.

 

 

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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 in the latter part of the year due, in part, to the demand for syringes during the flu season.

 

Licensing Agreement

 

We had a Licensing Agreement with BTMD which expired on May 13, 2008.  As a result of the expiration of the contract, we recognized $100,000 of prepaid royalty income in the second quarter of 2008 as other income.  Royalties that were expected in 2008 and 2007 were not received due to the time needed to build the factory, assembly equipment, and the related infrastructure as well as the need of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD is in the process of meeting Chinese government requirements.  We still continue to expect royalty payments, although we are unable to predict the date we will begin to receive such royalties.  We should begin earning royalties once we have an effective agreement, Chinese government requirements are met, and BTMD is able to produce and sell products.

 

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 event we continue to have only limited market access and cash generated from operations becomes insufficient to support operations, we would take cost cutting measures to reduce cash requirements.  Such measures could result in the reduction of units being produced, the reduction of workforce, the reduction of salaries of officers and other nonhourly employees, and the deferral of 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.

 

CAPITAL RESOURCES

 

In 2006, we invested $500,000 in a limited liability company (“LLC”).  We exercised our option and our funds were returned in 2008.

 

Material Commitments for Expenditures

 

We have substantially completed expansion of our warehouse (including additional warehouse space, additional office space, and a new Controlled Environment).  We are funding this expansion with a construction line of credit from Lewisville State Bank, a division of 1st International Bank, for approximately $4.2 million, secured by a second lien deed on the land and existing buildings.  Draws under the construction line of credit, which have totaled approximately $2.8 million at the end of the year, are expected to be replaced by permanent financing in the second quarter of 2009.

 

 

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Trends in Capital Resources

 

Interest expense will increase due to the recent loan of approximately $4.2 million, but will be somewhat mitigated by lower borrowing rates if current conditions in the credit markets continue.  Interest income may be negatively affected by lower interest rates and our prior movement of cash to U.S. Treasury bills and other U.S. government backed securities.  Although we believe that we have granted credit to credit-worthy firms, current economic conditions may affect the timing and/or collectability of some accounts.

 

RESULTS OF OPERATIONS

 

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties.  Our actual future results could differ materially from our historical results of operations and those discussed in the forward-looking statements.  All period references are to our fiscal years ended December 2008, 2007 or 2006.  Dollar amounts have been rounded for ease of reading.

 

Comparison of Year Ended

December 31, 2008, and Year Ended December 31, 2007

 

Revenues increased 6.1%, due principally to higher average sales prices and greater volumes.  Domestic sales were 83.3% of revenues with international sales comprising the remainder.  Unit sales of the 1cc syringe increased 22.7% and 3cc unit sales decreased 4.0%.  Unit sales of all products increased 3.1%.  Domestic unit sales as well as average sales prices increased.  International unit sales and average selling prices declined.  Sales to one distributor accounted for 17.1% and 13.7% of our revenues in 2008 and 2007, respectively.

 

Cost of sales increased due to higher manufacturing costs and higher volumes.  Royalty expenses were higher due to an increase in gross revenues.

 

As a result, gross profit margins declined from 30.4% in 2007 to 29.5% in 2008.

 

Operating expenses increased from the prior year due to higher general and administrative expenses mitigated by lower Sales and marketing and Research and development costs.

 

Sales and marketing expenses decreased due primarily to reduced travel and entertainment, trade shows and market expense, compensation and office supplies.  Consulting expense also decreased.

 

Research and development costs were flat.  We had decreases in engineering costs due principally to higher costs of validation and engineering samples offset by higher compensation costs.

 

General and administrative costs increased due principally to increased legal costs (including a settlement of litigation whereby we obtained a patent license/assignment), office expenses, compensation, property taxes and freight costs.  Travel and entertainment costs and fees to distributors decreased.

 

Preferred Stock dividend requirements decreased due to conversion of Preferred Stock to Common Stock.  The dividend arrearage at December 31, 2008, on all classes of Preferred Stock was approximately $13.9 million.

