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 March 31, 2010
or
o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
|
For the
transition period from to
Commission
file number: 000-30885
Retractable Technologies, Inc.
(Exact name of
registrant as specified in its charter)
Texas
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75-2599762
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(State or other
jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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|
|
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511
Lobo Lane
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|
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Little
Elm, Texas
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75068-0009
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(Address of
principal executive offices)
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(Zip Code)
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(972)
294-1010
(Registrants
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
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large
accelerated filer
o
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Accelerated
filer
o
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|
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|
Non-accelerated
filer
o
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|
Smaller
reporting company
x
|
(Do not check if
a smaller reporting company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes
o
No
o
APPLICABLE ONLY TO
CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date: 23,825,149 shares
of Common Stock, no par value, issued and outstanding on May 3, 2010.
RETRACTABLE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended March 31,
2010
TABLE OF CONTENTS
PART IFINANCIAL INFORMATION
Item 1. Financial
Statements.
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
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March 31, 2010
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(unaudited)
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December 31, 2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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19,316,342
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$
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18,126,084
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Accounts
receivable, net
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5,166,351
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9,948,210
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Inventories, net
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8,501,939
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6,907,369
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Income taxes receivable
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3,655,637
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3,655,637
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Other current assets
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742,083
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624,393
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Total
current assets
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37,382,352
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39,261,693
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Property,
plant, and equipment, net
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13,689,483
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14,234,181
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Intangible
assets and other assets, net
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434,565
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445,425
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Total
assets
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$
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51,506,400
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$
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53,941,299
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current
liabilities:
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Accounts
payable
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$
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6,086,735
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$
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6,997,310
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Current portion of long-term debt
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2,616,076
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2,628,652
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Accrued
compensation
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702,240
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561,484
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Marketing
fees payable
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1,419,760
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1,419,760
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Accrued
royalties to shareholders
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605,241
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843,327
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Other
accrued liabilities
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1,059,357
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745,460
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Total
current liabilities
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12,489,409
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13,195,993
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Long-term
debt, net of current maturities
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4,694,720
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4,824,833
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Total
liabilities
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17,184,129
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18,020,826
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Stockholders
equity:
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Preferred
stock $1 par value:
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Series I,
Class B
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144,000
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144,000
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Series II,
Class B
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219,700
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219,700
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Series III,
Class B
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130,245
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130,245
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Series IV,
Class B
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552,500
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552,500
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Series V,
Class B
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1,238,821
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1,238,821
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Common
stock, no par value
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Additional
paid-in capital
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57,762,447
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57,089,153
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Retained
deficit
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(25,725,442
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)
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(23,453,946
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)
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Total
stockholders equity
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34,322,271
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35,920,473
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Total
liabilities and stockholders equity
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$
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51,506,400
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$
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53,941,299
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|
See accompanying notes to condensed financial statements
1
RETRACTABLE
TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF
OPERATIONS
(unaudited)
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Three
Months
Ended
March 31, 2010
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Three
Months
Ended
March 31, 2009
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Sales,
net
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$
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8,465,617
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$
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5,258,465
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Cost
of sales
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Cost
of manufactured product
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4,409,571
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3,595,457
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Royalty
expense to shareholders
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605,242
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433,832
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Total
cost of sales
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5,014,813
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4,029,289
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Gross
profit
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3,450,804
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1,229,176
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Operating
expenses:
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Sales
and marketing
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850,016
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1,135,667
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Research
and development
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345,247
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278,361
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General
and administrative
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4,439,240
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3,856,872
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Total
operating expenses
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5,634,503
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5,270,900
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Loss
from operations
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(2,183,699
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)
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(4,041,724
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)
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Interest
and other income
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5,680
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|
|
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28,737
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Interest
expense, net
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(90,852
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)
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|
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Net
loss before income taxes
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(2,268,871
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)
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(4,012,987
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)
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Provision
(benefit) for income taxes
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2,625
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(105,346
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)
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Net
loss
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(2,271,496
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)
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(3,907,641
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)
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Preferred
stock dividend requirements
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(342,717
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)
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(342,717
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)
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Loss
applicable to common shareholders
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$
|
(2,614,213
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)
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$
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(4,250,358
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)
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Loss
per share (basic and diluted)
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$
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(0.11
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)
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$
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(0.18
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)
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Weighted
average common shares outstanding
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23,825,149
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23,800,064
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See accompanying
notes to condensed financial statements
2
RETRACTABLE
TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
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Three
Months
Ended
March 31, 2010
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Three
Months
Ended
March 31, 2009
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|
Cash flows from operating activities
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|
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Net loss
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$
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(2,271,496
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)
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$
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(3,907,641
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)
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Adjustments to
reconcile net loss to net cash provided by (used by) operating activities:
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Depreciation
and amortization
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429,365
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342,640
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Share-based
compensation
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673,293
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173,014
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Accreted
interest
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8,917
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11,878
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Impairment
of assets
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163,039
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(Increase)
decrease in assets:
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Inventories
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(1,594,570
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)
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(1,124,312
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)
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Accounts
receivable
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4,781,859
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1,551,704
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Income
taxes receivable
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(104,784
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)
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Other
current assets
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(117,690
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)
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(416,356
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)
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Increase
(decrease) in liabilities:
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Accounts
payable
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(910,575
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)
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502,896
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Other
accrued liabilities
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216,567
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(50,669
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)
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Income
taxes payable
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(408
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)
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Net
cash provided by (used by) operating activities
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1,378,709
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(3,022,038
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)
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Cash flows from investing activities
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|
|
|
|
Purchase
of property, plant, and equipment
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(36,842
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)
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(1,485,584
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)
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Net
cash used by investing activities
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(36,842
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)
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(1,485,584
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)
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Cash flows from financing activities
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Repayments
of long-term debt and notes payable
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(151,609
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)
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(123,670
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)
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Net
cash used by financing activities
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(151,609
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)
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(123,670
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)
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|
|
|
|
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|
Net
increase (decrease) in cash
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|
1,190,258
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(4,631,292
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)
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|
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Cash
and cash equivalents at:
|
|
|
|
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|
Beginning
of period
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18,126,084
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|
33,283,740
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|
End
of period
|
$
|
19,316,342
|
$
|
28,652,448
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
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Interest
paid
|
$
|
100,429
|
$
|
40,932
|
|
Income
taxes paid
|
$
|
12,278
|
$
|
15,883
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing and financing activities:
|
|
|
|
|
|
Debt
assumed to construct warehouse
|
$
|
|
$
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1,264,906
|
|
|
|
|
|
|
|
|
See accompanying
notes to condensed financial statements
3
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 Companys manufacturing and
administrative facilities are located in Little Elm, Texas. The Companys primary products with Notice of
Substantial Equivalence to the FDA are the VanishPoint
®
0.5mL insulin
syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 3mL, 5mL, and
10mL syringes; the small diameter tube adapter; the blood collection tube
holder; the allergy tray; the IV safety catheter; and the Patient Safe
®
syringe.
