RETRACTABLE TECHNOLOGIES INC - Annual Report: 2018 (Form 10-K)

Table of Contents

 

 

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, 2018

 

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 001-16465

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

972-294-1010

Registrant’s telephone number, including area code

 

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

 

Title of each class		Name of each exchange on which registered
Common		NYSE American LLC

 

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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x

 

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

 

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

 

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

 

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

 

The aggregate market value of the common equity held by non-affiliates as of June 29, 2018, was $10,309,114, assuming a closing price of $0.7365 and outstanding shares held by non-affiliates of 13,997,440.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of March 7, 2019, there were 32,666,454 shares of our Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 2019 are incorporated by reference into Part III hereof.

 

 

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2018

 

TABLE OF CONTENTS

 

PART I
Item 1. Business	1
Item 1A. Risk Factors	4
Item 1B. Unresolved Staff Comments	7
Item 2. Properties	7
Item 3. Legal Proceedings	7
Item 4. Mine Safety Disclosures	7
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	8
Item 6. Selected Financial Data	9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation	10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	15
Item 8. Financial Statements and Supplementary Data	F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	16
Item 9A. Controls and Procedures	16
Item 9B. Other Information	16
PART III
Item 10. Directors, Executive Officers and Corporate Governance	17
Item 11. Executive Compensation	17
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	17
Item 13. Certain Relationships and Related Transactions, and Director Independence	17
Item 14. Principal Accounting Fees and Services	17
PART IV
Item 15. Exhibits, Financial Statement Schedules	17
Item 16. Form 10-K Summary	19
SIGNATURES	20

 

i

Table of Contents

 

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, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to quickly increase capacity in response to an increase in demand, our ability to access the market, our ability to maintain or decrease production costs, our ability to continue to finance research and development as well as operations and expansion of production, the impact of larger market players, specifically Becton, Dickinson and Company (“BD”), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

 

Item 1. Business.

 

DESCRIPTION OF BUSINESS

 

General Development of Business

 

Retractable Technologies, Inc. was incorporated in Texas in 1994.  Our business is the manufacturing and marketing of safety medical products (predominately syringes) for the healthcare industry.  We have manufacturing facilities in Little Elm, Texas and use manufacturers in China as well.  We have developed several new products in the last few years, including the EasyPoint® needle which can be used with, among other things, prefilled syringes.

 

In 2007, we filed a lawsuit claiming that we have been blocked from gaining market access due to actions taken by BD.  In August 2017, a district court dismissed our remaining claims against BD and entered a take nothing judgment.  We filed for appeal. On March 26, 2019, the U.S. Court of Appeals for the Fifth Circuit issued an opinion affirming the take nothing judgment. We are evaluating this ruling and conferring with legal counsel regarding possible future action.

 

Financial Information

 

We have only one reporting segment.  See Item 8 for our financial statements.

 

Principal Products, Markets, and Distribution

 

Our goal is to become a leading provider of safety medical products.  Our principal products were designed to protect healthcare workers, patients, and others from needlestick injuries, cross-contamination through reuse, and reduce disposal costs.  The VanishPoint® products accomplish these goals by retracting the needle when the plunger handle is fully depressed while the needle is still in the patient.  This pre-removal activation virtually eliminates exposure to the contaminated needle, reducing the risk of needlestick injuries.  Activation is easily accomplished in one step, using one hand.  Upon activation of the retraction mechanism, VanishPoint® products are rendered unusable, reducing the risk of disposal-related injuries or reuse.

 

VanishPoint® syringe sales have historically comprised most of our sales.  VanishPoint® syringe sales were 93.0%, 89.9%, and 84.9% of our revenues in 2016, 2017, and 2018.

 

Our VanishPoint® safety products currently consist of tuberculin, insulin, and allergy antigen VanishPoint® syringes; 0.5mL, 1 mL, 2mL, 3mL, 5mL, and 10mL VanishPoint® syringes; and the VanishPoint® autodisable syringe.  We also sell the VanishPoint® IV catheter; the VanishPoint® blood collection tube holder; and the VanishPoint® blood collection set.  The Patient Safe® syringe protects patients by reducing the risk of bloodstream infections associated with catheter hub contamination.  Our Patient Safe® products currently consist of 3mL, 5mL, 10mL, 20mL, 30mL, 60mL syringes and the Patient Safe® Luer cap.

 

1

Table of Contents

 

In the second quarter of 2016, we began selling the EasyPoint® needle.  EasyPoint® needles made up 10.3% of revenues in 2018.  The EasyPoint® is a retractable needle that can be used with Luer lock syringes, Luer slip syringes, and prefilled syringes to give injections.  The EasyPoint® needle can also be used to aspirate fluids and collect blood.

 

We currently have under development additional safety products that add to or build upon our current product line offering.  These products include: retractable needles and syringes, glass syringes, dental syringes, IV catheter introducers, and blood collection sets.

 

Our products are sold to and used by healthcare providers primarily in the U.S. (with 13.9% of revenues in 2018 generated from sales outside the U.S.) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, long-term care facilities, Veterans Administration facilities, military organizations, public health facilities, and prisons.

