RETRACTABLE TECHNOLOGIES INC - Quarter Report: 2018 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2018

 

or

 

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

 

For the transition period from                   to                  

 

Commission file number:  001-16465

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

(972) 294-1010

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No o

 

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

 

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 32,666,454 shares of Common Stock, no par value, outstanding on November 1, 2018.

 

 

Table of Contents

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2018

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
CONDENSED BALANCE SHEETS		1
CONDENSED STATEMENTS OF OPERATIONS		2
CONDENSED STATEMENTS OF CASH FLOWS		3
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY		4
NOTES TO CONDENSED FINANCIAL STATEMENTS		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
SIGNATURES		23

 

Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1.       Financial Statements.

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

 

		September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	13,640,696		$	14,877,899
Accounts receivable, net		4,475,695			5,105,556
Inventories, net		7,385,413			6,206,161
Other current assets		404,530			418,154
Total current assets		25,906,334			26,607,770
Property, plant, and equipment, net		10,976,350			11,353,202
Income taxes receivable		188,456			188,456
Other assets		3,477			6,052
Total assets	$	37,074,617		$	38,155,480
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,908,336		$	4,957,750
Current portion of long-term debt		424,421			410,949
Accrued compensation		670,498			547,021
Dividends payable		55,113			55,113
Accrued royalties to shareholder		1,102,583			793,489
Insurance proceeds		312,424			466,293
Other accrued liabilities		1,046,480			657,923
Income taxes payable		10,234			11,407
Total current liabilities		8,530,089			7,899,945
Long-term debt, net of current maturities		2,726,146			3,081,409
Total liabilities		11,256,235			10,981,354
Commitments and contingencies — see Note 6
Stockholders’ equity:
Preferred stock, $1 par value:
Series I, Class B		98,500			98,500
Series II, Class B		171,200			171,200
Series III, Class B		129,245			129,245
Series IV, Class B		342,500			342,500
Series V, Class B		40,000			40,000
Common stock, no par value		—			—
Additional paid-in capital		61,926,869			62,092,206
Accumulated deficit		(36,889,932	)		(35,699,525	)
Total stockholders’ equity		25,818,382			27,174,126
Total liabilities and stockholders’ equity	$	37,074,617		$	38,155,480

 

See accompanying notes to condensed unaudited financial statements

 

1

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended September 30, 2018			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
Sales, net	$	9,863,272		$	10,412,036		$	25,011,066		$	24,981,833
Cost of sales
Cost of manufactured product		6,203,842			6,304,397			15,112,538			15,116,805
Royalty expense to shareholder		863,295			847,301			2,174,778			2,070,699
Total cost of sales		7,067,137			7,151,698			17,287,316			17,187,504
Gross profit		2,796,135			3,260,338			7,723,750			7,794,329
Operating expenses:
Sales and marketing		1,033,295			1,220,451			3,251,231			3,472,004
Research and development		146,487			159,921			432,179			465,765
General and administrative		1,676,579			1,912,824			5,196,224			6,346,731
Total operating expenses		2,856,361			3,293,196			8,879,634			10,284,500
Loss from operations		(60,226	)		(32,858	)		(1,155,884	)		(2,490,171	)
Interest and other income		39,290			19,477			102,133			44,155
Interest expense		(42,481	)		(52,962	)		(136,446	)		(159,053	)
Loss before income taxes		(63,417	)		(66,343	)		(1,190,197	)		(2,605,069	)
Provision for income taxes		—			283			210			848
Net loss		(63,417	)		(66,626	)		(1,190,407	)		(2,605,917	)
Preferred stock dividend requirements		(176,249	)		(176,249	)		(528,747	)		(528,747	)
Loss applicable to common shareholders	$	(239,666	)	$	(242,875	)	$	(1,719,154	)	$	(3,134,664	)
Basic loss per share	$	(0.01	)	$	(0.01	)	$	(0.05	)	$	(0.10	)
Diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.05	)	$	(0.10	)
Weighted average common shares outstanding:
Basic		32,666,454			32,166,454			32,666,454			31,722,010
Diluted		32,666,454			32,166,454			32,666,454			31,722,010

 

See accompanying notes to condensed unaudited financial statements

 

