RETRACTABLE TECHNOLOGIES INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

or

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)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   ¨ No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 33,816,604 shares of Common Stock, no par value, issued and outstanding on November 2, 2020.

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2020

TABLE OF CONTENTS 

PART I—FINANCIAL INFORMATION

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

See accompanying notes to condensed unaudited financial statements

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes to condensed unaudited financial statements

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to condensed unaudited financial statements

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, 2020:

The following shows the changes in stockholders’ equity for the three-month period ended September 30, 2019:

The following shows the changes in stockholders’ equity for the nine-month period ended September 30, 2020:

The following shows the changes in stockholders’ equity for the nine-month period ended September 30, 2019:

See accompanying notes to condensed unaudited financial statements

RETRACTABLE TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Business of the Company

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

Basis of presentation

The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 30, 2020 for the year ended December 31, 2019.

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 $271 thousand and $147 thousand as of September 30, 2020 and December 31, 2019, respectively.

The Company requires certain customers to make a prepayment prior to beginning production or shipment of their order. Customers may apply such prepayments to their outstanding invoices or pay the invoice and

continue to carry forward the deposit for future orders. Such amounts are included in Other accrued liabilities on the Condensed Balance Sheets and are shown in Note 6, Other Accrued Liabilities.

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

Inventories

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

Investments in debt and equity securities

The Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, equity securities, and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. Net unrealized and realized gains or losses on investments in debt and equity securities are reflected as a component of Interest and other income. Realized gains or losses on investments in debt and equity securities are recognized using the specific identification method.

Property, plant, and equipment

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

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

Long-lived assets

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

Fair value measurements

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

liabilities in active markets. For all remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model.

Financial instruments

The Company estimates the fair value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information. Judgment is required in interpreting data to develop estimates of fair value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange. Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management's estimates, equals their recorded values. Investments in equity securities consist primarily of individual equity securities, exchange-traded and closed-end funds, and mutual funds and are reported at their fair value based upon quoted prices in active markets. Investments in U.S. Treasury Notes are reported at their fair value based upon quoted prices in active markets. Investments in certificates of deposit (CD) with original maturities of greater than three months are reported at their estimated fair value based upon the duration of the CD and the interest rate earned on the CD versus current interest rates of similar duration CDs. The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values.

Concentration risks

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, certificates of deposit, U.S. Treasury Notes, exchange-traded and closed-end funds, mutual funds, equity securities, and accounts receivable. Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality. The Company assesses market risk in debt and equity securities through consultation with its outside investment advisors. Management is responsible for directing investment activity based on current economic conditions. The majority of accounts receivable are due from companies which are well-established entities. In the third quarter of 2020, a significant portion of the Company’s sales were to the U.S. government, which Management does not consider a credit risk. As a consequence, Management considers any exposure from concentrations of credit risks to be limited.

The following table reflects significant customers for the three- and nine-month periods ending September 30, 2020 and 2019, respectively:

In the third quarter of 2020, approximately $12.9 million of the Company’s sales were to the Department of Health and Human Services of the United States in partial fulfillment of a recent $83.8 million delivery order to supply automated retraction safety syringes (the “HHS Order”). Management expects the U.S. government to remain a significant customer through the remainder of 2020, and sales under the HHS Order to increase quarterly through May 2021.

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China. The Company obtained roughly 82.2% and 82.1% of its products in the first nine months of 2020 and 2019, respectively, from its Chinese manufacturers. Purchases from Chinese manufacturers aggregated 80.5% and 84.2% of products in the three-month periods ended September 30, 2020 and 2019, 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. Regardless of vendor availability, the Company expects to increase its domestic syringe production capacity at its facilities pursuant to the plans outlined in the TIA as hereinafter defined.

Revenue recognition

The Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of loss pass to the customer. Payments from customers with approved credit terms are typically due 30 days from the invoice date. Under certain contracts, revenue is recorded on the basis of sales 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 recognized in the period the related sales are recognized and is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report. Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted. The estimated contractual allowance is included in Accounts payable in the Condensed Balance Sheets and deducted from Revenues in the Condensed Statements of Operations. Accounts payable included estimated contractual allowances for $3,714,002 and $3,586,726 as of September 30, 2020 and December 31, 2019, respectively. The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors. Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company. End-users do not receive any contractual allowances on their purchases. Any product shipped or distributed for evaluation purposes is expensed.