Basis of presentation
The accompanying
condensed financial statements are unaudited and, in the opinion of Management,
reflect all adjustments that are necessary for a fair presentation of the
financial position and results of operations for the periods presented. All such adjustments are of a normal and
recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the entire year.
The condensed financial statements should be read in conjunction with
the financial statement disclosures contained in the Companys audited
financial statements incorporated into its Form 10-K filed on March 31,
2010 for the year ended December 31, 2009 and Form 10-K/A filed on April 7,
2010 for the same period. Certain prior
year amounts have been reclassified to conform with the current periods
presentation.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly
from those estimates.
Cash and cash equivalents
For purposes of reporting
cash flows, cash and cash equivalents include unrestricted cash, 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 Companys allowance for doubtful accounts
is primarily determined by review of specific trade receivables. Those accounts that are doubtful of
collection are included in the allowance.
An additional allowance has been established based on a percentage of
receivables outstanding. These
provisions are reviewed to determine the adequacy of the allowance for doubtful
accounts. Trade receivables are charged
off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent
when payment has not been made within contract terms.
4
Inventories
Inventories are valued at
the lower of cost or market, with cost being determined using actual average
cost. A reserve is established for any
excess or obsolete inventories.
Property,
plant, and equipment
Property, plant, and
equipment are stated at cost.
Expenditures for maintenance and repairs are charged to operations as
incurred. Cost includes major
expenditures for improvements and replacements which extend useful lives or
increase capacity and interest cost associated with significant capital additions. Gains or losses from property disposals are
included in income.
Depreciation
and amortization are calculated using the straight-line method over the
following useful lives:
Production equipment
|
|
3 to 13 years
|
Office furniture and
equipment
|
|
3 to 10 years
|
Buildings
|
|
39 years
|
Building improvements
|
|
15 years
|
Automobiles
|
|
7 years
|
Long-lived assets
The Company assesses the recoverability of
long-lived assets using an assessment of the estimated undiscounted future cash
flows related to such assets. In the event that assets are found to be carried
at amounts which are in excess of estimated gross future cash flows, the assets
will be adjusted for impairment to a level commensurate with a discounted cash
flow analysis of the underlying assets.
During the first quarter of 2010, the Company
recognized an impairment charge of $163,039 on equipment designed in connection
with research and development activities. The Company will outsource the
majority of this production through overseas manufacturers. Minimal cash flows,
if any, are expected to be generated by this equipment. Accordingly, the
Company has reduced the carrying value of this equipment to an estimated fair
value of zero. The Companys management estimated the fair value of the
equipment based on guidance established by the
Fair Value
Measurements and Disclosures
Topic of the FASB Accounting Standards
Codification. In this instance, the Companys management determined the
impairment charge by utilizing observable market data, a Level 2 input under
the FASB Accounting Standards Codification. A Level 1 input would require
quoted prices, which were not available in this matter.
Intangible assets
Intangible
assets are stated at cost and consist primarily of patents, a license agreement
granting exclusive rights to use patented technology, and trademarks which are
amortized using the straight-line method over 17 years.
Financial instruments
The
Company estimates the fair market value of financial instruments through the
use of public market prices, quotes from financial institutions, and other
available information. Judgment is
required in interpreting data to develop estimates of market value and,
accordingly, amounts are not necessarily indicative of the amounts that could
be realized in a current market exchange.
Short-term financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and other liabilities, consist primarily
of instruments without extended maturities, the fair value of which, based on
Managements estimates, equals their recorded values.
Concentration risks
The
Companys financial instruments exposed to concentrations of credit risk
consist primarily of cash, cash equivalents, and accounts receivable. Cash balances, some of which exceed federally
insured limits, are maintained in financial institutions; however, Management
believes the institutions are of high credit quality. The majority of accounts receivable are due
from companies which are well-established entities. As a consequence, Management considers any
exposure from concentrations of credit risks to be limited. The Company had a high concentration of sales
with two significant customers accounting for approximately $2.8 million, or
32.6% of net sales in the first quarter of 2010.