 

Interest income decreased due to lower interest rates and cash balances.  Interest expense decreased due to lower interest rates mitigated by higher debt balances and capitalized interest, principally due to the construction of the warehouse.

 

Other accrued liabilities increased due to prepayments from international customers.

 

Cash flow from operations was a negative $5.9 million for 2008 due principally to our losses.  The effect of non-cash expenses and the change in working capital was a positive $3.7 million.  Investing activities utilized $1.9 million in cash.

 

 

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Comparison of Year Ended
December 31, 2007, and Year Ended December 31, 2006

 

Revenues increased due principally to increased sales in the international market.  Domestic sales were 81.6% of revenues with international sales comprising the remainder.  Unit sales of the 1cc syringe increased 7.3% and 5cc unit sales increased 30.6%.  Unit sales of all products increased 7.5%.  The discount reimbursements ended in 2006.  The discount reimbursement program expired after the settlement agreement under which it was established provided for a total of $8.0 million in reimbursements.  We had recognized $8.0 million in cumulative discount reimbursements by the third quarter of 2006.  Sales to three distributors accounted for 36.5% and 31.3% of our revenues in 2007 and 2006, respectively.

 

Cost of sales as a percentage of revenues decreased slightly due to higher volumes offset by the lower average selling price principally in the international sales.  The increased volume of production resulted in a lower unit cost.  Royalty expenses were flat.

 

As a result, gross profits increased and gross profit margins increased slightly from 29.8% in 2006 to 30.4% in 2007.

 

Operating expenses increased from the prior year primarily due to increases in General and administrative costs.

 

Sales and marketing expenses declined due primarily to decreased marketing and trade show expense.  Increased compensation and consulting costs were mitigated by reductions in stock option expenses and travel and entertainment.

 

Research and development costs were somewhat higher.  We had increases in engineering costs due principally to validation testing and the development work on the IV safety catheter and higher compensation costs.

 

General and administrative costs increased due principally to higher legal expenses.  Compensation costs, outside accounting costs, and distribution fees also increased.  Stock option expenses, shareholder expenses, consulting and training decreased.  Legal costs concerning the litigation against BD comprise the largest amount of legal fees and have a significant effect on our expenses.  Our lawsuit against BD is currently scheduled for trial in October 2009.  After conclusion of the trial, legal expenses are expected to decrease significantly.  The legal costs incurred in 2007 with regard to the Abbott litigation are lower than those in 2006.  We expect such costs to continue until the litigation is resolved.  We also have higher litigation expenses concerning OMI.  We had decreases in taxes other than income taxes in 2007.  We awarded merit increases to our employees in 2006.  We donated product in an international humanitarian effort in 2006.  There have been no stock options awarded since 2004; therefore, this expense continues to decline as the costs become fully amortized with virtually none recorded in 2007.  We also increased our allowance for bad debt.

 

Preferred Stock dividend requirements declined due to conversion of Preferred Stock into Common Stock.  The dividend arrearage at December 31, 2007, on all classes of Preferred Stock was approximately $12,500,000.

 

Interest income decreased due to lower interest rates and cash balances.  Interest expense decreased due to lower interest rates and debt balances.

 

Provision for income tax benefits consists primarily of the settlement in our favor of a state tax audit.  We also have a valuation reserve for all deferred taxes, with the exception of deferred taxes on the beneficial conversion feature associated with our note payable to Katie Petroleum.

 

Cash flow from operations was negative for 2007 due principally to the loss for the year.  The effect of non-cash expenses and the change in working capital were a positive $2.7 million.

 

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

CONTRACTUAL OBLIGATIONS

 

Contractual Obligations and Commercial Commitments

 

The following chart summarizes our material obligations and commitments to make future payments under contracts for long-term debt as of December 31, 2008:

 

		Payments Due by Period
Contractual Obligations		Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-term debt, including current maturities		$6,642,854		$543,748		$3,129,735		$510,126		$2,459,245

 

The presentation of contractual obligations of long-term debt includes assumptions regarding our ability to replace a construction loan with permanent financing.