2

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
Cash flows from operating activities
Net loss	$	(1,190,407	)	$	(2,605,917	)
Adjustments to reconcile loss to net cash used by operating activities:
Provision for doubtful accounts		—			(81,152	)
Share-based compensation		—			652,862
Depreciation and amortization		669,584			603,580
(Increase) decrease in operating assets:
Accounts receivable		629,861			(1,897,332	)
Inventories		(1,179,252	)		(336,023	)
Other current assets		13,624			(313,108	)
Increase (decrease) in operating liabilities:
Accounts payable		(49,414	)		574,258
Other accrued liabilities		821,128			507,768
Insurance proceeds		(153,869	)		876,250
Income taxes payable		(1,173	)		—
Net cash used by operating activities		(439,918	)		(2,018,814	)
Cash flows from investing activities
Purchase of property, plant, and equipment		(290,153	)		(172,305	)
Net cash used by investing activities		(290,153	)		(172,305	)
Cash flows from financing activities
Repayments of long-term debt		(341,795	)		(326,227	)
Proceeds from the sale of common stock		—			2,350,100
Payment of Preferred Stock dividends		(165,337	)		(165,339	)
Net cash provided (used) by financing activities		(507,132	)		1,858,534
Net decrease in cash and cash equivalents		(1,237,203	)		(332,585	)
Cash and cash equivalents at:
Beginning of period		14,877,899			16,199,043
End of period	$	13,640,696		$	15,866,458
Supplemental schedule of cash flow information:
Interest paid	$	136,445		$	159,053
Income taxes paid	$	1,050		$	2,000
Supplemental schedule of noncash investing and financing activities:
Preferred dividends declared, not paid	$	55,113		$	55,113

 

See accompanying notes to condensed unaudited financial statements

 

3

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

The following shows the changes in stockholders’ equity for the three month period ended September 30, 2018:

 

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at June 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,981,981	$	(36,826,515	)	$	25,936,911
Dividends		—		—		—		—		—		—		(55,112	)	—			(55,112	)
Net Loss		—		—		—		—		—		—		—		(63,417	)		(63,417	)
Balance at September 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,926,869	$	(36,889,932	)	$	25,818,382

 

The following shows the changes in stockholders’ equity for the three month period ended September 30, 2017:

 

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at June 30, 2017	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,430,417	$	(34,502,778	)	$	27,709,084
Issuance of New Common Stock		—		—		—		—		—		—		570,100		—			570,100
Dividends		—		—		—		—		—		—		(55,112	)	—			(55,112	)
Share-based Compensation		—		—		—		—		—		—		182,551		—			182,551
Net Loss		—		—		—		—		—		—		—		(66,626	)		(66,626	)
Balance at September 30, 2017	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	62,127,956	$	(34,569,404	)	$	28,339,997

 

The following shows the changes in stockholders’ equity for the nine month period ended September 30, 2018:

 

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at December 31, 2017	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	62,092,206	$	(35,699,525	)	$	27,174,126
Dividends		—		—		—		—		—		—		(165,337	)	—			(165,337	)
Net Loss		—		—		—		—		—		—		—		(1,190,407	)		(1,190,407	)
Balance at September 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,926,869	$	(36,889,932	)	$	25,818,382

 

See accompanying notes to condensed unaudited financial statements

 

4

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

The following shows the changes in stockholders’ equity for the nine month period ended September 30, 2017:

 

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at December 31, 2016	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	59,290,333	$	(31,963,487	)	$	28,108,291
Issuance of New Common Stock		—		—		—		—		—		—		2,350,100		—			2,350,100
Dividends		—		—		—		—		—		—		(165,339	)	—			(165,339	)
Share-based Compensation		—		—		—		—		—		—		652,862		—			652,862
Net Loss		—		—		—		—		—		—		—		(2,605,917	)		(2,605,917	)
Balance at September 30, 2017	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	62,127,956	$	(34,569,404	)	$	28,339,997

 

See accompanying notes to condensed unaudited financial statements

 

5

Table of Contents

 

RETRACTABLE TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

1.                    BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION

 

Business of the Company

 

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

 

Basis of presentation

 

The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented.  All such adjustments are of a normal and recurring nature.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year.  The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on April 2, 2018 for the year ended December 31, 2017.

 

2.                    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

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

 

Accounts receivable

 

The Company records trade receivables when revenue is recognized.  No product has been consigned to customers.  The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful of collection are included in the allowance.  This provision is reviewed to determine the adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when there is certainty as to their being uncollectible.  Trade receivables are considered delinquent when payment has not been made within contract terms.  The Allowance for bad debt was $102 thousand as of December 31, 2017 and also as of September 30, 2018.

 

The Company requires certain customers to make a prepayment prior to beginning production or shipment of their order.  Customers may apply such prepayments to their outstanding invoices or pay the invoice and continue to carry forward the deposit for future orders.  Such amounts are included in Other accrued liabilities on the Condensed Balance Sheets and are shown in Note 5, Other Accrued Liabilities.  The Company records an allowance for estimated returns as a reduction to Accounts receivable and Gross sales.  Historically, returns have been immaterial.