The Company manufactures
syringes in Little Elm, Texas as well as utilizing manufacturers in China. The Company purchases most of its product
components from single suppliers, including needle adhesives and packaging
materials. There are multiple sources of
these materials. The Company obtained
roughly 65.3% of
5
its finished products in
the first three months of 2010 from Double Dove, a Chinese manufacturer. In the event that the Company becomes unable
to purchase such product from Double Dove, the Company would need to find an
alternate supplier for its 0.5mL insulin syringe, its 5mL and 10mL syringes and
its autodisable syringe and increase domestic production for 1mL and 3mL
syringes to avoid a disruption in supply.
Revenue
recognition
Revenue is recognized for
sales to distributors when title and risk of ownership passes to the
distributor, generally upon shipment.
Revenue is recorded on the basis of sales price to distributors, less
contractual pricing allowances.
Contractual pricing allowances consist of: (i) rebates granted to
distributors who provide tracking reports which show, among other things, the
facility that purchased the products, and (ii) a provision for estimated
contractual pricing allowances for products that the Company has not received
tracking reports. Rebates are recorded
when issued and are applied against the customers receivable balance. The provision for contractual pricing
allowances is reviewed at the end of each quarter and adjusted for changes in levels
of products for which there is no tracking report. Additionally, if it becomes clear that
tracking reports will not be provided by individual distributors, the provision
is further adjusted. The estimated
contractual allowance is netted against individual distributors accounts
receivable balances for financial reporting purposes. The resulting net balance is reflected in
accounts receivable or accounts payable, as appropriate. The terms and conditions of contractual
pricing allowances are governed by contracts between the Company and its
distributors. Revenue for shipments
directly to end-users is recognized when title and risk of ownership pass from
the Company. Any product shipped or
distributed for evaluation purposes is expensed.
The Companys domestic
return policy is set forth in its standard Distribution Agreement. This policy provides that a customer may
return incorrect shipments within 10 days following arrival at the distributors
facility. In all such cases the
distributor must obtain an authorization code from the Company and affix the
code to the returned product. The
Company will not accept returned goods without a returned goods authorization
number. The Company may refund the
customers money or replace the product.
The Companys return
policy also provides that a customer may return product that is
overstocked. Overstocking returns are
limited to two times in each 12-month period up to 1% of distributors 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 Companys
international distribution agreements do not provide for any returns.
The Company records an
allowance for estimated returns as a reduction to Accounts receivable and Gross
sales. Historically, returns have been
less than 0.5% of net sales.
Marketing
fees
Under a sales and
marketing agreement with Abbott Laboratories (Abbott), the Company paid
marketing fees until the Company terminated the contract for breach. The contracted services were to include
participation in promotional activities, development of educational and
promotional materials, representation at trade shows, clinical demonstrations,
inservicing and training, and tracking reports detailing the placement of the
Companys products to end-users.
Marketing fees were accrued at the time of the sale of product to
Abbott. These fees were paid after
Abbott provided the Company a tracking report of product sales to
end-users. These costs were included in
Sales and marketing expense in the Condensed Statements of Operations. No marketing fees have been accrued since October 15,
2003, the date the National Marketing and Distribution Agreement with Abbott
was terminated. The Company filed suit
against Abbott in August 2005 for breach of contract. See
Note 5. COMMITMENTS AND
CONTINGENCIES
for further discussion.
6
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.
Under recent tax law changes, companies are allowed to carry back
taxable losses from either 2008 or 2009.
The Company will file for a tax refund utilizing its 2009 taxable losses
which will result in a minimum of a $3.7 million refund. The Company has established a valuation
allowance for its net deferred tax asset as future taxable income cannot be
reasonably assured. Penalties and
interest on uncertain tax positions are classified as income taxes in the
Condensed Statements of Operations.
Earnings
per share
The Company computes
basic earnings per share 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.
The Companys potentially dilutive Common Stock equivalents, consisting
of options, convertible debt and convertible Preferred Stock, are all
antidilutive for the three months ended March 31, 2010 and 2009. Accordingly basic loss per share is equal to
diluted earnings per share.
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 Companys 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
March 31, 2010
|
|
Three
Months
Ended
March 31, 2009
|
|
|
|
|
|
|
|
Cost
of sales
|
$
|
91,446
|
$
|
39,082
|
|
Sales
and marketing
|
|
42,315
|
|
48,389
|
|
Research
and development
|
|
14,129
|
|
6,317
|
|
General
and administrative
|
|
525,403
|
|
79,226
|
|
|
$
|
673,293
|
$
|
173,014
|
|
7
3.
INVENTORIES
Inventories consist of
the following:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Raw
materials
|
$
|
2,226,026
|
$
|
2,424,818
|
|
Finished
goods
|
|
6,481,513
|
|
4,688,151
|
|
|
|
8,707,539
|
|
7,112,969
|
|
Inventory
reserve
|
|
(205,600
|
)
|
(205,600
|
)
|
|
$
|
8,501,939
|
$
|
6,907,369
|
|
4.
INCOME TAXES
The
Companys effective tax rate on the net loss before income taxes was 0.1% and
2.6% (benefit) for the three months ended March 31, 2010 and March 31,
2009, respectively.
5.