 

SIGNIFICANT ACCOUNTING POLICIES

 

We consider the following to be our most significant accounting policies.  Careful consideration and review is given to these and all accounting policies on a routine basis to ensure that they are accurately and consistently applied.

 

Accounts Receivable

 

We record trade receivables when revenue is recognized.  No product has been consigned to customers.  Our allowance for doubtful accounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful of collection are included in the allowance.  An additional allowance has been established based on a percentage of receivables outstanding.  These provisions are 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.

 

Revenue Recognition

 

Revenue is recognized for sales to distributors when title and risk of ownership passes to the distributor, generally upon shipment.  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 we have not received tracking reports.  Rebates are recorded when issued and are applied against the customer’s receivable balance.  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 netted against individual distributors’ accounts receivable balances for financial reporting purposes.  The resulting net balance is reflected in accounts receivable or accounts payable, as appropriate.  The terms and conditions of contractual pricing allowances are governed by contracts between us and our distributors.  Revenue for shipments directly to end-users is recognized when title and risk of ownership passes from us.  Any product shipped or distributed for evaluation purposes is expensed.

 

 

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Our domestic return policy is set forth in our standard Distribution Agreement.  This policy provides that a customer may return incorrect shipments within 10 days following arrival at the distributor’s facility.  In all such cases the distributor must obtain an authorization code from us and affix the code to the returned product.  We will not accept returned goods without a returned goods authorization number.  We may refund the customer’s money or replace the product.

 

Our return policy also provides that a customer may return product that is overstocked.  Overstocking returns are limited to two times in each 12 month period up to one percent 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 manufacturer.

 

Our international Distribution Agreements do not provide for any returns.

 

We record an allowance for estimated returns as a reduction to accounts receivable and gross sales.  Historically, returns have been less than 0.5% of Total sales.

 

Inventories

 

Inventories are valued at the lower of cost or market, with cost being determined using a standard cost method, which approximates average cost.  A reserve is established for any excess or obsolete inventories.

 

Marketing Fees

 

Under a sales and marketing agreement with Abbott, we paid marketing fees until we terminated the contract for breach.  The contracted services were to include participation in promotional activities, development of educational and promotional materials, representation at trade shows, clinical demonstrations, inservicing and training, and tracking reports detailing the placement of our products to end-users.  Marketing fees were accrued at the time of the sale of product to Abbott.  These fees were paid after Abbott provided us a tracking report of product sales to end-users.  These costs were included in Sales and marketing expense in the Statements of Operations.  No marketing fees have been accrued since October 15, 2003, the date the National Marketing and Distribution Agreement with Abbott was terminated.  We filed suit against Abbott in August 2005 for breach of contract.  We do not expect the eventual liability for marketing fees, if any, to exceed the amount accrued.

 

Reimbursed Discounts

 

We received reimbursed discounts from one of the settlement agreements reached in our previous federal antitrust lawsuit, Retractable Technologies, Inc. v. BD, et al.  Payments under the discount reimbursement program were recognized upon invoicing of amounts due under the agreement, provided collection was reasonably assured.  Such amounts are presented in the Statements of Operations as a separate component of revenues.  All funds available under the discount reimbursement program were recognized by the third quarter of 2006.

 

Item 7A. Quantitative and Qualitative Disclosures About  Market Risk.

 

We believe that our market risk exposures regarding our cash and cash equivalents are immaterial as we do not have instruments for trading purposes.  We shifted the bulk of our funds into U.S. Treasury bills and other U.S. government backed securities in April 2008.  Additionally, reasonable, possible near-term changes in market rates or prices will not result in material near-term losses in earnings.

 

 

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Item 8. Financial Statements and Supplementary Data.