 

6

Table of Contents

 

Inventories

 

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

 

Property, plant, and equipment

 

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

 

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

 

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

 

Long-lived assets

 

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

 

Financial instruments

 

The Company estimates the fair value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information.  Judgment is required in interpreting data to develop estimates of fair value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange.  Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management’s estimates, equals their recorded values.  The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values.

 

Concentration risks

 

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable.  Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality.  The majority of accounts receivable are due from companies which are well-established entities. 

 

7

Table of Contents

 

As a consequence, Management considers any exposure from concentrations of credit risks to be limited. The following table reflects our significant customers for the three and nine months ended September 30, 2018 and 2017:

 

		Three Months ended September 30, 2018		Three Months ended September 30, 2017		Nine Months ended September 30, 2018		Nine Months ended September 30, 2017
Number of significant customers		3		3		2		2
Aggregate dollar amount of net sales to significant customers		$5.4 million		$5.1 million		$10.0 million		$9.4 million
Percentage of net sales to significant customers		55.2%		49.1%		39.9%		37.5%

 

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China.  The Company obtained roughly 85.1% and 81.7% of its products in the first nine months of 2018 and 2017, respectively, from its Chinese manufacturers.  Purchases from Chinese manufacturers aggregated 79.9% and 80.1% of products in the three month periods ended September 30, 2018 and 2017, respectively.  In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

 

Revenue recognition

 

Revenue is recognized for sales when title and risk of ownership passes to the customer, generally upon shipment.  When title and risk of ownership have passed to the customer, the Company has satisfied all performance obligations to the customer.  Payments from customers with approved credit terms are typically due 30 days from the invoice date.  Under certain contracts, revenue is recorded on the basis of sales price to distributors, less contractual pricing allowances.  Contractual pricing allowances consist of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the facility that purchased the products, and (ii) a provision for estimated contractual pricing allowances for products for which the Company has not received tracking reports.  Rebates are recorded when issued and are applied against the customer’s receivable balance.  Distributors receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the distributor.  One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report.  Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted.  The estimated contractual allowance is included in Accounts payable in the Condensed Balance Sheets and deducted from Revenues in the Condensed Statements of Operations.  Accounts payable included estimated contractual allowances for $3,443,368 and $4,115,628 as of September 30, 2018 and December 31, 2017, respectively.  The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors.  Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company.  End-users do not receive any contractual allowances on their purchases.  Any product shipped or distributed for evaluation purposes is expensed.

 

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

 

8

Table of Contents

 

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

 

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

 

Disaggregated information of revenue recognized from contracts with customers is as follows:

 

		For the three months ended September 30, 2018:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	6,454,432	$	466,392	$	1,803,904	$	22,968	$	8,747,696
North and South America sales (excluding U.S.)		803,414		240		—		—		803,654
Other international sales		290,760		12,490		—		8,672		311,922
Total	$	7,548,606	$	479,122	$	1,803,904	$	31,640	$	9,863,272

 

		For the three months ended September 30, 2017:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	7,019,389	$	309,012	$	1,016,226	$	14,220	$	8,358,847
North and South America sales (excluding U.S.)		1,896,492		1,700		—		2,700		1,900,892
Other international sales		117,447		30,800		—		4,050		152,297
Total	$	9,033,328	$	341,512	$	1,016,226	$	20,970	$	10,412,036

 

		For the nine months ended September 30, 2018:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	18,097,760	$	991,318	$	2,519,973	$	55,988	$	21,665,039
North and South America sales (excluding U.S.)		2,595,634		8,805		252		900		2,605,591
Other international sales		682,134		36,024		456		21,825		740,436
Total	$	21,375,528	$	1,036,147	$	2,520,681	$	78,713	$	25,011,066

 

		For the nine months ended September 30, 2017:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	18,260,242	$	821,869	$	1,232,979	$	46,757	$	20,361,847
North and South America sales (excluding U.S.)		3,531,574		2,944		—		193,934		3,728,452
Other international sales		829,680		42,954		—		18,900		891,534
Total	$	22,621,496	$	867,767	$	1,232,979	$	259,591	$	24,981,833

 

9

Table of Contents

 

Income taxes

 

The Tax Cuts and Job Act (“the Act”) was enacted on December 22, 2017, and the U.S. federal corporate tax rate was reduced from 35% to 21%.  U.S. generally accepted accounting principles require companies to account for the effects of changes in income tax rates and laws in the period the change is enacted. Financial results, including provisional amounts, have been calculated for the income tax effects of the change. The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) allowing companies to use provisional estimates to record the effects of the Act.  SAB 118, as codified by Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update),” allows companies to complete accounting for these effects no later than one year from the enactment date of the Act.  During the quarter ended September 30, 2018, the Company completed its analysis of the provisional estimates made to record the effects of the Act.  There were no adjustments made to previously recorded amounts.