COMMITMENTS AND CONTINGENCIES
On August 12, 2005,
the Company filed a lawsuit against Abbott in the U.S. District Court in the
Eastern District of Texas, Texarkana Division.
The Company is alleging fraud and breach of contract in connection with
the National Marketing and Distribution Agreement dated as of May 4, 2000,
which was terminated on October 15, 2003.
It is seeking damages which it estimates to be in millions of dollars of
lost profits, out of pocket expenses, and other damages. In addition, it is seeking punitive damages,
pre- and post-judgment interest, and attorneys fees. Following Abbotts unsuccessful attempt to
get the case dismissed and ordered to arbitration, Abbott filed an answer and
counterclaim on July 15, 2008, alleging several breaches of contract,
breach of implied warranty of merchantability, and breach of express warranty,
seeking in excess of $6,000,000 in compensatory damages as well as seeking
attorneys fees. The Company denies the
validity of Abbotts counterclaims.
Discovery has already taken place and is substantially completed. Trial is currently set for July 2010.
In June 2007, the
Company sued Becton Dickinson and Company (BD) in the U.S. District Court for
the Eastern District of Texas, Marshall Division, alleging infringement of
three patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of the
federal and state antitrust laws, and of the Lanham Act. The Company subsequently dropped the 5,578,011
patent allegations from the lawsuit. In January 2008,
the Court severed the patent claims from the other claims pending resolution of
the patent dispute. In April 2008,
the Company and the officer sued BD in the U.S. District Court for the Eastern
District of Texas, Marshall Division, alleging infringement of another recently
issued patent (7,351,224). BD
counterclaimed for non-infringement and invalidity of the asserted patent. The Court consolidated this case with the
above-stated case filed in June 2007.
On November 9, 2009, the jury returned a verdict finding that the
patents asserted by the Company were valid and infringed by BD and awarded
$5,000,000 in damages. No final judgment
has been entered in this case. The
Company is seeking injunctive relief.
In September 2007,
BD and MDC Investment Holdings, Inc. (MDC) sued the Company in the
United States District Court for the Eastern District of Texas, Texarkana
Division, initially alleging that the Company is infringing two U.S. patents of
MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seek
injunctive relief and unspecified damages.
The Company counterclaimed for declarations of non-infringement,
invalidity, and unenforceability of the asserted patents. The plaintiffs subsequently dropped
allegations with regard to patent no. 7,090,656 and the Company subsequently
dropped its counterclaims for unenforceability of the asserted patents. The Court conducted a claims construction
hearing on September 25, 2008 and issued its claims construction order on November 14,
2008. No trial date has been set.
6.
SUBSEQUENT EVENTS
On April 23,
2010, the Company paid $2,122,445 to
Lewisville State Bank, a
division of 1st International Bank (1st International), to pay off a loan in
the original principal amount of $2,500,000 which matured in late March 2010. The Company may seek other financing to
replace this loan.
8
On May 11,
2010, the Company declared a dividend to holders of Series I Class B
and Series II Class B Convertible Preferred Stock in the amount of
$216,000 and $660,555, respectively.
Dividends cover amounts in arrears from June 30, 2007 through date
of conversion or June 30, 2010, whichever is applicable. The dividends will be paid on July 15,
2010.
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENT WARNING
Certain statements included by reference in this filing containing the
words could, may, believes, anticipates, intends, expects, and
similar such words constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act.
Any forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results,
performance, or achievements to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors
include, among others, our ability to maintain liquidity, our maintenance of
patent protection, the impact of current litigation (as it affects our costs as
well as market access), our ability to maintain favorable supplier arrangements
and relationships, our ability to receive royalties from Baiyin Tonsun Medical
Device Co., Ltd. (BTMD), our ability to quickly increase capacity in response
to an increase in demand, our ability to access the market, our ability to
maintain or lower production costs, our ability to continue to finance research
and development as well as operations and expansion of production, the
increased interest of larger market players, specifically Becton Dickinson and
Company (BD), in providing devices to the safety market, and other factors
referenced in
Item 1A. Risk Factors
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 into the
marketplace since 1997. We currently
provide other safety medical products in addition to safety syringe
products. One such product is the
Patient Safe
®
syringe, which is uniquely designed to reduce
the risk of bloodstream infections resulting from catheter hub contamination. Patient Safe
®
s
unique luer guard reduces the risk of luer tip contact contamination and the
risk of contamination of intravenous fluid.
Safety syringes comprised 99.0% of our sales in the first three months
of 2010.
Historically, unit sales have increased in the latter
part of the year due, in part, to the demand for syringes during the flu
season. The H1N1 virus (Swine Flu) may have a longer worldwide
immunization duration than the seasonal flu. In the third quarter of 2009, we were awarded a contract by
the Department of Health and Human Services (DHHS) to supply a portion of the
safety engineered syringes to be used in the U.S. efforts to vaccinate the U.S.
population against the Swine Flu. The impact on us was material. Sales to the DHHS comprised 24.4% of our
revenues for the twelve months ended December 31, 2009. This
program, which was estimated to run from August 2009 through March 2010,
ended in December 2009. We do not
know if there will be a similar program in 2010. We recorded sales to DHHS in 2010 (7.1% of Sales,
net for the first quarter) that were attributable to orders placed in 2009.
Our products have been and continue to be distributed nationally
through numerous distributors. However,
we have been blocked from access to the market by exclusive marketing practices
engaged in by BD, which dominates the market.
