NOTES TO FINANCIAL STATEMENTS
1.
|
BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
|
Business of the Company
Retractable Technologies, Inc. (the “Company”)
was incorporated in Texas on May 9, 1994, and designs, develops, manufactures, and markets safety syringes and other safety medical
products for the healthcare profession. The Company began to develop its manufacturing operations in 1995. The Company’s
manufacturing and administrative facilities are located in Little Elm, Texas. The Company’s products are the VanishPoint®
0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 0.5mL, 1mL, 2mL, 3mL, 5mL, and 10mL syringes; the
small diameter tube adapter; the blood collection tube holder; the allergy tray; the IV safety catheter; the Patient Safe®
syringes; the Patient Safe® Luer Cap; the VanishPoint® Blood Collection Set; and the EasyPoint®
needle. The Company also sells VanishPoint® autodisable syringes in the international market in addition to the
Company’s other products.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash
and cash equivalents include cash, money market accounts, and investments with original maturities of three months or less.
Accounts receivable
The Company records trade receivables when
revenue is recognized. No product has been consigned to customers. The Company’s allowance for doubtful accounts is primarily
determined by review of specific trade receivables. Those accounts that are doubtful of collection are included in the allowance.
This provision is reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off
when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been
made within contract terms.
The 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 Balance Sheets and are shown in Note 7, 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, and debt securities as investments. These assets are readily marketable and are
carried at fair value as of the date of the 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:
Production equipment
|
|
3 to 13 years
|
|
Office furniture and equipment
|
|
3 to 10 years
|
|
Buildings
|
|
39 years
|
|
Building improvements
|
|
15 years
|
|
Long-lived assets
The Company assesses the recoverability
of long-lived assets using an assessment of the estimated undiscounted future cash flows related to such assets. In the event that
assets are found to be carried at amounts which are in excess of estimated gross future cash flows, the assets will be adjusted
for impairment to a level commensurate with fair value determined using a discounted cash flow analysis or appraised 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 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, 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 that are well-established entities. 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. As a consequence, Management considers any exposure from concentrations of credit
risks to be limited.
The following table reflects our significant
customers in 2019, 2018, and 2017:
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Number of significant customers
|
|
3
|
|
2
|
|
2
|
Aggregate dollar amount of net sales to significant customers
|
|
$19.0 million
|
|
$13.1 million
|
|
$14.0 million
|
Percentage of net sales to significant customers
|
|
45.6%
|
|
39.2%
|
|
40.5%
|
The Company decreased its allowance for
doubtful accounts by approximately $3 thousand in 2019.
The Company manufactures some of its products
in Little Elm, Texas, as well as utilizing manufacturers in China. The Company obtained roughly 82.6% of its products in 2019 from
its Chinese manufacturers. Purchases from Chinese manufacturers aggregated 85.3% and 82.9% of products in 2018 and 2017, respectively.
In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find
an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe,
0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and would increase domestic production for the 1mL and 3mL syringes
and EasyPoint® needles.
Revenue recognition
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 Balance Sheets and
deducted from revenues in the Statements of Operations. Accounts payable included estimated contractual
allowances for $3,586,726 and $3,896,341
as of December 31, 2019 and 2018, 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 receipt at the time product is shipped.
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:
|
|
For the year ended December 31, 2019:
|
|
Geographic Segment
|
|
Syringes
|
|
|
Blood Collection Products
|
|
|
EasyPoint® Needles
|
|
|
Other Products
|
|
|
Total Product Sales
|
|
U.S. sales
|
|
$
|
26,722,414
|
|
|
$
|
2,130,767
|
|
|
$
|
2,970,374
|
|
|
$
|
74,369
|
|
|
$
|
31,897,924
|
|
North and South America sales (excluding U.S.)