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

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

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

The Company requires certain customers to pay in advance of product shipment. Such prepayments from customers are recorded in Other accrued liabilities and are generally recognized as revenue within 30 to 60 days of shipment of the product.

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

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

Income taxes

The Company evaluates tax positions taken or expected to be taken in a tax return for recognition in the financial statements based on whether it is “more-likely-than-not” that a tax position will be sustained based

upon the technical merits of the position. Measurement of the tax position is based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The Company provides for deferred income taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects of differences between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in effect when such differences reverse in future periods. Deferred tax assets are periodically reviewed for realizability. In prior periods, the Company established a valuation allowance for its net deferred tax asset as future taxable income which could not be reasonably assured. During the quarter ended June 30, 2020, the Company released its valuation allowance based on available evidence supporting that its deferred tax assets will be realized in full.

Earnings per share

The Company computes basic earnings or loss per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock. The calculation of diluted EPS included 226,150 shares of Common Stock underlying issued and outstanding stock options for both the three and nine months ended September 30, 2020. Common Stock issuable upon the conversion of convertible preferred stock is excluded from the calculation of diluted EPS for the three months ended September 30, 2019 and for the nine months ended September 30, 2020 and 2019 as their effect was antidilutive for those periods. Common Stock issuable upon the conversion of convertible preferred stock is included in the calculation of diluted EPS for the three months ended September 30, 2020 as their effect was dilutive for the period. The potential dilution, if any, is shown on the following schedule:

The FASB Codification 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, requires the gain or loss on extinguishment of equity-classified preferred stock to be included in the net income per common stockholder used to calculate earnings per share (similar to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.

The Company has determined to apply this guidance to its accounting treatment of the preferred stock transactions described in Note 12.

Shipping and handling costs

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

Research and development costs

Research and development costs are expensed as incurred.

Leases

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

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

Technology Investment Agreement (TIA)

Effective July 1, 2020, the Company entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense, U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA) (“Government”) for $53,664,286 in Government funding for expanding the Company’s domestic production of needles and syringes. Pursuant to the terms of the TIA, the Company is expected to make significant additions to its facilities which should allow the Company to increase domestic production. As reimbursements are received from the Government for such expenditures, the Company records a deferred liability. The deferred liability will be systematically amortized as a gain over the life of the related property, plant, and equipment as to offset the related depreciation expense of the assets acquired. The amortization will be presented separately from the depreciation expense on the Condensed Statements of Operations.

Recently Adopted Pronouncements

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

The Company adopted ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)” on January 1, 2020.  This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should be accounted for in accordance with ASC 350-40 Internal-Use Software.  Accordingly, costs incurred during the preliminary project and post-implementation stages are expensed and costs associated with the application development phase are capitalized.  The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.  The adoption of this ASU did not have a significant impact on the Company’s financial statements or disclosures.

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

Recently Issued Pronouncements

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

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

Inventories consist of the following:

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:

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

The Company holds high-grade ETFs, mutual funds, individual equity stocks (predominately in the energy sector), and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. The Company intends to hold these assets for possible future operating requirements.

The following table summarizes gross unrealized gains and losses from Investments in debt and equity securities:

Unrealized gains (losses) on investments in debt and equity securities were $559,543 and $129,728 for the nine months ended September 30, 2020 and 2019, respectively.

The Company’s effective tax rate on the net income before income taxes was 15.63% and (1.2)% for the three and nine months ended September 30, 2020, respectively, and 0.4% and 0.6% for each of the three- and nine-month periods ended September 30, 2019. For the three and nine months ended September 30, 2020 and 2019, the Company's effective tax rate was determined based on the estimated annual effective income tax rate.

The effective tax rate for the three and nine months ended September 30, 2020 was different from the federal statutory rate due primarily to the income tax benefit recorded in connection with the release of the valuation allowance on deferred tax assets.