 

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

 

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

 

The American Journal of Infection Control published an article in its November 2017 issue that estimates that more than 300,000 healthcare workers in the United States suffer sharps injuries (such as needlesticks) annually.  The article is the most recent of a series of articles published over the past few years (several of which were published in the AOHP Journal).  The data shows that the number of sharps injuries has remained essentially unchanged over the past several years.

 

Sources and Availability of Raw Materials

 

Our product components, including needle adhesives and packaging materials, are purchased from various suppliers.  There is no scarcity of such materials or such suppliers.

 

Intellectual Property

 

Intellectual property rights, particularly patent rights, are material to our business.  The patent rights are jointly owned by the Company and Thomas J. Shaw, our founder and CEO, and have varying expiration dates.  Under the terms of an exclusive license agreement that has been in effect since 1995, the Company is exclusively licensed to use the patent rights held by Mr. Shaw, and Mr. Shaw receives a five percent (5%) royalty on gross sales of products subject to the license.

 

The last unexpired U.S. patent covering VanishPoint® syringes (as presently manufactured and marketed) will expire in 2020.  Following the expiration of such patent, competitors will be permitted to attempt to copy the VanishPoint® syringe as presently manufactured.  Issued patents covering possible future modifications to the VanishPoint® syringe and core technology of the VanishPoint® syringe will expire during the years 2028 through 2032.  If the VanishPoint® syringes are modified to incorporate the modifications covered in the unexpired patents,

 

2

Table of Contents

 

then competitors will not be permitted to attempt to copy such modified syringes in the countries where the patents remain in effect.  Other patent applications covering inventions applicable to the VanishPoint® syringe are pending.

 

The Company has unexpired patents which relate to the EasyPoint® technology and other products as well.

 

The Company has registered the following trade names and trademarks for our products: VanishPoint®, EasyPoint®, Patient Safe®, VanishPoint® logos, RT and design, the VanishPoint® and design, the spot design and the Company slogans “The New Standard for Safety” ® and “We Make Safety Safe” ®.

 

We are involved in patent litigation detailed in Item 3.

 

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.

 

Working Capital Items

 

Our significant accounting policies are set forth in the notes to our financial statements in Item 8.  Our inventory practices will vary in response to demand.  Order backlog is not material to our business.

 

Dependence on Customers

 

Although our business has historically derived significant percentages of its revenues from a few customers, we do not believe that the loss of any one of these customers would have a material adverse effect on our business.

 

Government Approval and Government Regulations

 

For all products manufactured for sale in the domestic market, we have given notice of intent to market to the FDA, and the devices were shown to be substantially equivalent to the predicate devices for the stated intended use.

 

For all products manufactured for sale in the domestic market and foreign market, we hold a Quality Management System certification to ISO 13485:2016.  Additionally, for all products manufactured for sale into the applicable countries, we hold a Quality Management System certification in compliance with the Medical Device Single Audit Program (MDSAP). For all products manufactured for sale into European Union countries, we hold a Full Quality Assurance System certification to Directive 93/42/EEC Annex II (excluding section 4).  All of these certifications are issued by our notified body, BSI, and are reviewed annually.

 

We will continue to comply with applicable regulations of all countries in which our products are registered for sale.

 

Competitive Conditions

 

Major domestic competitors include BD and Medtronic Minimally Invasive Therapies (“Medtronic,” formerly known as Covidien).  Terumo Medical Corp., Smiths Medical, and B Braun are additional competitors with smaller market shares. BD and Medtronic have controlling U.S. market share; greater financial resources; larger and more established sales, marketing, and distribution organizations; and greater market influence, including long-term and/or exclusive contracts.  Additionally, BD may be able to use its resources to improve its products through research or acquisitions or develop new products which may compete with our products.

 

We compete primarily on the basis of healthcare worker and patient safety, product performance, and quality.  We believe our competitive advantages include, but are not limited to, our leadership in quality and innovation. We believe our products continue to be the most effective safety devices in today’s market.  Our syringe products include passive safety activation, require less disposal space, and are activated while in the patient,

 

3

Table of Contents

 

reducing exposure to the contaminated needle.  Our price per unit is competitive or even lower than the competition once all the costs incurred during the life cycle of a syringe are considered. Such life cycle costs include disposal costs, testing and treatment costs for needlestick injuries, and treatment for contracted illnesses resulting from needlestick injuries.

 

EasyPoint® retractable needles offer unique safety benefits not found in other commercially available safety needles.  Manually activated safety needles that compete with EasyPoint® must be removed from the patient, exposing the contaminated needle prior to activation of the manual safety mechanism.  EasyPoint® needles allow for activation of the automated retraction mechanism while the needle is still in the patient, reducing exposure to the contaminated needle and effectively reducing the risk of needlestick injuries.  EasyPoint® retractable needles are compatible with Luer-fitting syringes, including pre-filled syringes.  In addition, EasyPoint® retractable needles may be activated with fluid in the syringe, making it applicable for aspiration procedures such as blood collection.

 

Environmental Compliance

 

We believe that we do not incur material costs in connection with compliance with environmental laws.

 

Employees

 

As of March 7, 2019, we had 125 employees. 123 of such employees were full time employees.

 

Available Information

 

We make available, free of charge on our website (www.retractable.com), our Form 10-K Annual Report and Form 10-Q Quarterly Reports and Current Reports on Form 8-K (and any amendments to such reports) as soon as reasonably practical after such reports are filed.