 

RETRACTABLE TECHNOLOGIES, INC.

 

FINANCIAL STATEMENTS AND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

DECEMBER 31, 2008 AND 2007

 

 

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RETRACTABLE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS

 

	Page
Report of Independent Registered Public Accounting Firm	F-3
Financial Statements:
Balance Sheets as of December 31, 2008 and 2007	F-4
Statements of Operations for the years ended December 31, 2008, 2007 and 2006	F-5
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006	F-6
Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	F-9
Notes to Financial Statements	F-11
Selected Quarterly Financial Data - Unaudited	F-26
Financial Statement Schedule:
Schedule II: Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2008, 2007 and 2006	45

 

 

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Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Stockholders

of Retractable Technologies, Inc.

 

We have audited the accompanying balance sheets of Retractable Technologies, Inc. as of December 31, 2008 and 2007, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.  Our audits also included the financial statement schedule of Retractable Technologies, Inc., listed in Item 15(a).  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Retractable Technologies, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 included in Item 9A of the Company’s December 31, 2008 Form 10-K and, accordingly, we do not express an opinion thereon.

 

		/s/ CF & Co., L.L.P.
		CF & Co., L.L.P.
Dallas, Texas
March 31, 2009

 

 

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RETRACTABLE TECHNOLOGIES, INC.

BALANCE SHEETS

 

		December 31,
		2008			2007
ASSETS
Current assets:
Cash and cash equivalents		$	33,283,740		$	40,507,431
Accounts receivable, net of allowance for doubtful accounts of $499,966 and $254,008, respectively		3,288,942			1,667,636
Inventories, net		6,641,532			7,037,129
Income taxes receivable		—			2,345,041
Other current assets		400,113			358,807
Total current assets		43,614,327			51,916,044
Property, plant, and equipment, net		14,435,667			11,483,423
Intangible assets, net		470,115			424,560
Other assets		18,750			505,899
Total assets		$	58,538,859		$	64,329,926
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	6,144,435		$	5,535,365
Current portion of long-term debt		451,865			387,906
Accrued compensation		650,704			539,330
Marketing fees payable		1,419,760			1,419,760
Accrued royalties to shareholders		620,987			619,304
Other accrued liabilities		949,770			263,339
Current deferred tax liability		—			20,626
Total current liabilities		10,237,521			8,785,630
Long-term debt, net of current maturities		6,095,535			3,747,259
Long-term deferred tax liability		—			36,200
Total liabilities		16,333,056			12,569,089
Stockholders’ equity:
Preferred Stock $1 par value:
Class B; authorized: 5,000,000 shares
Series I, Class B; issued: 1,000,000 shares; outstanding: 144,000 and 144,000 shares, respectively (liquidation preference of $900,000 and $900,000 respectively)		144,000			144,000
Series II, Class B; issued: 1,000,000 shares; outstanding 219,700 and 219,700, respectively (liquidation preference of $2,746,250 and $2,746,250, respectively)		219,700			219,700
Series III, Class B; issued: 1,160,445 shares; outstanding: 130,245 and 130,245 shares, respectively (liquidation preference of $1,628,063 and $1,628,063, respectively)		130,245			130,245
Series IV, Class B; issued: 1,133,800 shares; outstanding: 552,500 and 553,500 shares (liquidation preference of $6,077,500 and $6,088,500)		552,500			553,500
Series V, Class B; issued 2,416,221 shares; outstanding: 1,238,821 and 1,282,471 shares, respectively (liquidation preference of $5,450,812 and $5,642,872, respectively)		1,238,821			1,282,471
Common Stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 23,800,064 and 23,755,414 shares, respectively		—			—
Additional paid-in capital		53,952,183			53,818,987
Retained deficit		(14,031,646		)	(4,388,066		)
Total stockholders’ equity		42,205,803			51,760,837
Total liabilities and stockholders’ equity		$	58,538,859		$	64,329,926