We believe that its monopolistic business practices continue despite its
paying $100 million in 2004 to settle a prior lawsuit with us for
anticompetitive practices, business disparagement, and tortious
interference. Additionally, a jury
returned a verdict in November 2009 finding that all three patents
asserted by us against BD are valid and infringed by BD (with regard to its
Integra product). Although we have made
limited progress in some areas, such as the alternate care and international
markets, our volumes are not as high as they should be given the nature and
quality of our products and the federal and state legislation requiring the use
of safe needle devices.
9
We
continue to pursue various strategies to have better access to the hospital
market, as well as other markets, including attempting to gain access to the
market through our sales efforts, our innovative technology, introduction of
new products, and, when necessary, litigation.
We are also marketing more products internationally.
We
sued Occupational and Medical Innovations Limited (OMI) in April 2008
and separately sued BD in June 2007 for claims of patent infringement (see
Item 3. Legal Proceedings of the Form 10-K), and in December 2009 and
November 2009, respectively, such companies were found to infringe our
patents. These verdicts could increase
demand for our product. However, there
is no assurance when or if such increase will occur.
In the event we continue to have only limited market access, the cash
provided by the litigation settlements and generated from operations becomes
insufficient, and royalties from BTMD are not forthcoming, we would take
additional cost cutting measures to reduce cash requirements. Such measures could result in the reduction
of units being produced, the reduction of workforce, the reduction of salaries
of officers and other nonhourly employees, and the deferral of royalty payments. We took such actions at the end of the second
quarter of 2009.
At the end of the second quarter of 2009, we announced that in the
interest of the long-term survival of the Company we would reorganize some of
the Companys functions and implement staff reductions, all in order to minimize
our cash expenditures and conserve our resources. Our workforce was reduced by 16% on July 1,
2009. However, due to the expected
increase in production from sales to DHHS, we increased the workforce at the
Little Elm facility beginning in the latter part of the third quarter of
2009. The effect of Mr. Shaws waiver of
$1,000,000 in royalties was fully realized in 2009. Salaries for all personnel above a certain
salary level were cut by 10% in 2009 (subject to contract rights). As a result of the cost cutting measures,
compensation costs included in Operating expenses were reduced by $270,000 and
401(k) matching expense declined $26,000.
Other costs related to the reduction in force declined $71,000 for
consulting, $57,000 for travel and entertainment, and $48,000 for marketing
expense. We have begun additional
molding in Little Elm. These measures
will remain in place as long as Management deems them necessary.
We are focusing on methods of upgrading our manufacturing capability
and efficiency in order to reduce costs.
We believe our current capitalization provides the resources necessary
to implement some of these changes and improve our manufacturing capacity and
efficiency, thereby reducing our unit cost.
Product purchases from Double Dove, a Chinese manufacturer, have
enabled us to increase manufacturing capacity with little capital outlay and
have provided a competitive manufacturing cost.
In the first quarter of 2010, Double Dove manufactured approximately
65.3% of the units we produced. The cost
of production per unit has generally declined as volumes increased. We believe we could make up any long-term
disruption in these supplies by utilizing more of the capacity at the Little
Elm facility, except for the 0.5mL insulin syringe, the 5mL and 10mL syringes,
and the autodisable syringe which altogether comprised about 9.9% of our
revenues in the first quarter of 2010.
We entered into a new agreement (effective as of July 1, 2009)
with BTMD along similar terms as our prior agreement. This agreement expires on July 1, 2010
which may automatically extend under certain conditions. Such terms include granting to BTMD a limited
exclusive license to manufacture and a limited exclusive right to sell syringes
in China having retractable needles that incorporate our technology. This License Agreement is subject to the
Technology License Agreement dated June 23, 1995 between Mr. Thomas
J. Shaw, our founder and CEO, as licensor, and the Company, as licensee (as
amended). Accordingly, Mr. Shaw
will receive 5% of the licensing proceeds we receive. BTMD has agreed to manufacture and sell these
products in China and to pay us a quarterly royalty of two and one-half cents
per unit on 3mL and 5mL syringes and a royalty of three and one-half cents per
unit on 0.5mL, 1mL, and 10mL syringes.
The BTMD facility has been completed and BTMD has met Chinese Government
requirements. BTMD received a
Registration Certificate for Medical Device on August 24, 2009. The obligation to pay the royalties continues
even if any and all of our patent rights in China are found to be invalid or
unenforceable for any reason. BTMD
reported they owe us $22,952 for royalties attributable to the first quarter of
2010. This amount is included in Sales,
net for the quarter ended March 31, 2010.
With increased volumes, our manufacturing unit costs have generally
tended to decline. Factors that could
affect our unit costs include increases in costs by third party manufacturers,
changing production volumes, costs of petroleum products, and transportation
costs. Increases in such costs may not
be recoverable through price increases of our products.
10
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.
Variances have been rounded for ease of reading. All period references are to the periods
ended March 31, 2010 or 2009.
Comparison of Three Months Ended March 31,
2010 and March 31, 2009
Domestic sales accounted for 88.2% and 78.8% of the revenues for the
three months ended March 31, 2010 and 2009, respectively. International sales accounted for the
remaining revenues. Domestic revenues
increased 80.1% principally due to higher average prices and higher
volumes. Most of the increase in
domestic revenues is attributable to sales of the 1mL and 3mL syringes. International revenues decreased 10.1% due
primarily to lower volumes mitigated by higher prices. Overall, unit sales increased 27.6%. Domestic unit sales increased 47.9% due to
increased sales to our major domestic distributors and filling orders from DHHS
from 2009. International unit sales
decreased 14.3%. Domestic unit sales
were 78.1% of total unit sales for the three months ended March 31, 2010.