 

Item 1A. Risk Factors.

 

We could be subject to complex and costly regulation.  Our business could suffer if we or our suppliers encounter manufacturing problems.  We could be subject to risks associated with doing business outside of the U.S.  Current or worsening economic conditions may adversely affect our business and financial condition.

 

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

 

We Compete in a Marketplace Dominated by BD

 

We operate in a marketplace that is dominated by BD, the major syringe manufacturer in the U.S.  We initiated a lawsuit in 2007 against BD.  The suit was for patent infringement, antitrust practices, and false advertising.  The court severed the patent claims from the other claims.  The antitrust and false advertising case was dismissed in district court in August 2017 and we were awarded a take nothing judgment.  We filed for appeal. On March 26, 2019, the U.S. Court of Appeals for the Fifth Circuit issued an opinion affirming the take nothing judgment. We are evaluating this ruling and conferring with legal counsel regarding possible future action.

 

Although we have made limited progress in some areas, such as the alternate care and some international markets, our volumes are not as high as they should be given the nature and quality of our products and the federal and state legislation requiring the use of safe needle devices.  We believe this is due to BD’s activities, despite our litigation efforts described briefly above.

 

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

 

We have a history of incurring net operating losses.  We may experience operating losses in the future.  If we are unable to gain sufficient market access and market share, we may be unable to continue to finance research and development as well as support operations and expansion of production.

 

4

Table of Contents

 

We Are Challenged by Uncertainties in Obtaining and Enforcing Intellectual Property Rights

 

Our main competitive strength is our technology.  We are dependent on patent rights, and if the patent rights are invalidated or circumvented, our business would be adversely affected.  Patent protection is considered, in the aggregate, to be of material importance in the design, development, and marketing of products.

 

VanishPoint® syringes comprised 84.9% of sales in 2018 and a principal remaining patent protecting those syringes (as presently manufactured and marketed) will expire in 2020.  Following the expiration of such patent, competitors will be permitted to attempt to copy the VanishPoint® syringe as presently manufactured.  Issued patents covering possible future modifications to the VanishPoint® syringe and core technology of the VanishPoint® syringe will expire during the years 2028 through 2032.  If the VanishPoint® syringes are modified to incorporate the modifications covered in the unexpired patents, then competitors will not be permitted to attempt to copy such modified syringes in the countries where the patents remain in effect.  There is no assurance that the modifications will be incorporated or profitably sold.  Other patent applications covering inventions applicable to the VanishPoint® syringe are pending.

 

When the current patents for the VanishPoint® syringes and other products expire, we may experience a significant and rapid loss of sales, and our competitive position in the marketplace may weaken if other competitors use our technology.  Such occurrences could have a material adverse effect on profitability.

 

We do not maintain patent or trademark protection in all foreign countries, but, where possible, have taken steps to protect our patents and trademarks in those countries where we market our products or where we believe other manufacturers are most likely to attempt to replicate our technology.  Our lack of patent and trademark protection in certain foreign countries heightens the risk that our designs may be copied by a competitor in those countries.

 

Our Patents Are Subject to Litigation

 

We have been sued by BD and MDC Investment Holdings, Inc. for patent infringement.  This case has been administratively closed until our case against BD is resolved.  Patent litigation and challenges involving our patents are costly and unpredictable and may deprive us of market exclusivity for a patented product or, in some cases, third party patents may prevent us from marketing and selling a product in a particular geographic area.

 

We Are Vulnerable to New Technologies

 

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

 

Our Competitors Have Greater Resources

 

Our competitors have greater financial resources, larger and more established sales and marketing and distribution organizations, and greater market influence, including long-term contracts.  These competitors may be able to use these resources to improve their products through research and acquisitions or develop new products, which may compete more effectively with our products.  If our competitors choose to use their resources to create products superior to ours, we may be unable to sell our products and our ability to continue operations would be weakened.

 

Operations May Be Affected By Foreign Trade Policy

 

We are subject to risks associated with foreign trade policy.  In 2018, we used Chinese manufacturers to produce 85.3% of our products.  Trade protection measures, including tariffs, and/or changes to import or export requirements could materially adversely impact our operations.  As of the date of this filing, syringes are not included among the Chinese products on which the U.S. has proposed tariffs.  We cannot predict the impact of potential changes to U.S. foreign trade policy.  Additionally, we derive 13.9% of our revenues from international sales.  International sales, particularly in emerging market countries, are further subject to a variety of regulatory, economic, and political risks as well.

 

5

Table of Contents

 

Our New Products May Not Replace Lost VanishPoint® Sales After 2020

 

Presently existing patent coverage for VanishPoint® syringes (as presently manufactured) will expire in 2020.  Following the patent expiration, expected declines in sales of VanishPoint® syringes, which currently comprise 84.9% of our revenues, means that our future success is dependent on new products.  We have engaged in research and development for many years to develop other commercially successful products.  Often, new products take a number of years to develop and sales of a new product may be disappointing.  Based on industry-wide trends, we anticipate that demand may increase for one of our newer products, the EasyPoint® needle.  Sales in 2017 and 2018 for this product were 6.0% and 10.3%, respectively, of our total revenues.