Other accrued liabilities consist of the following:

Other long-term liabilities consist of the following:

On November 7, 2019, the Company filed a lawsuit in the 44^th District Court of Dallas County, Texas (No. DC-19-17946) against Locke Lord, LLP and Roy Hardin in connection with their legal representation of the Company in its previous litigation against Becton, Dickinson and Company (“BD”). The Company alleges that the defendants breached their fiduciary duties, committed malpractice, and were negligent in their representation of the Company. The Company seeks actual and exemplary damages, disgorgement, costs, and interest. On October 6, 2020, the Court dismissed Defendants’ motion to dismiss, which order was appealed by the Defendants on October 9, 2020 to the Court of Appeals, Fifth District of Texas at Dallas.

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:

Long-lived assets by geography are as follows:

The Board declared and the Company paid dividends to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,313 and $42,800, respectively, on January 18, 2019 and April 22, 2019. The Board declared and the Company paid dividends to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,000 and $42,800, respectively, on July 19, 2019, October 21, 2019, January 22, 2020, April 20, 2020, and July 20, 2020. The Board declared and the Company paid dividends on October 22, 2020 to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,000 and $40,242.

In the third quarter of 2020, a shareholder converted 15,000 shares of Series II Class B Preferred Stock into the same number of shares of Common Stock.

The Company has operating leases for a corporate office and warehouse space.  The leases have a remaining lease term of less than one year.  The Company currently has no finance leases.  The right-of-use (“ROU”) asset is determined based on the lease liability adjusted for lease incentives received.  Lease expense is recognized on a straight-line basis over the lease term.  The leases may include various expenses incidental to the use of the property, such as common area maintenance, property taxes and insurance.  These costs are separate from the minimum rent payment and are not considered in the determination of the lease liability and ROU asset.  The Company has not noted any material instances in its leases where these costs were combined with the minimum rent payment and has therefore elected the policy to not separate lease from non-lease components if they are combined with the minimum rent payment.  The option periods are not included in the determination of the lease liability and right-of-use asset as the Company is not reasonably certain if it will extend at the time of lease commencement.

The operating lease cost component of the lease expense was $69,689 for the nine-month period ended September 30, 2020.  The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $69,689 for the nine months ended September 30, 2020.  The operating lease cost component of the lease expense was $60,175 for the nine months ended September 30, 2019. The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $60,175 for the nine months ended September 30, 2019.

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

The weighted average remaining lease term is 9.4 months and the weighted average discount rate is 3.82%.

Future minimum payments under non-cancelable operating leases and financing leases consist of the following at September 30, 2020:

Effective January 13, 2020, the Company purchased outstanding Class B Convertible Preferred Stock (the “Preferred Stock”) from preferred shareholders for cash and Common Stock. Such preferred stockholders tendered to the Company a total of 2,500 shares of Series III Preferred Stock and 5,000 shares of Series IV Preferred Stock. A total of $75,000 and 7,500 shares of Common Stock were issued as consideration therefor. In accordance with the terms of the agreements, the preferred stockholders agreed to waive all unpaid dividends in arrears associated with their Preferred Stock, which resulted in a waiver of a total of $149,795 in unpaid dividends in arrears.

Effective May 18, 2020, the Company purchased 2,500 shares of Series IV Preferred Stock from one shareholder for $25,000 and 2,500 shares of Common Stock. Such preferred stockholder agreed to waive all unpaid dividends in arrears associated with its Preferred Stock, which resulted in a waiver of a total of $50,370 in unpaid dividends in arrears.

On September 30, 2020, the Company purchased 300,000 shares of Series IV Preferred Stock from a shareholder for $3,000,000 in cash, with a net present value of $2,723,248, to be paid over a three-year period beginning February 2021 and 600,000 shares of Common Stock. Such preferred stockholder agreed to waive all unpaid dividends in arrears associated with its Preferred Stock, which resulted in a waiver of a total of $6,091,233 in unpaid dividends in arrears.

Stock options were exercised by the Company’s employees and directors at various dates during the quarter ended September 30, 2020, and, consequently, a total of 121,800 shares of Common Stock were issued for an aggregate payment to the Company of $224,325 to exercise such options. For the nine months ended September 30, 2020, as a result of exercised stock options, a total of 406,650 shares of Common Stock were issued for an aggregate payment to the Company of $851,012.