 

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

 

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

 

Earnings per share

 

The Company computes basic earnings per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period.  Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock.  The calculation of diluted EPS excluded 93,125 shares of Common Stock underlying issued and outstanding stock options for the three months ended September 30, 2017 as their effect was antidilutive.  The calculation of diluted EPS excluded 6,126 and 128,540 shares of Common Stock underlying issued and outstanding stock options for the nine months ended September 30, 2018 and September 30, 2017, respectively, as their effect was antidilutive.  The potential dilution, if any, is shown on the following schedule:

 

		Three Months Ended September 30, 2018			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
Net loss	$	(63,417	)	$	(66,626	)	$	(1,190,407	)	$	(2,605,917	)
Preferred dividend requirements		(176,249	)		(176,249	)		(528,747	)		(528,747	)
Loss applicable to common shareholders after assumed conversions	$	(239,666	)	$	(242,875	)	$	(1,719,154	)	$	(3,134,664	)
Average common shares outstanding		32,666,454			32,166,454			32,666,454			31,722,010
Average common and common equivalent shares outstanding – assuming dilution		32,666,454			32,166,454			32,666,454			31,722,010
Basic loss per share	$	(0.01	)	$	(0.01	)	$	(0.05	)	$	(0.10	)
Diluted loss per share	$	(0.01	)	$	(0.01	)	$	(0.05	)	$	(0.10	)

 

10

Table of Contents

 

Shipping and handling costs

 

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

 

Research and development costs

 

Research and development costs are expensed as incurred.

 

Share-based compensation

 

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

 

		Three Months Ended September 30, 2018		Three Months Ended September 30, 2017		Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
Cost of sales	$	—	$	74,683	$	—	$	270,800
Sales and marketing		—		38,578		—		143,255
Research and development		—		12,458		—		45,174
General and administrative		—		56,832		—		193,633
	$	—	$	182,551	$	—	$	652,862

 

Insurance Proceeds

 

Receipts from insurance up to the amount of any loss recognized by the Company are considered recoveries.  Any such recoveries are recorded when they are received.  Insurance recoveries are not recognized as a component of earnings (loss) from operations until all repairs are made.

 

Recently Adopted Pronouncements

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”.  These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The updated guidance was effective for the Company’s quarter ended March 31, 2018.  The adoption of ASU 2016-18 did not have a material effect on the Company’s financial statements as the Company currently holds no restricted cash or restricted cash equivalents.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Payments” (ASU 2016-15), clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows.  This ASU was effective for the Company’s quarter ended March 31, 2018.  The adoption of ASU 2016-15 did not have a material impact on the Company’s financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, as well as several subsequently issued clarifying amendments, which provides guidance for revenue recognition.  This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services.  The ASU, as amended, also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a

 

11

Table of Contents

 

contract.  ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption.  The ASU, as amended, was effective commencing with the Company’s quarter ended March 31, 2018.  The Company adopted this amended guidance on a Modified Retrospective basis in the first quarter of 2018.  The adoption of the ASU, as amended, had no impact on the opening balance of retained earnings.  The Company applied the guidance of ASU No. 2014-09, as amended, to those contracts that were not completed as of January 1, 2018.  In implementing the guidance of ASU 2014-09, as amended, the Company applied the practical expedients of FASB ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.”  Under ASU 2016-12, the Company applies the guidance of ASU 2014-09, as amended, to a portfolio of contracts with similar characteristics, as opposed to individual contracts, as applying the guidance to the portfolio does not materially differ from applying the guidance to individual contracts.  In addition, the Company accounts for shipping and handling as activities to fulfill the promise to transfer goods to a customer as opposed to a performance obligation.  Historically, freight and handling activities billed to customers have not been material.

 

In August 2018, the Securities and Exchange Commission (SEC) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, “Disclosure Update and Simplification”. The amendments were effective November 5, 2018.   The amendments eliminate or revise several redundant or duplicative requirements between SEC rules and GAAP, including the elimination of the disclosure of the ratio of earnings to fixed charges and the presentation of dividends per share on the face of the statement of operations for interim periods.  Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC staff has indicated that it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.  The Company has elected to adopt the provisions of Securities Act Release No. 33-10532 for the quarter ended September 30, 2018 and has presented condensed statements of changes in stockholders’ equity for the periods ended September 30, 2018 and 2017 in this quarterly report on Form 10-Q.