 

The Majority of Our Sales Are Filled Using Third Party Manufacturers

 

Most international sales, as well as a substantial portion of domestic sales, are filled by production from Chinese manufacturers.  In the event that we become unable to purchase such product from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes.  Even with increased domestic production, we may not be able to avoid a disruption in supply.  In 2018, the 1mL and 3mL syringes made up 75.4% of our unit sales and 75.7% of our revenues. We have a strong relationship with our Chinese manufacturers and we communicate with them frequently.

 

Fluctuations in Supplies of Inventory Could Temporarily Increase Costs

 

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

 

We Are Controlled by One Shareholder

 

Thomas J. Shaw, our President and Chief Executive Officer, has investment or voting power over a total of 55.9% of the outstanding Common Stock.  Mr. Shaw therefore has the ability to direct our operations and financial affairs and to elect members of our Board of Directors.  His interests may not always coincide with the Company’s interests or the interests of other stockholders.  This concentration of ownership, for example, may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially adversely affect the market price of our Common Stock.  Mr. Shaw’s rights under the Technology License Agreement, as the owner of the technology we produce, present similar conflicts of interest.

 

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.  If a product liability claim is made and damages are in excess of our product liability coverage, our competitive position could be weakened by the amount of money we could be required to pay to compensate those injured by our products.  In the event of a recall, we have recall insurance.

 

Our Business May Be Affected By Changes in the Health Care Regulatory Environment

 

In the U.S. and internationally, government authorities may enact changes in regulatory requirements, reform existing reimbursement programs, and/or make changes to patient access to health care, all of which could adversely affect the demand for our products and/or put downward pressure on our prices.  Future health care rulemaking could affect our business.  We cannot predict the timing or impact of any future rulemaking or changes in the law.

 

6

Table of Contents

 

Item 1B. Unresolved Staff Comments.

 

Not applicable and none.

 

Item 2. Properties.

 

Our headquarters are 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 houses our administrative offices and manufacturing facility.  The manufacturing facility produced approximately 14.4% of the units that were manufactured in 2018.  In the event that we become unable to purchase product from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes.  The 5mL and 10mL syringes are sold principally in the international market.  In 2018, we used approximately 15% of our current U.S. productive capacity.

 

A loan in the original principal amount of approximately $4,210,000 is secured by our land and buildings.  See Note 8 to our financial statements for more information.

 

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

 

Item 3. Legal Proceedings.

 

In May 2010, our and Mr. Shaw’s suit against BD in the U.S. District Court for the Eastern District of Texas, Marshall Division alleging violations of antitrust acts, false advertising, product disparagement, tortious interference, and unfair competition was reopened.  The trial commenced on September 9, 2013 in the U.S. District Court for the Eastern District of Texas, Tyler Division, and the jury found that BD illegally engaged in anticompetitive conduct with the intent to acquire or maintain monopoly power in the safety syringe market and engaged in false advertising under the Lanham Act.  The jury awarded us $113,508,014 in damages, which was trebled pursuant to statute.  The Court granted injunctive relief to take effect January 15, 2015 including, among other things, a requirement to notify certain customers and others regarding misleading disclosures.  In connection with BD’s subsequent appeal, on December 2, 2016, the United States Court of Appeals for the Fifth Circuit overturned the antitrust damages.  The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled.  On August 17, 2017, District Court for the Eastern District of Texas issued the Court’s Final Judgment ordering that we take nothing in our suit against BD and dismissing the case.  We filed a notice of Appeal with the United States Court of Appeals for the Fifth Circuit on November 3, 2017.  Oral arguments occurred on October 3, 2018. On March 26, 2019, the U.S. Court of Appeals for the Fifth Circuit issued an opinion affirming the District Court’s take nothing judgment.

 

In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued us in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that we are infringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD.  BD and MDC seek injunctive relief and unspecified damages.  We counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patents.  The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and we subsequently dropped our counterclaims for unenforceability of the asserted patents.  On June 30, 2015, the Court ordered that further proceedings in this matter be stayed and that this case remain administratively closed until resolution of all appeals in the case detailed in the preceding paragraph.  The case remains stayed as a result of the ongoing proceedings regarding the claims in the separate proceeding described above.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

7

Table of Contents

 

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 American (or its predecessor entities) under the symbol “RVP” since May 4, 2001.

 

SHAREHOLDERS

 

As of March 7, 2019, there were 32,666,454 shares of Common Stock held by 199 shareholders of record, not including Cede & Co. participants or beneficial owners thereof.

 

DIVIDENDS

 

We have not ever declared or paid any dividends on the Common Stock.  We have no current plans to pay any cash dividends on the Common Stock.  We intend to retain all earnings, except those required to be paid to the holders of the Preferred Stock as resources allow, to support operations and future growth.  Dividends on Common Stock cannot be paid so long as preferred dividends are unpaid.  As of December 31, 2018, there was an aggregate of $11.8 million in preferred dividends in arrears.  As of December 31, 2017, there was an aggregate of $11.3 million in preferred dividends in arrears.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table sets forth information relating to our equity compensation plans as of December 31, 2018:

 

Equity Compensation Plan Information

 

		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))
		(a)		(b)			(c)
Plan category
Equity compensation plans approved by security holders		1,357,803		$	1.54		—
Total		1,357,803		$	1.54		—

 

8

Table of Contents

 

STOCK PERFORMANCE GRAPH

 

The following graph compares the cumulative total return for our Common Stock from December 31, 2013 to December 31, 2018, to the total returns for the Russell Microcap® and Becton, Dickinson and Company (or “BDX”), a peer issuer.  The graph assumes an investment of $100 in the aforementioned equities as of December 31, 2013, and that all dividends are reinvested.