To date, the Company’s manufacturing facility in Little Elm, Texas has continued to operate due to its status as an essential business. As a result of the COVID-19 pandemic, the Company has implemented certain safety precautions at its facility to reduce the risk of the potential spread of the novel coronavirus. The Company has implemented arrangements to reduce the number of office staff employees working on-site at the production facility, as well as instituting personal distancing policies and monitoring of essential production staff to minimize the risk of infection. The Company continues to monitor the evolving situation and will work to further mitigate risks to staff and to customers. The Company is continuing to evaluate the ever-changing circumstances surrounding this pandemic as it relates to its ability to continue to source materials and products, maintain a workforce, and operate its business effectively and efficiently. Despite the global disruption of the coronavirus pandemic, the Company has not experienced a significant disruption to its supply chain. During 2020, the Company has experienced an increase in demand for its products and has been able to meet such demand with increased volumes despite the pandemic. The Company is unable to predict with certainty its ability to maintain its current operational functionality.

On April 17, 2020, the Company entered into a promissory note in the principal amount of $1,363,000 (the “PPP Loan”) in favor of Independent Bank (the “Lender”) pursuant to the Paycheck Protection Program (the

“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.0% per annum. Commencing November 17, 2020, the Company is required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize the principal amount outstanding by the maturity date. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The PPP Loan is unsecured and is a non-recourse obligation. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs, rent, utilities, and interest on debt. The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.

As of September 30, 2020, the Company believes it has incurred qualifying expenses equal to or greater than the principal amount of the PPP Loan; however, the Company is not able to determine the amount, if any, that might be forgiven.

On June 5, 2020, the PPP Flexibility Act was signed into law which, among other things, (i) extended the covered period from 8 weeks after the date of PPP funding to 24 weeks after the date of PPP funding, (ii) reduced the required amount of payroll expenditures from 75% to 60%, (iii) removed the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and (iv) extended the repayment deferral period to be the earlier of (a) the date forgiveness funds are received or (b) ten months from the end of the covered period. The Company is evaluating the impact of these changes on the PPP Loan, including the payment date and the amounts available for forgiveness.

Assuming the PPP Loan is not forgiven, the Company’s obligations thereunder are as follows as of September 30, 2020 for years ending December 31:

Effective July 1, 2020, the Company entered into the TIA with the Government. The principle purpose of the TIA is to fund the expansion of the Company’s manufacturing capacity for hypodermic safety needles and corresponding syringes in response to the worldwide COVID-19 global pandemic. The Government award is an expenditure-type TIA, whereby the Government will make payments to the Company for the Company’s expenditures for equipment and supplies in carrying out the expansion of the Company’s domestic production. The Company’s contributions under the terms of the TIA to enhance domestic capacity of pandemic-essential technology include providing facilities, technical expertise, labor, and maintenance of the TIA-funded equipment for a ten-year term.

As of early November 2020, the Company has negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $38 million. The Company has engaged architects and general construction contractors for the completion of new controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. The estimated cost of the controlled environment within existing properties is $6 million, and construction of the new warehouse is estimated to be $5.8 million. The cost of the controlled environment will be funded by the Government under the TIA, while the cost of the new warehouse will be funded by the Company. Building permits were obtained for both buildings in October 2020. The scheduled completion dates for the construction are within the second quarter of 2021.

In October 2020, the Company purchased a total of 30,000 shares of Series IV Preferred Stock and 25,000 shares of Series V Preferred Stock from six shareholders in exchange for a total of $400,000 (of which $303,330 is to be paid over a three-year period beginning February 2021) and 110,000 shares of Common Stock. Such preferred shareholders agreed to waive all unpaid dividends in arrears associated with its Preferred Stock, which resulted in a waiver of a total of $757,759 in unpaid dividends in arrears.

FORWARD-LOOKING STATEMENT WARNING

Certain statements included by reference in this filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the impact of COVID-19 on all facets of logistics and operations, as well as costs, our ability to complete capital improvements and ramp up domestic production in response to government agreements, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to access the market, production costs, the impact of larger market players, specifically Becton, Dickinson and Company ("BD"), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors in Part II. Given these uncertainties, undue reliance should not be placed on forward-looking statements.