Gross profit increased 181% primarily due to higher revenues and lower
unit costs. The average cost of
manufactured product sold per unit decreased by 3.9% due to higher
volumes. Profit margins can fluctuate
depending upon, among other things, the cost of product manufactured and the
capitalized cost of product recorded in inventory, as well as product sales
mix. Royalty expense increased 39.5% due
to higher gross sales.
Operating expenses increased 6.9%.
The increase was mitigated by the effect of cost cutting measures taken
in 2009. Compensation costs declined $270,000 and 401(k) matching expense
declined $26,000. Other related costs such as travel and entertainment,
marketing expense, and consulting declined $176,000. General and administrative
costs increased due primarily to stock options and litigation expense. The decrease in expense for Sales and
marketing was attributable primarily to lower compensation costs. Research and development costs increased
$163,000 due to impairment charges mitigated by lower compensation costs.
Loss from operations decreased 46% due principally to higher gross
profit.
Interest expense increased due to less capitalized interest. Interest expense for the first quarter of
2010 was $91,000.
The Companys effective tax rate on the net loss before income taxes
was 0.1% and 2.6% (benefit) for the three months ended March 31, 2010 and March 31,
2009, respectively.
There are two charges to our Statement of Operations in the first
quarter of 2010 that are nonrecurring or are not typical of a manufacturing
company. These charges include
litigation costs and stock option expense (a noncash charge which will be fully
amortized at the end of the second quarter of 2010). Were it not for these two charges, our Net
earnings applicable to common shareholders for the quarter would have been
approximately $350,000 and our Net income would have been approximately
$700,000. There would be no federal
income tax impact since we have net operating loss carryforwards which would
have eliminated the tax obligation.
Discussion of Balance Sheet and Statement of Cash
Flow Items
The Companys balance sheet remains strong with cash making up 37.5% of
total assets. Working capital was $24.9
million at March 31, 2010, a decrease of $1.2 million from December 31,
2009. The current ratio was 3.0 at December 31,
2009 and March 31, 2010. The quick
ratio was 2.5 at December 31, 2009 and 2.3 at March 31, 2010. We expect the cost cutting measures described
earlier to continue to mitigate the reduction in future cash balances.
We increased our raw materials inventory in the fourth quarter of 2009
due to the demand for flu shots, particularly under the DHHS program. Since the cancellation of the DHHS program,
we have decreased raw materials for production.
We expect to continue moving the manufacturing of piece parts to Little
Elm as a cost saving measure. Finished
goods inventory increased 38.3% since December 31, 2009 because of a build
up related to the DHHS program.
Approximately $1.4 million in cash flow in the first quarter of 2010
was provided by operating activities. Uses
of cash were primarily for repayment of debt.
11
LIQUIDITY
Historical Sources of
Liquidity
We have historically funded operations primarily from the proceeds from
revenues, private placements, loans, and litigation settlements.
Internal Sources of
Liquidity
Margins
and Market Access
To achieve break even quarters, we need minimal access to hospital
markets which has been difficult to obtain due to the monopolistic marketplace
which was the subject of our initial lawsuit and now also included in our
second antitrust lawsuit against BD.
We will continue to attempt to gain
access to the market through our sales efforts, innovative technology, the
introduction of new products, and, when necessary, litigation.
We are focusing on methods of upgrading our manufacturing capability
and efficiency in order to reduce costs. We believe our current
capitalization provides the resources necessary to implement some of these
changes and improve our manufacturing capacity and efficiency, thereby reducing
our unit cost.
In the third quarter of 2009, w
e were awarded a contract by the DHHS to
supply a portion of the safety engineered syringes to be used in the U.S.
efforts to vaccinate the U.S. population against the Swine Flu. The
impact on us was material. Sales to the
DHHS comprised 24.4% of our revenues for the twelve months ended December 31,
2009. This program, which was estimated to run from August 2009
through March 2010, ended in December 2009. We do not know if there will be a similar
program in 2010. We recorded sales to
DHHS in 2010 (7.1% of Sales, net for the first quarter) that were attributable
to orders placed in 2009.
Fluctuations in the cost and availability of raw materials and
inventory and our ability to maintain favorable supplier arrangements and
relationships could result in the need to manufacture all (as opposed to 32.9%)
of our products in the U.S. This could
temporarily increase unit costs as we ramp up domestic production.
The mix of domestic and international sales affects the average sales
price of our products. Generally, the
higher the ratio of domestic sales to international sales, the higher the
average sales price will be. Typically
international sales are shipped directly from China to the customer. Purchases of product manufactured in China,
if available, usually decrease the average cost of manufacture for all units. Domestic
costs, such as indirect labor and overhead, remain relatively constant. The number of units produced by the Company
versus manufactured in China can have a significant effect on the carrying
costs of inventory as well as Cost of sales.
We will continue to evaluate the appropriate mix of products
manufactured domestically and those manufactured in China to achieve economic
benefits as well as to maintain our domestic manufacturing capability. Currently, approximately 32.9%
of our products are produced domestically.