|
|
|
7,863,796
|
|
|
|
6,313
|
|
|
|
7,996
|
|
|
|
370,885
|
|
|
|
8,248,990
|
|
Other international sales
|
|
|
1,052,217
|
|
|
|
578,617
|
|
|
|
635
|
|
|
|
18,796
|
|
|
|
1,650,265
|
|
Total
|
|
$
|
35,638,427
|
|
|
$
|
2,715,697
|
|
|
$
|
2,979,005
|
|
|
$
|
464,050
|
|
|
$
|
41,797,179
|
|
|
|
For the year ended December 31, 2018:
|
|
Geographic Segment
|
|
Syringes
|
|
|
Blood Collection Products
|
|
|
EasyPoint® Needles
|
|
|
Other Products
|
|
|
Total Product Sales
|
|
U.S. sales
|
|
$
|
23,803,483
|
|
|
$
|
1,365,936
|
|
|
$
|
3,401,389
|
|
|
$
|
75,766
|
|
|
$
|
28,646,574
|
|
North and South America sales (excluding U.S.)
|
|
|
3,521,823
|
|
|
|
8,805
|
|
|
|
252
|
|
|
|
66,564
|
|
|
|
3,597,444
|
|
Other international sales
|
|
|
940,740
|
|
|
|
48,101
|
|
|
|
11,768
|
|
|
|
30,075
|
|
|
|
1,030,684
|
|
Total
|
|
$
|
28,266,046
|
|
|
$
|
1,422,842
|
|
|
$
|
3,413,409
|
|
|
$
|
172,405
|
|
|
$
|
33,274,702
|
|
|
|
For the year ended December 31, 2017:
|
|
Geographic Segment
|
|
Syringes
|
|
|
Blood Collection Products
|
|
|
EasyPoint® Needles
|
|
|
Other Products
|
|
|
Total Product Sales
|
|
U.S. sales
|
|
$
|
23,794,258
|
|
|
$
|
1,098,667
|
|
|
$
|
2,065,777
|
|
|
$
|
57,010
|
|
|
$
|
27,015,712
|
|
North and South America sales (excluding U.S.)
|
|
|
6,182,952
|
|
|
|
3,859
|
|
|
|
—
|
|
|
|
193,934
|
|
|
|
6,380,745
|
|
Other international sales
|
|
|
1,032,508
|
|
|
|
43,473
|
|
|
|
—
|
|
|
|
21,400
|
|
|
|
1,097,381
|
|
Total
|
|
$
|
31,009,718
|
|
|
$
|
1,145,999
|
|
|
$
|
2,065,777
|
|
|
$
|
272,344
|
|
|
$
|
34,493,838
|
|
Income taxes
The Tax Cuts and Job Act ("the Act")
was enacted on December 22, 2017, and the U.S. federal corporate tax rate was reduced from 35% to 21%. U.S. generally accepted
accounting principles require companies to account for the effects of changes in income tax rates and laws in the period the change
is enacted. Financial results, including provisional amounts, have been calculated for the income tax effects of the change. The
U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) allowing companies to use provisional estimates
to record the effects of the Act. SAB 118, as codified by Financial Accounting Standards Board (“FASB”) Accounting
Standards Update (“ASU”) 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118 (SEC Update),” allows companies to complete accounting for these effects no later than one year
from the enactment date of the Act. During 2018, the Company completed its analysis of the provisional estimates made to record
the effects of the Act. On January 14, 2019, the IRS issued a statement saying that alternative minimum tax (“AMT”)
refunds for taxable years beginning after December 31, 2017 will not be subject to sequestration. Prior to this statement from
the IRS, refundable AMT credits under Section 53(e) were subject to sequestration, as required by the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended. The previously recorded AMT receivable was reduced in anticipation of sequestration. Based
upon this development, the Company recorded an additional tax benefit of approximately $13 thousand for the year ended December
31, 2018 to reflect the full amount of refundable AMT credits.