 

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Purchases by affiliate(s) during 2018 were not repurchases by or on behalf of the issuer.  Based on our review, affiliates properly filed Section 16(a) beneficial ownership reports.

 

Item 6. Selected Financial Data.

 

The following selected financial data is qualified by reference to, and should be read in conjunction with, our audited financial statements and the notes to those statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein.  The selected Statements of Operations data presented below for the years ended December 31, 2015 and 2014 and the Balance Sheet data as of December 31, 2016, 2015, and 2014 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,
		2018			2017			2016			2015			2014
Sales, net		$	33,275		$	34,494		$	29,827		$	29,552		$	34,521
Cost of sales		23,053			24,522			19,485			18,987			22,499
Gross profit		10,222			9,972			10,342			10,565			12,022
Total operating expenses		11,803			13,750			13,849			13,773			14,180
Income from insurance proceeds		261			—			—			—			—
Loss from operations		(1,320		)	(3,778		)	(3,507		)	(3,208		)	(2,158		)
Litigation proceeds		—			—			—			7,725			—
Interest and other income		144			65			26			25			34
Interest expense		(177		)	(211		)	(213		)	(220		)	(223		)
Income (loss) before income taxes		(1,353		)	(3,924		)	(3,694		)	4,322			(2,347		)
Provision (benefit) for income taxes		(13		)	(188		)	1			8			8
Net income (loss)		(1,340		)	(3,736		)	(3,695		)	4,314			(2,355		)
Preferred Stock dividend requirements		(705		)	(705		)	(705		)	(709		)	(915		)

 

9

Table of Contents

 

		As of and for the Years Ended December 31,
		2018			2017			2016			2015			2014
Deemed capital contribution on extinguishment of preferred stock		—			—			—			2,306			—
Income (loss) applicable to common shareholders		$	(2,045	)	$	(4,441	)	$	(4,400	)	$	5,911		$	(3,270	)
Earnings (loss) per share — basic		$	(0.06	)	$	(0.14	)	$	(0.15	)	$	0.21		$	(0.12	)
Earnings (loss) per share — diluted		$	(0.06	)	$	(0.14	)	$	(0.15	)	$	0.20		$	(0.12	)
Weighted average shares outstanding — basic		32,666,454			31,958,121			29,354,437			27,822,593			27,375,450
Weighted average shares outstanding — diluted		32,666,454			31,958,121			29,354,437			29,481,294			27,375,450
Current assets		$	23,847		$	26,608		$	26,677		$	30,811		$	33,983
Current liabilities		$	8,539		$	7,900		$	7,172		$	8,096		$	15,100
Property, plant, and equipment, net		$	10,852		$	11,353		$	12,092		$	11,468		$	10,853
Total assets		$	36,792		$	38,155		$	38,779		$	42,294		$	45,106
Long-term debt, net of current maturities		$	2,640		$	3,081		$	3,498		$	3,417		$	3,425
Stockholders’ equity		$	25,614		$	27,174		$	28,108		$	30,781		$	26,581
Redeemable Preferred Stock (in shares)		781,445			781,445			781,445			781,445			987,445
Capital leases		—			—			—			—			—
Cash dividends per common share		$	—		$	—		$	—		$	—		$	—
Gross profit margin		30.7		%	28.9		%	34.7		%	35.8		%	34.8		%

 

Events that could affect the trends indicated above include changes in manufacturing costs, changing average sales prices, changing raw material cost, the gaining of market access, protection of our patents, foreign currency exchange rates, the Medical Device Excise Tax, the impact of flu season requirements, new or changing regulations or changes in trade policy, or new products.  As our products are made from petroleum products, the changing cost of oil and transportation may have an impact on our costs to the extent increases may not be recoverable through price increases of our products and reductions in oil prices may not quickly affect petroleum product prices.

 

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, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to quickly increase capacity in response to an increase in demand, our ability to access the market, our ability to maintain or decrease production costs, our ability to continue to finance research and development as well as operations and expansion of production, the impact of larger market players, specifically BD, 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.

 

10

Table of Contents

 

Overview

 

We have been manufacturing and marketing our products since 1997.  VanishPoint® syringes comprised 84.9% of our sales in 2018.  We also manufacture and market the EasyPoint® needle, blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set.  We currently provide other safety medical products in addition to safety products utilizing retractable technology.  One such product is the Patient Safe® syringe, which is uniquely designed to reduce the risk of bloodstream infections associated with catheter hub contamination.

 

In the second quarter of 2016, we began selling the EasyPoint® needle.  EasyPoint® needles made up 10.3% of revenues in 2018.  The EasyPoint® is a retractable needle that can be used with Luer lock syringes, Luer slip syringes, and prefilled syringes to give injections.  The EasyPoint® needle can also be used to aspirate fluids and collect blood.  Based on industry-wide trends, we anticipate that demand may increase for the EasyPoint® needle.