Fluctuations in the cost of oil (since our products are petroleum
based), transportation, and the volume of units purchased from Double Dove may
have an impact on the unit costs of our product. Increases in such costs may not be
recoverable through price increases of our products. Reductions in oil prices may not quickly
affect petroleum product prices.
Seasonality
Historically, unit sales have increased in the latter part of the year
due, in part, to the demand for syringes during the flu season. The Swine
Flu may have a longer worldwide immunization duration than the seasonal flu.
Licensing
Agreement
We
entered into a new agreement (effective as of July 1, 2009) with BTMD
along similar terms as our prior agreement.
This agreement expires on July 1, 2010 which may automatically
extend under certain conditions. Such
12
terms include granting to
BTMD a limited exclusive license to manufacture and a limited exclusive right
to sell syringes in China having retractable needles that incorporate our
technology. This License Agreement is
subject to the Technology License Agreement dated June 23, 1995 between Mr. Thomas
J. Shaw, our founder and CEO, as licensor, and the Company, as licensee (as
amended). Accordingly, Mr. Shaw
will receive 5% of the licensing proceeds we receive. BTMD has agreed to manufacture and sell these
products in China and to pay us a quarterly royalty of two and one-half cents
per unit on 3mL and 5mL syringes and a royalty of three and one-half cents per
unit on 0.5mL, 1mL, and 10mL syringes.
The facility has been completed and BTMD has met Chinese government
requirements. BTMD received a
Registration Certificate for Medical Device on August 24, 2009. The obligation to pay the royalties continues
even if any and all of our patent rights in China are found to be invalid or unenforceable
for any reason. BTMD reported they owe
us $22,952 for royalties attributable to the first quarter of 2010. This amount is included in Sales, net for the
quarter ended March 31, 2010.
Cash
Requirements
Due to funds received from prior litigation settlements, we have
sufficient cash reserves and intend to rely on operations, cash reserves, and
debt financing as the primary ongoing sources of cash. In the event we continue to have only limited
market access and cash generated from operations becomes insufficient to
support operations, we would take additional cost cutting measures to reduce
cash requirements. Such measures could
result in the reduction of units being produced, the reduction of workforce,
the reduction of salaries of officers and other nonhourly employees, and the
deferral of royalty payments.
External Sources of
Liquidity
We have obtained several loans from our inception, which have, together
with the proceeds from the sales of equities and litigation efforts, enabled us
to pursue development and production of our products. Given the current economic conditions, our
ability to obtain additional funds through loans is uncertain. Furthermore, the shareholders previously
authorized an additional 5,000,000 shares of a Class C Preferred Stock
that could, if necessary, be designated and used to raise funds through the
sale of equity. Due to the current
market price of our Common Stock, it is unlikely we would choose to raise funds
by the sale of equity.
We
obtained a loan from Lewisville State Bank, a division of 1st International
Bank (1st International), for $2,500,000, secured by the land and existing
buildings, which provided funding for the construction of the 47,250 square
foot warehouse placed in service in 2005.
This loan matured in late March 2010 and we paid $2,122,445 to pay
off the loan on April 23, 2010. We
may seek other
financing to replace this loan.
On August 29,
2008, we obtained a $4,210,000 interim construction loan from 1
st
International.
The purpose of the loan was to expand the warehouse, including
additional office space, and construct a new Controlled Environment. The construction project was completed and
the loan was renewed on December 10, 2009 with a 20 year amortization and
10 year maturity. The interest rate is
5.968%.
CAPITAL
RESOURCES
Material Commitments for
Capital Expenditures
None.
Trends in Capital
Resources
Interest expense will increase due to the reduction of capitalized
interest at the present time. It may
also be affected by additional loans or rising interest rates. However, interest expense may be lower if we
do not obtain a loan to replace the money expended to pay off the 1st
International note, which was paid in the second quarter of 2010. Interest income may continue to be negatively
affected by lower interest rates and our prior movement of cash to U.S.
Treasury bills and other U.S. government backed securities.
Although
we believe that we have granted credit to credit-worthy firms, current economic
conditions may affect the timing and/or collectability of some accounts.
13
CONTRACTUAL OBLIGATIONS
We obtained a loan from 1st International for $2,500,000, secured by
the land and existing buildings, which provided funding for the construction of
the 47,250 square foot warehouse placed in service in 2005. This loan matured in late March 2010 and
we paid $2,122,445 to pay off the loan on April 23, 2010. We
may seek other financing to
replace this loan.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
No update.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) of the Securities Exchange Act of
1934, Management, with the participation of our President, Chairman, and Chief
Executive Officer, Thomas J. Shaw (the CEO), and our Vice President and Chief
Financial Officer, Douglas W. Cowan (the CFO), acting in their capacities as
our principal executive and principal financial officer, 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
Commissions 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 March 31,
2010, our disclosure controls and procedures were effective.
Changes in Internal
Control Over Financial Reporting
There have been no changes during the first quarter of 2010 or
subsequent to March 31, 2010 in our internal control over financial
reporting that has materially affected or is reasonably likely to materially
affect our internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1. Legal
Proceedings.