The Company evaluates tax positions taken
or expected to be taken in a tax return for recognition in the financial statements based on whether it is “more-likely-than-not”
that a tax position will be sustained based upon the technical merits of the position. Measurement of the tax position is based
upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The Company provides for deferred income
taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects of differences
between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in effect when such
differences reverse in future periods. Deferred tax assets are periodically reviewed for realizability. The Company has established
a valuation allowance for its net deferred tax asset as future taxable income cannot be reasonably assured. Penalties and interest
related to income taxes are classified as General and administrative expense and Interest expense, respectively, in the Statements
of Operations.
Earnings per share
The Company computes basic earnings per
share (“EPS”) by dividing net earnings or loss 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. At December 31, 2019, the calculation of diluted EPS excluded 639,300
shares of common stock underlying issued and outstanding stock options, as the exercise prices of the stock options were greater
than the average stock prices. The calculation of diluted EPS excluded 1,357,803 and 79,441 shares of Common Stock underlying issued
and outstanding stock options at December 31, 2018 and 2017, as their effect was antidilutive. The calculation of diluted EPS also
excludes
the impact of the conversion of convertible
preferred stock, as the impact was antidilutive for all periods presented. The potential dilution, if any, is shown on the following
schedule:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net income (loss)
|
|
$
|
3,148,234
|
|
|
$
|
(1,339,943
|
)
|
|
$
|
(3,736,038
|
)
|
Preferred dividend requirements
|
|
|
(702,618
|
)
|
|
|
(704,996
|
)
|
|
|
(704,996
|
)
|
Income (loss) applicable to common shareholders
|
|
$
|
2,445,616
|
|
|
$
|
(2,044,939
|
)
|
|
$
|
(4,441,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
32,672,475
|
|
|
|
32,666,454
|
|
|
|
31,958,121
|
|
Weighted average common and common equivalent shares outstanding - assuming dilution
|
|
|
32,672,475
|
|
|
|
32,666,454
|
|
|
|
31,958,121
|
|
Basic earnings (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.14
|
)
|
Shipping and handling costs
The
Company classifies shipping and handling costs as part of Cost of sales in the Statements of Operations.
Self-insured
employee benefit costs
Beginning in 2019, the Company
self-insures certain health insurance benefits for its employees under certain policy limits. The Company has
additional coverage provided by an insurance company for any individual with claims in excess of $60,000 and/or total plan
claims in excess of $601,716 for the plan year. A receivable of $445 thousand was recorded as of December 31, 2019 due to
claims paid by the Company in 2019 but not yet recouped by the stop-loss policy.
Research and development costs
Research and development costs are expensed
as incurred.
Share-based compensation
The Company’s share-based payments
are accounted for using the Black-Scholes 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:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
272,811
|
|
Sales and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
143,255
|
|
Research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
45,174
|
|
General and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
210,983
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
672,223
|
|
Options awarded to employees in 2016 were
amortized over twelve months. The Company amortized four months’ expense for options granted in September 2016 and amortized
the remainder in 2017.
Insurance Proceeds
Receipts from insurance, up to the amount
of any loss recognized by the Company, are considered recoveries. Any such recoveries are recorded when they are received. Insurance
proceeds are not recognized as a component of income (loss) from operations until all repairs are made.
Recently Adopted Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)”, as well as several subsequently issued clarifying amendments. Under the ASU, as amended,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted
basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged. The lease guidance simplified
the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. This amendment clarifies
Topic 842 and corrected unintended application of guidance and is effective concurrent with Topic 842 or upon issuance if Topic
842 was early adopted. In August 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements”.
This amendment provides additional transition options allowing entities to recognize a cumulative effect adjustment to the opening
balance of retained earnings in the period of adoption rather than the earliest period presented and provides a practical expedient
to lessors to elect, by class of underlying assets, to account for non-lease and lease components as a single arrangement.