 

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

 

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

 

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

 

We have reported in the past that our progress is limited principally due to the practices engaged in by BD, the dominant maker and seller of disposable syringes.  We initiated an antitrust and false advertising lawsuit in 2007 against BD.  Although a district court judgment in 2015 awarded us approximately $340 million in antitrust damages from BD and the Fifth Circuit affirmed a finding of false advertising liability against BD, we were ultimately awarded a take nothing judgment in August 2017 and the case was dismissed.  We appealed that ruling and oral arguments occurred October 3, 2018. On March 26, 2019, the U.S. Court of Appeals for the Fifth Circuit issued an opinion affirming the take nothing judgment. We are evaluating this ruling and conferring with legal counsel regarding possible future action.

 

Our litigation expenses were significantly less in 2017 and 2018 than previous years.  2017 costs related to additional compensation, bonuses to Ms. Larios and Mr. Cowan, and stock option expense related to options granted in 2016 affect comparability of 2018 results to 2017 results.

 

In November 2018, we terminated 19 employees earning total annual compensation of approximately $1.12 million.  Some of these positions may be filled in the future.  Severance costs associated with the 2018 terminations were $244 thousand.

 

In January 2018, Congress imposed another two-year moratorium on the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191.  Thus, the medical device excise tax is not expected to go into effect until January 1, 2020.

 

In 2016, we granted a right to three of our executive officers to purchase shares directly from the Company.  Thomas J. Shaw was the only officer to exercise such right prior to expiration, buying a total of three million shares in two transactions in 2017 for an aggregate purchase price of $2.35 million.

 

We received approximately $1 million from our insurance carrier in the second quarter of 2017 and used these funds to repair our buildings from earlier storm damage.  The remaining proceeds of $261 thousand were recognized as Insurance proceeds in the fourth quarter of 2018.

 

Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost.  In 2018, our Chinese manufacturers

 

11

Table of Contents

 

produced approximately 85.3% of our products.  In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes.

 

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

 

With increased volumes, our manufacturing unit costs have generally tended to decline.  Factors that could affect our unit costs include increases in costs by third party manufacturers, changing production volumes, costs of petroleum products, and transportation costs.  Increases in such costs may not be recoverable through price increases of our products.

 

RESULTS OF OPERATIONS

 

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties.  Our actual future results could differ materially from our historical results of operations and those discussed in the forward-looking statements.  All period references are to our fiscal years ended December 2018, 2017, or 2016.  Dollar amounts have been rounded for ease of reading.

 

Comparison of Year Ended

December 31, 2018 and Year Ended December 31, 2017

 

Domestic sales accounted for 86.1% and 78.3% of the revenues in 2018 and 2017, respectively.  Domestic revenues increased 6.0% principally due to increased volume mitigated by lower average price.  Domestic unit sales increased 12.0%.  Domestic unit sales were 81.0% of total unit sales for 2018.  International revenues decreased from $7.5 million in 2017 to $4.6 million in 2018, primarily due to lower volumes.  Overall unit sales decreased 3.8%.  Our international orders may be subject to significant fluctuation over time.  Such orders may fluctuate due to health initiatives at various times as well as economic conditions.

 

Cost of manufactured product decreased $1.5 million principally due to lower volumes and lower unit cost of manufacture.  Royalty expense increased $80 thousand due to increased gross sales.  Gross profit margins increased from 28.9% in 2017 to 30.7% in 2018 principally due to lower cost of manufacturing.

 

Operating expenses decreased 14.2% from the prior year due to lower legal expense, no bonuses paid in 2018, lower travel and entertainment cost, decreased costs of engineering samples, and no stock option expense in 2018.  These decreases were mitigated by severance costs.

 

Recognition of Insurance proceeds of $261 thousand is due to actual building repairs being less than the insurance payment.

 

The loss from operations was $1.3 million in 2018 compared to a loss from operations of $3.8 million in 2017.

 

We recorded $188 thousand in tax benefits in connection with the enactment of the Tax Cut and Jobs Act (the “Act”) on December 22, 2017.  The Act established new tax provisions that affect us including the elimination of the corporate alternative minimum tax and changing rules related to uses and limitations of net operating loss carry forwards created after December 31, 2017.  Carry forward credits from alternative minimum taxes paid in prior years became refundable in tax years beginning January 1, 2018.  Such credits were, however, subject to sequestration.  However, in January 2019, the IRS had a ruling that provided that Alternative Minimum Tax payments are not subject to sequestration, bringing the total benefit to $202 thousand, an increase of $13 thousand from last year.

 

12

Table of Contents

 

Cash flow from operations was negative $1.2 million in 2018 due to our Net loss, increased inventory, and use of Insurance proceeds for repairs.  The decrease in cash was mitigated by a decrease in accounts receivable and an increase in liabilities.

 

In 2018, we transferred $3 million from our cash accounts into securities with maturities of one to three years.  This transfer significantly affects our net decrease in cash in 2018.  However, the securities may increase investment income in the future.

 

Comparison of Year Ended

December 31, 2017 and Year Ended December 31, 2016

 

Domestic sales accounted for 78.3% and 88.2% of the revenues in 2017 and 2016, respectively.  Domestic revenues increased 2.7% principally due to increased sales of EasyPoint® and the blood collection set.  Domestic unit sales increased 7.1%.  Domestic unit sales were 69.5% of total unit sales for 2017.  International revenues increased from $3.5 million in 2016 to $7.5 million in 2017, primarily due to increased volumes mitigated by lower average prices.  Overall unit sales increased 28.3%.  Our international orders may be subject to significant fluctuation over time.  Such orders may fluctuate due to health initiatives at various times as well as economic conditions.