 

 

See accompanying notes to financial statements

 

 

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RETRACTABLE TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

 

		Years Ended December 31,
		2008			2007			2006
Sales, net		$	27,899,318		$	26,289,720		$	20,897,207
Reimbursed discounts		—			—			4,427,312
Total sales		27,899,318			26,289,720			25,324,519
Cost of Sales
Costs of manufactured product		17,504,842			16,212,609			15,684,450
Royalty expense to shareholders		2,168,268			2,087,596			2,093,822
Total cost of sales		19,673,110			18,300,205			17,778,272
Gross profit		8,226,208			7,989,515			7,546,247
Operating expenses:
Sales and marketing		4,835,272			5,299,157			5,545,500
Research and development		1,066,068			1,071,143			958,798
General and administrative		12,769,774			11,565,144			7,756,647
Total operating expenses		18,671,114			17,935,444			14,260,945
Loss from operations		(10,444,906		)	(9,945,929		)	(6,714,698		)
Interest and other income		855,685			1,870,512			1,976,406
Interest expense, net		(54,359		)	(326,304		)	(411,154		)
Loss before income taxes		(9,643,580		)	(8,401,721		)	(5,149,446		)
Benefit for income taxes		—			(1,453,617		)	(1,279,962		)
Net loss		(9,643,580		)	(6,948,104		)	(3,869,484		)
Preferred Stock dividend requirements		(1,373,019		)	(1,399,062		)	(1,451,321		)
Net loss applicable to common shareholders		$	(11,016,599	)	$	(8,347,166	)	$	(5,320,805	)
Loss per share		$	(0.46	)	$	(0.35	)	$	(0.23	)
Weighted average common shares outstanding		23,794,566			23,727,029			23,591,999

 

 

See accompanying notes to financial statements

 

 

F-5

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

	Series I Class B   Shares     Amount				Series II Class B Shares     Amount				Series III Class B Shares     Amount				Series IV Class B Shares    Amount				Series V Class B   Shares          Amount				Common         Shares      Amount
Balance as of December 31, 2005	171,000		$171,000		255,200		$255,200		135,245		$135,245		556,000		$556,000		1,381,221		$1,381,221		23,511,884		$	—
Conversion of Preferred Stock into Common Stock	(7,000	)	(7,000	)	(30,500	)	(30,500	)	—		—		(2,500	)	(2,500	)	(17,500	)	(17,500	)	57,500		—
Recognition of stock option exercise	—		—		—		—		—		—		—		—		—		—		74,780		—
Recognition of stock option compensation	—		—		—		—		—		—		—		—		—		—		—		—
Net loss	—		—		—		—		—		—		—		—		—		—		—		—
Balance as of December 31, 2006	164,000		164,000		224,700		224,700		135,245		135,245		553,500		553,500		1,363,721		1,363,721		23,644,164		—
Conversion of Preferred Stock into Common Stock	(20,000	)	(20,000	)	(5,000	)	(5,000	)	(5,000	)	(5,000	)	—		—		(81,250	)	(81,250	)	111,250		—
Recognition of stock option compensation	—		—		—		—		—		—		—		—		—		—		—		—
Dividends declared and paid on Series I Class B Preferred Stock	—		—		—		—		—		—		—		—		—		—		—		—
Dividends declared and paid on Series II Class B Preferred Stock	—		—		—		—		—		—		—		—		—		—		—		—
Net loss	—		—		—		—		—		—		—		—		—		—		—		—
Balance as of December 31, 2007	144,000		144,000		219,700		219,700		130,245		130,245		553,500		553,500		1,282,471		1,282,471		23,755,414		—
Conversion of Preferred Stock into Common Stock	—		—		—		—		—		—		(1,000	)	(1,000	)	(43,650	)	(43,650	)	44,650		—
Recognition of stock option compensation	—		—		—		—		—		—		—		—		—		—		—		—

 

 

F-6