On August 12, 2005, we filed a lawsuit against Abbott Laboratories
(Abbott) in the U.S. District Court in the Eastern District of Texas,
Texarkana Division. We are alleging fraud and breach of contract in
connection with the National Marketing and Distribution Agreement dated as of May 4,
2000, which was terminated on October 15, 2003. We are seeking
damages which we estimate to be in millions of dollars of lost profits, out of
pocket expenses, and other damages. In addition, we are seeking punitive
damages, pre- and post-judgment interest, and attorneys fees. Following
Abbotts unsuccessful attempt to get the case dismissed and ordered to
arbitration, Abbott filed an answer and counterclaim on July 15, 2008,
alleging several breaches of contract, breach of implied warranty of
merchantability, and breach of express warranty, seeking in excess of
$6,000,000 in compensatory damages as well as seeking attorneys fees. We
deny the validity of Abbotts counterclaims. Discovery has already taken
place and is substantially completed. Trial is currently set for July 2010.
In June 2007, we sued BD in the U.S. District Court for the
Eastern District of Texas, Marshall Division, alleging infringement of three
patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of the
federal and state antitrust laws, and of the Lanham Act. We subsequently
dropped the 5,578,011 patent allegations from the lawsuit. In January 2008,
the Court severed the patent claims from the other claims pending resolution of
the patent dispute. In April 2008, we and Thomas J. Shaw sued BD in
the U.S. District Court for the Eastern District of Texas, Marshall Division,
alleging infringement of another recently issued patent (7,351,224). BD counterclaimed for non-infringement and
invalidity of the asserted patent. The Court consolidated this case with
the above-stated case filed in June 2007. On November 9, 2009, the
jury returned a verdict finding that the patents asserted by us were
14
valid
and infringed by BD and awarded $5,000,000 in damages. No final judgment has been entered in this
case. We are seeking injunctive relief.
In September 2007, BD and MDC Investment Holdings, Inc. (MDC)
sued us in the United States District Court for the Eastern District of Texas,
Texarkana Division, initially alleging that we are infringing two U.S. patents
of MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seek
injunctive relief and unspecified damages. We counterclaimed for declarations
of non-infringement, invalidity, and unenforceability of the asserted
patents. The plaintiffs subsequently dropped allegations with regard to
patent no. 7,090,656 and we subsequently dropped our counterclaims for
unenforceability of the asserted patents. The Court conducted a claims
construction hearing on September 25, 2008 and issued its claims
construction order on November 14, 2008. No trial date has been set.
Item 1A. Risk Factors.
There were no material
changes in the Risk Factors applicable to the Company as set forth in our Form 10-K
annual report for 2009 which was filed on March 31, 2010, and which is
available on EDGAR.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales
of Equity Securities and Use of Proceeds
None.
Purchases of
Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases
of Equity Securities
Period
|
|
Total
Number
of Shares
(or Units)
Purchased
|
|
Average
Price Paid
Per Share
(or Unit)
|
|
Total Number of
Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
Maximum Number
(or
Approximate Dollar Value) of
Shares (or Units) that May Yet
Be Purchased Under the Plans
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
March 23, 2010
|
|
10,000
(1)
|
|
$1.54
|
|
0
|
|
N/A
|
|
(1) These shares were purchased by an
affiliated purchaser in a private transaction, not through a publicly announced
plan or program.
Working Capital
Restrictions and Limitations on the Payment of Dividends
The Board of Directors
declared a dividend to the Series I Class B and Series II Class B
Convertible Preferred Shareholders in the aggregate amount of $876,555.
This dividend shall be paid on July 15, 2010.
We maintain cash for use as collateral for letters of credit we provide
from time to time to enable, among other things, the purchase of product from
China. As of March 31, 2010, we had
no funds held as restricted cash for such purposes. The Board of Directors has authorized
Management to borrow and incur indebtedness in the form of letters of credit in
an aggregate amount, at any one time, of $5,000,000.
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.
15
Item 3. Defaults
Upon Senior Securities.
Series I Class B
Convertible Preferred Stock
As of the three months
ended March 31, 2010, the amount of dividends in arrears was $18,000 and
the total arrearage was $198,000. This
amount will be included in the dividend payment to be made on July 15,
2010.
Series II Class B
Convertible Preferred Stock
As of the three months
ended March 31, 2010, the amount of dividends in arrears was $55,000 and
the total arrearage was $606,000. This
amount will be included in the dividend payment to be made on July 15,
2010.
Series III Class B
Convertible Preferred Stock
As of the three months
ended March 31, 2010, the amount of dividends in arrears was $33,000 and
the total arrearage was $3,278,000.
Series IV Class B
Convertible Preferred Stock
As of the three months
ended March 31, 2010, the amount of dividends in arrears was $138,000 and
the total arrearage was $7,721,000.
Series V Class B
Convertible Preferred Stock
As of the three months
ended March 31, 2010, the amount of dividends in arrears was $99,000 and
the total arrearage was $3,792,000.
Item 5. Other
Information.
The 2010 annual meeting
shall be held on September 24, 2010, at 10:00 a.m. Central time at
Little Elm City Hall; 100 West Eldorado Parkway; Little Elm, Texas 75068.
Item 6. Exhibits.
Exhibit No.
|
|
Description of Document
|
|
|
|
31.1
|
|
Certification of
Principal Executive Officer
|
|
|
|
31.2
|
|
Certification of
Principal Financial Officer
|
|
|
|
32
|
|
Certification Pursuant
to 18 U.S.C. Section 1350
|
16
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DATE: May 17,
2010
|
RETRACTABLE TECHNOLOGIES, INC.
|
|
(Registrant)
|
|
|
|
|
|
BY:
|
/s/
Douglas W. Cowan
|
|
|
|
DOUGLAS W. COWAN
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
|
|
17
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