 

Cost of manufactured product increased $4.7 million principally due to higher volumes.  Royalty expense increased $337 thousand due to increased gross sales.  Gross profit margins decreased from 34.7% in 2016 to 28.9% in 2017 principally due to a larger portion of international sales which bear a lower average sales price.

 

Operating expenses decreased 0.7% from the prior year due to decreased legal expenses and no impairment costs incurred in 2017, offset by increased staffing in Sales and marketing, stock option expense, and bonuses paid in 2017.

 

The loss from operations was $3.8 million in 2017 compared to $3.5 million in 2016.

 

We recorded $188 thousand in tax benefits in connection with the enactment of the Tax Cut and Jobs Act (the “Act”) on December 22, 2017.  The Act established new tax provisions that affect us including the elimination of the corporate alternative minimum tax and changing rules related to uses and limitations of net operating loss carry forwards created after December 31, 2017.  Carry forward credits from alternative minimum taxes paid in prior years became refundable in tax years beginning January 1, 2018.

 

Cash flow from operations was a negative $2.9 million for 2017 due to our Net loss, increased accounts receivable and other current assets, mitigated by noncash expenses of depreciation and stock option expense, lower inventory levels, increased liabilities, and insurance proceeds.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At the present time, Management does not intend to publicly raise equity capital.  Due to the funds received from prior litigation and direct purchase of stock, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing, when available, as the primary ongoing sources of cash. Our ability to obtain additional funds through loans is uncertain.

 

In 2018, we transferred $3 million from our cash accounts into securities with maturities of one to three years.  This transfer significantly affects our net decrease in cash in 2018.  However, the securities may increase investment income in the future.

 

Historical Sources of Liquidity

 

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

 

13

Table of Contents

 

Internal Sources of Liquidity

 

Margins and Market Access

 

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

 

We continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.

 

Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable manufacturing arrangements and relationships could result in the need to manufacture all (as opposed to 14.4%) of our products in the U.S. or find other manufacturers.  This could temporarily increase unit costs as we ramp up domestic production.

 

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

 

Cash Requirements

 

Due to funds received from prior litigation, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing, when available, as the primary ongoing sources of cash.  We have taken steps to decrease our legal costs and we continue to evaluate these costs.  We also decreased our workforce, as discussed in the Overview of this Item 7.  In the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, further reduce the workforce, reduce the salaries of officers and other employees, and/or defer royalty payments.

 

External Sources of Liquidity

 

We have obtained several loans since 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.  Our ability to obtain additional funds through loans is uncertain.  Due to the current market price of our Common Stock, it is unlikely we would choose to raise funds by the public sale of equity.  We granted a right to three of our executive officers to engage in private purchases of stock at market prices.  Thomas J. Shaw was the only officer to exercise such right prior to expiration, buying a total of three million shares in two transactions in 2017 for an aggregate purchase price of $2.35 million.

 

Capital Resources

 

In 2017, we received approximately $1 million to make necessary repairs to our buildings from storm damage.  Such repairs were completed in 2018.  The remaining insurance proceeds of $261 thousand were recognized in the fourth quarter of 2018.  There were no material commitments for capital projects as of December 31, 2018.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

None.

 

14

Table of Contents

 

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 and operating leases as of December 31, 2018:

 

		Payments Due by Period
		Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
Contractual Obligations
Long-term debt		$	3,046,008		$	406,361		$	522,166		$	587,041		$	1,530,440
Operating leases		165,849			81,694			84,155			—			—
Total		$	3,211,857		$	488,055		$	606,321		$	587,041		$	1,530,440

 

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

 

Not applicable.

 

15

Table of Contents

 

Item 8. Financial Statements and Supplementary Data.

 

RETRACTABLE TECHNOLOGIES, INC.

 

FINANCIAL STATEMENTS AND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

DECEMBER 31, 2018 AND 2017

 

F-1

Table of Contents

 

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, 2018 and 2017	F-4
Statements of Operations for the years ended December 31, 2018, 2017, and 2016	F-5
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016	F-6
Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016	F-8
Notes to Financial Statements	F-9
Selected Quarterly Financial Data - Unaudited	F-27
Financial Statement Schedule:
Schedule II: Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017, and 2016	17

 

F-2

Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of

Retractable Technologies, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Retractable Technologies, Inc. (the “Company”) as of December 31, 2018 and 2017, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by Management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Moss Adams LLP

 

Dallas, TX

March 28, 2019

 

We have served as the Company’s auditor since 2016.