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We have been manufacturing and marketing our products since 1997. VanishPoint^® syringes comprised 82.3% of our sales in the first nine months of 2020. 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 12.0% of revenues for the nine months ended September 30, 2020. 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.

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

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season. Experts and industry professionals predicted that flu shots would be critical for the public in the 2020 flu season because of the continuing COVID-19 pandemic. Although our domestic sales outside of the HHS Order increased approximately 40% during the three months ended September 30, 2020, we cannot determine what percent of the increased sales were attributable to flu shots versus preparation for a COVID-19 vaccine.

On May 1, 2020, we were awarded a delivery order under an existing contract by the Department of Health and Human Services of the United States to supply automated retraction safety syringes (the “HHS Order”). The total fixed price under the delivery order is $83,788,440. The existing contract was executed in September 2018, but the order placed on May 1, 2020 is unusually significant. In the third quarter of 2020, our sales under this order were approximately $12.9 million and we expect such sales to increase each quarter through May 2021. We

understand that the purpose of the HHS Order is to provide syringes for the COVID-19 vaccine, when available. Additionally, in October 2020, the contract value was increased by $10 million when the U.S. government agreed to expedite freight into our facilities by paying for airfreight costs from China.

Effective July 1, 2020, we entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense, U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA) (“Government”) for $53,664,286 in government funding for expanding our domestic production of needles and syringes. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. Additionally, the TIA provides for reimbursement for equipment and supplies. As of early November 2020, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $38 million. We have engaged architects and general construction contractors for the completion of new controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. The estimated cost of the controlled environment within existing properties is $6 million, and construction of the new warehouse is estimated to be $5.8 million. The cost of the controlled environment will be funded by the Government under the TIA, while the cost of the new warehouse will be our financial obligation. Building permits were obtained for both buildings in October 2020. The scheduled completion dates for the construction are within the second quarter of 2021.

On April 17, 2020, we entered into a promissory note in the principal amount of $1,363,000 (the “PPP Loan”) in favor of Independent Bank (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act, administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.0% per annum. Commencing November 17, 2020, we may be required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize the principal amount outstanding by the maturity date. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

As detailed in Note 4 to the financial statements, we held $6.7 million in debt and equity securities as of September 30, 2020, which represents 14.3% of our current assets. During the third quarter of 2020, we liquidated a portion of our investment portfolio (approximately $4.0 million) for operational needs. We continually monitor our invested balances.

During the third quarter of 2020, we hired 15 new full-time employees, predominantly as production line workers, and terminated several back office employees. We also moderately increased non-executive pay. The net effect of these actions caused a net increase of approximately $150 thousand in our operating expenses for the quarter ended September 30, 2020.

Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost. In the first nine months of 2020, our Chinese manufacturers produced approximately 82.2% of our products. Despite the global disruption of the coronavirus pandemic, we have not experienced a significant disruption to our supply chain. In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe^® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint^® needles. Regardless of vendor availability, we expect to increase our domestic syringe production capacity at our facilities pursuant to the plans outlined in the TIA.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The

license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales of products subject to the license and he receives fifty percent (50%) of the royalties paid to us by certain sublicensees of the technology subject to the license.

With increased volumes, our manufacturing unit costs have generally tended to decline. Factors that could affect our unit costs include possible tariffs, 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. Decreases in costs of petroleum products during the first nine months of 2020 have reduced certain raw material costs.

RESULTS OF OPERATIONS

The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties. Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements. Dollar amounts have been rounded for ease of reading. All period references are to the periods ended September 30, 2020 or 2019.

Comparison of Three Months Ended September 30, 2020 and September 30, 2019

Domestic sales, including sales to the U.S. government, accounted for 94.2% and 77.7% of the revenues for the three months ended September 30, 2020 and 2019, respectively. Domestic revenues increased 182.3% principally due to the increase in units sold. Domestic unit sales increased 151.7%. Domestic unit sales were 90.6% of total unit sales for the three months ended September 30, 2020. Domestic sales excluding the HHS Order rose approximately 40%. International revenue and unit sales decreased 39.7% and 41.3%, representing a return to normal levels after the unusually high volumes in 2019. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 92.2%. Other than the Department of Health and Human Services, our increased sales are predominantly attributable to existing customers as well as several new smaller customers who do not operate as distributors. Our sales under the HHS Order in the quarter ended September 30, 2020 were approximately $12.9 million and we expect such sales to increase each quarter through May 2021.