 

Recently Issued Pronouncements

 

In June 2016, the FASB issued Accounting Standards Update 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.  Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  This ASU is effective for the Company’s quarter ending March 31, 2020 with early application permitted for the Company’s quarter ending March 31, 2019.  The Company is currently assessing the impact that adoption of this guidance will have on its financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, as well as several subsequently issued clarifying amendments. Under the ASU, as amended, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged. The lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. This amendment clarifies Topic 842 and corrected unintended application of guidance and is effective concurrent with Topic 842 or upon issuance if Topic 842 was early adopted.  In August 2018, the FASB issued ASU 2018-11, “Leases (Topic 842):  Targeted Improvements”. This amendment provides additional transition options allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented and provides a practical expedient to lessors to elect, by class of underlying assets, to account for non-lease and lease

 

12

Table of Contents

 

components as a single arrangement.  The Company intends to adopt the provisions of ASU 2018-11 through a cumulative effect adjustment.  Topic 842, and its subsequent amendments, is effective for the Company’s quarter ending March 31, 2019, with early adoption permitted. The Company is currently evaluating the various accounting policy elections associated with this ASU, as amended, including transition methods and practical expedients, identifying contracts for evaluation, and reviewing contracts to determine if they contain leases.  While the Company is currently evaluating the timing and impact of adopting ASU 2016-02, as amended, the Company anticipates recording lease assets and liabilities less than $250,000 on its Condensed Balance Sheets, with no material impact to its Condensed Statements of Operations or to its accumulated deficit. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date. The Company expects to complete these procedures before the end of the year and determine any transition adjustments.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)”.  This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should be accounted for in accordance with ASC 350-40.  Accordingly, costs incurred during the preliminary project and post-implementation stages are expensed and costs associated with the application development phase are capitalized.  The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.  The amendment is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods.  The Company is currently assessing the impact that adoption of this ASU will have on its financial statements and related disclosures.

 

3.                    INVENTORIES

 

Inventories consist of the following:

 

		September 30, 2018		December 31, 2017
Raw materials	$	1,467,431	$	1,511,339
Finished goods		6,512,470		5,289,761
		7,979,901		6,801,100
Inventory reserve		(594,488	)	(594,939	)
	$	7,385,413	$	6,206,161

 

4.                    INCOME TAXES

 

The Company’s effective tax rate on the net earnings (loss) before income taxes was 0.0% for the nine months ended September 30, 2018 and September 30, 2017.  For the three months ended September 30, 2018 and September 30, 2017, the Company’s effective tax rate on the net earnings (loss) before income taxes was 0.0% and (0.4)%, respectively.

 

5.                    OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consist of the following:

 

		September 30, 2018		December 31, 2017
Prepayments from customers	$	440,528	$	355,742
Accrued property taxes		331,284		14,681
Accrued professional fees		233,153		231,826
Other accrued expenses		41,515		55,674
Total	$	1,046,480	$	657,923

 

13

Table of Contents

 

6.                    COMMITMENTS AND CONTINGENCIES

 

In May 2010, the Company and an officer’s suit against Becton, Dickinson and Company (“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 the Company $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 the Company is entitled.  On August 17, 2017, District Court for the Eastern District of Texas issued the Court’s Final Judgment ordering that the Company take nothing in its suit against BD and dismissing the case.  The Company filed a notice of Appeal with the United States Court of Appeals for the Fifth Circuit on November 3, 2017.  Briefing for the appeal was completed by the parties on May 2, 2018 and oral argument occurred on October 3, 2018.

 

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

 

7.                    BUSINESS SEGMENT

 

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

 

		Three Months Ended September 30, 2018		Three Months Ended September 30, 2017		Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
U.S. sales	$	8,747,696	$	8,358,847	$	21,665,039	$	20,361,847
North and South America sales (excluding U.S.)		803,654		1,900,892		2,605,591		3,728,452
Other international sales		311,922		152,297		740,436		891,534
Total sales	$	9,863,272	$	10,412,036	$	25,011,066	$	24,981,833

 

Long-lived assets by geography are as follows:

 

		September 30, 2018		December 31, 2017
Long-lived assets
U.S.	$	10,856,824	$	11,215,583
International		119,526		137,619
Total	$	10,976,350	$	11,353,202

 

14