 

F-3

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

BALANCE SHEETS

 

		December 31,
		2018			2017
ASSETS
Current assets:
Cash and cash equivalents		$	9,647,292		$	14,877,899
Accounts receivable, net of allowance for doubtful accounts of $149,665 and $101,872, respectively		4,912,356			5,105,556
Held-to-maturity securities, at amortized cost		996,233			—
Inventories, net		7,545,094			6,206,161
Income taxes receivable		100,887			—
Other current assets		644,803			418,154
Total current assets		23,846,665			26,607,770
Property, plant, and equipment, net		10,851,747			11,353,202
Held-to-maturity securities, at amortized cost (non-current)		1,989,923			—
Income taxes receivable		100,835			188,456
Other assets		2,849			6,052
Total assets		$	36,792,019		$	38,155,480
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,369,677		$	4,957,750
Current portion of long-term debt		406,361			410,949
Accrued compensation		540,852			547,021
Dividends payable		55,113			55,113
Accrued royalties to shareholder		769,324			793,489
Insurance proceeds		—			466,293
Other accrued liabilities		1,387,287			657,923
Income taxes payable		10,025			11,407
Total current liabilities		8,538,639			7,899,945
Long-term debt, net of current maturities		2,639,647			3,081,409
Total liabilities		11,178,286			10,981,354
Commitments and contingencies — See Note 9
Stockholders’ equity:
Preferred Stock, $1 par value:
Class B; authorized: 5,000,000 shares
Series I, Class B; outstanding: 98,500 shares (liquidation preference of $615,625)		98,500			98,500
Series II, Class B; outstanding: 171,200 shares (liquidation preference of $2,140,000)		171,200			171,200
Series III, Class B; outstanding: 129,245 shares (liquidation preference of $1,615,563)		129,245			129,245
Series IV, Class B; outstanding: 342,500 shares (liquidation preference of $3,767,500)		342,500			342,500
Series V, Class B; outstanding: 40,000 (liquidation preference of $176,000)		40,000			40,000
Common Stock, no par value; authorized: 100,000,000 shares; outstanding: 32,666,454		—			—
Additional paid-in capital		61,871,756			62,092,206
Accumulated deficit		(37,039,468		)	(35,699,525		)
Total stockholders’ equity		25,613,733			27,174,126
Total liabilities and stockholders’ equity		$	36,792,019		$	38,155,480

 

See accompanying notes to financial statements

 

F-4

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

 

		Years Ended December 31,
		2018			2017			2016
Sales, net		$	33,274,702		$	34,493,838		$	29,826,636
Cost of Sales
Costs of manufactured product		20,108,798			21,658,062			16,957,073
Royalty expense to shareholder		2,944,102			2,864,188			2,527,508
Total cost of sales		23,052,900			24,522,250			19,484,581
Gross profit		10,221,802			9,971,588			10,342,055
Operating expenses:
Sales and marketing		4,404,441			4,658,548			4,025,786
Research and development		621,365			740,567			571,842
General and administrative		6,776,705			8,351,053			8,795,310
Impairment of assets		—			—			456,119
Total operating expenses		11,802,511			13,750,168			13,849,057
Income from insurance proceeds		260,514			—			—
Loss from operations		(1,320,195		)	(3,778,580		)	(3,507,002		)
Interest and other income		144,124			65,695			26,522
Interest expense		(177,190		)	(210,761		)	(213,295		)
Loss before income taxes		(1,353,261		)	(3,923,646		)	(3,693,775		)
Provision (benefit) for income taxes		(13,318		)	(187,608		)	1,132
Net loss		(1,339,943		)	(3,736,038		)	(3,694,907		)
Preferred Stock dividend requirements		(704,996		)	(704,996		)	(704,996		)
Loss applicable to common shareholders		$	(2,044,939	)	$	(4,441,034	)	$	(4,399,903	)
Basic loss per share		$	(0.06	)	$	(0.14	)	$	(0.15	)
Diluted loss per share		$	(0.06	)	$	(0.14	)	$	(0.15	)
Weighted average common shares outstanding:
Basic		32,666,454			31,958,121			29,354,437
Diluted		32,666,454			31,958,121			29,354,437

 

See accompanying notes to financial statements

 

F-5

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

		Series I Class B					Series II Class B					Series III Class B					Series IV Class B					Series V Class B					Common
		Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Balance as of December 31, 2015		98,500		$	98,500		171,200		$	171,200		129,245		$	129,245		342,500		$	342,500		40,000		$	40,000		28,619,874		$	—
Stock options exercised		—		—			—		—			—		—			—		—			—		—			1,046,580		—
Dividends		—		—			—		—			—		—			—		—			—		—			—		—
Stock option compensation		—		—			—		—			—		—			—		—			—		—			—		—
Net loss		—		—			—		—			—		—			—		—			—		—			—		—
Balance as of December 31, 2016		98,500		98,500			171,200		171,200			129,245		129,245			342,500		342,500			40,000		40,000			29,666,454		—
Issuance of new Common Stock		—		—			—		—			—		—			—		—			—		—			3,000,000		—
Dividends		—		—			—		—			—		—			—		—			—		—			—		—
Stock option compensation		—		—			—		—			—		—			—		—			—		—			—		—
Net loss		—		—			—		—			—		—			—		—			—		—			—		—
Balance as of December 31, 2017		98,500		98,500			171,200		171,200			129,245		129,245			342,500		342,500			40,000		40,000			32,666,454		—
Dividends		—		—			—		—			—		—			—		—			—		—			—		—
Net loss		—		—			—		—			—		—			—		—			—		—			—		—
Balance as of December 31, 2018		98,500		$	98,500		171,200		$	171,200		129,245		$	129,245		342,500		$	342,500		40,000		$	40,000		32,666,454		$	—

 

See accompanying notes to financial statements

 

F-6