The Cost of manufactured product increased by 67.0% principally due to the increase in the volume of units sold. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense increased 79.6% due to increased gross sales.

Gross profit increased 267.0% primarily due to the increase in net revenues.

Operating expenses increased 24.8%. The increase was due to employee expenses such as added payroll and related costs and consulting fees.

Our income from operations was $10.3 million compared to an operating income of $978 thousand for the same period last year due primarily to the increase in net revenues and resulting gross profit.

Interest and other income decreased $179 thousand for the quarter ended September 30, 2020 compared to the same period last year principally due to unrealized losses in investments.

Our effective tax rate on income before income taxes was 15.63% and 0.4% for the three months ended September 30, 2020 and September 30, 2019, respectively.

Comparison of Nine Months Ended September 30, 2020 and September 30, 2019

Domestic sales, including sales to the U.S. government, accounted for 86.8% and 79.4% of the revenues, excluding product licensing fees, for the nine months ended September 30, 2020 and 2019, respectively. Domestic revenues increased 87.9% principally due to the increase in units sold. Domestic unit sales increased 76.4%. Domestic unit sales were 81.6% of total unit sales for the nine months ended September 30, 2020. International

revenue and unit sales increased 10.1% and 3.7%, respectively, due to increased orders and the timing of the same. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 56.3%. As discussed above, our sales under the HHS Order contributed $14.3 million to our results for the nine months ended September 30, 2020.

The Cost of manufactured product increased by 45.2% principally due to the increase in the volume of units sold. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense increased 38.5% due to increased gross sales.

Gross profit increased 128.9% primarily due to the increase in net revenues.

Operating expenses increased 14.7%. The increase was due to an increase in employee headcount and related costs as well as consulting fees and an increase in the allowance for doubtful accounts.

Our operating income was $11.8 million compared to an operating income for the same period last year of $1.1 million due primarily to increased net revenues and resulting gross profit.

Interest and other income for the first nine months of 2020 increased $589 thousand compared to the same period last year principally due to realized and unrealized gains on investments.

Our effective tax rate on income before income taxes was (1.2)% and 0.6% for the nine months ended September 30, 2020 and September 30, 2019, respectively. As of June 30, 2020, we released our valuation allowance for deferred tax assets based on evidence supporting the position that the potential benefit would be “more-likely-than-not” realized. As a result of the release of the valuation allowance, we recognized approximately $1.8 million in deferred tax assets and recognized the corresponding amount as a beneficial income tax provision. The recognition of the benefit and deferred tax asset is reflected in the second quarter of 2020.

Discussion of Balance Sheet and Statement of Cash Flow Items

Cash comprises 23% of total assets. Working capital was $32.0 million at September 30, 2020, an increase of $11.8 million from December 31, 2019.

Cash provided by operations was $8.8 million for the nine months ended September 30, 2020 due primarily to net income for the period, offset by a significant increase in accounts receivable.

Cash used by investing activities was $7.7 million for the nine months ended September 30, 2020 due primarily to the net sales of equity securities and the purchase of fixed assets. The $9.5 million impact to cash from the purchase of such fixed assets reflects down payments on orders for certain assets detailed in this report in connection with the TIA. In the third quarter of 2020, we liquidated approximately $4.0 million of our investment portfolio for operational needs.

Cash provided by financing activities was $8.6 million for the nine months ended September 30, 2020. This was primarily due to the proceeds from the PPP loan, proceeds from the exercise of stock options, and proceeds from the government under the TIA for down payments on our orders for fixed assets.

LIQUIDITY

Historical Sources of Liquidity

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

Internal Sources of Liquidity

Margins

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

Seasonality

Historically, unit sales have increased during the flu season. We cannot determine what percent of our recent increase in domestic sales (excluding the HHS Order) were attributable to flu shots versus preparation for a COVID-19 vaccine.

Cash Requirements

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

Contracts with the U.S. Government

As discussed above, we were awarded a material delivery order by the Department of Health and Human Services of the United States in the total amount of approximately $83.8 million, plus certain expedited freight expenses. In the third quarter of 2020, our sales under this HHS Order were approximately $12.9 million and we expect such sales to increase each quarter through May 2021.

As discussed above, we entered into a TIA with United States government for approximately $53.7 million in Government funding for expanding our domestic production of needles and syringes. To date, we have received approximately $6.9 million for down payments on the purchase of certain fixed assets. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. We have engaged architects and construction contractors for the completion of new controlled environment facilities and warehousing facilities which are expected to be completed in the second quarter of 2021.

Option Exercises

Stock options were exercised by our employees and directors at various dates during the quarter ended September 30, 2020, and, consequently, we received approximately $224 thousand to exercise such options.

External Sources of Liquidity

We recently received a PPP Loan, as described above, in the principal amount of $1,363,000. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

We may obtain a construction loan for the construction of new facilities in connection with our expansion plans in connection with the TIA. While a portion of the planned construction will be funded by the Government, we expect to fund the construction of the new warehouse and expect the cost to be approximately $5.8 million.

It is unlikely we would choose to raise funds by the public sale of equity despite recent increases in the value of our stock. Our stock price increased materially during the first nine months of 2020. The closing price per share on January 1, 2020 was $1.53. On September 30, 2020, our stock price closed at $6.66 per share and it was $8.25 on November 10, 2020.

We consider our investment portfolio a source of liquidity as well. For example, in the third quarter of 2020, we liquidated approximately $4.0 million from our investment portfolio for operational needs. As of September 30, 2020, $6.7 million was invested in third party securities.

CAPITAL RESOURCES

Since the execution of the TIA on July 1, 2020, we have been planning significant expansion to our facilities. We have engaged architects and general construction contractors for the completion of controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. We expect this construction to be completed in the second quarter of 2021. We have also contracted for additional automated assembly equipment, along with necessary auxiliary equipment, costing approximately $38 million in the aggregate.

Not applicable.

Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, Management, with the participation of our President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”), and our Vice President and Chief Financial Officer, John W. Fort III (the “CFO”), acting in their capacities as our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in our periodic reports is: i) recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms; and ii) accumulated and communicated to our Management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of September 30, 2020, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes during the third quarter of 2020 or subsequent to September 30, 2020 in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

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

There were no material changes in our Risk Factors as set forth in our most recent annual and quarterly reports which are available on EDGAR.

On September 30, 2020, the Company purchased 300,000 shares of Series IV Preferred Stock from a shareholder for $3,000,000 in cash over a three-year period beginning February 2021 and 600,000 shares of Common Stock. Such preferred stockholder agreed to waive all unpaid dividends in arrears associated with its Preferred Stock, which resulted in a waiver of a total of $6,091,233 in unpaid dividends in arrears. We are relying on Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”) to exempt this transaction from the registration requirements of the Securities Act.

Working Capital Restrictions and Limitations on the Payment of Dividends

We declared a dividend to the Series I Class B and Series II Class B Convertible Preferred Shareholders in the aggregate amount of $52,242. This dividend was paid on October 22, 2020.

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

Series I Class B Convertible Preferred Stock

For the nine months ended September 30, 2020, no dividends were in arrears.

Series II Class B Convertible Preferred Stock

For the nine months ended September 30, 2020, no dividends were in arrears.

Series III Class B Convertible Preferred Stock

For the nine months ended September 30, 2020, the amount of dividends in arrears was $95,209 and the total arrearage was $4,447,893 as of September 30, 2020.

Series IV Class B Convertible Preferred Stock

For the nine months ended September 30, 2020, the amount of dividends in arrears was $228,615 and the total arrearage was $814,747 as of September 30, 2020.

Series V Class B Convertible Preferred Stock

For the nine months ended September 30, 2020, the amount of dividends in arrears was $8,160 and the total arrearage was $1,028,356 as of September 30, 2020.

SIGNATURES

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