The Company adopted the provisions of ASU 2018-11 through a cumulative effect adjustment. Topic 842, and its subsequent amendments,
was effective for the Company’s quarter ended March 31, 2019. The Company has completed evaluating the various accounting
policy elections associated with this ASU, as amended, including transition methods and practical expedients, identifying contracts
for evaluation, and reviewing contracts to determine if they contain leases. The Company completed evaluating the timing
and impact of adopting ASU 2016-02, as amended, and recorded lease assets and liabilities of $163,007 on its Balance Sheets, with
no impact to its accumulated deficit.
The following table summarizes the impact
of the adoption of ASU 2016-02 to the previously reported results:
Balance Sheet as of December 31, 2018
|
|
As Previously Reported
|
|
|
New Lease
Standard Adjustment
|
|
|
As Restated
|
|
Other assets
|
|
$
|
2,849
|
|
|
$
|
163,007
|
|
|
$
|
165,856
|
|
Other current liabilities
|
|
$
|
1,387,287
|
|
|
$
|
80,648
|
|
|
$
|
1,467,935
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
82,359
|
|
|
$
|
82,359
|
|
Recently Issued Pronouncements
In June 2016, the FASB issued Accounting
Standards Update 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments,” as well as subsequent clarifying amendments. Among other things, these amendments require the measurement
of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although
the inputs to those techniques will change to reflect the full amount of expected credit losses. This ASU is effective for
the Company’s quarter ending March 31, 2020 with early application permitted. The Company has considered the potential
impact from 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.” The Company expects that the adoption of ASU
2016-13, along with the provisions of ASU 2019-05, will not have a material impact on the Company’s financial statements,
but may require expanded disclosure.
In August 2018, the FASB issued ASU 2018-15,
“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues
Task Force)”. This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract
should be accounted for in accordance with ASC 350-40 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
amendment is effective for annual periods
beginning after December 15, 2019 and interim periods within those annual periods. The Company has completed its assessment
of the standard and does not anticipate a material impact on its financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes: Simplifying the Accounting for Income Taxes. The new standard 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 to primarily be made prospectively, with some changes to be made retrospectively. The Company is currently evaluating
the impact adoption of ASU 2019-12 will have on its financial statements.
Inventories consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
1,254,313
|
|
|
$
|
1,399,543
|
|
Finished goods
|
|
|
6,493,487
|
|
|
|
6,442,759
|
|
|
|
|
7,747,800
|
|
|
|
7,842,302
|
|
Inventory reserve
|
|
|
(297,208
|
)
|
|
|
(297,208
|
)
|
|
|
$
|
7,450,592
|
|
|
$
|
7,545,094
|
|
4.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
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:
|
·
|
Level 1 – quoted market prices in active markets for identical
assets and liabilities
|
|
·
|
Level 2 – inputs other than quoted prices that are directly
or indirectly observable
|
|
·
|
Level 3 - unobservable inputs where there is little or no market
activity
|
The following tables summarize the values
of assets designated as Investments in debt and equity securities:
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Mutual funds and exchange traded funds
|
|
$
|
6,708,746
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,708,746
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
1,062,914
|
|
|
|
—
|
|
|
|
1,062,914
|
|
|
|
$
|
6,708,746
|
|
|
$
|
1,062,914
|
|
|
$
|
—
|
|
|
$
|
7,771,660
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
US Treasury Notes
|
|
$
|
—
|
|
|
$
|
1,411,156
|
|
|
$
|
—
|
|
|
$
|
1,411,156
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
1,575,000
|
|
|
|
—
|
|
|
|
1,575,000
|
|
|
|
$
|
—
|
|
|
$
|
2,986,156
|
|
|
$
|
—
|
|
|
$
|
2,986,156
|
|
The Company holds high-grade exchange-traded
and closed-end funds (ETFs), mutual funds, and debt securities as investments. These assets are readily marketable and are carried
at fair value as of the date of the 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:
|
|
December 31, 2019
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Mutual funds and exchange traded funds
|
|
$
|
6,592,345
|
|
|
$
|
116,401
|
|
|
$
|
—
|
|
|
$
|
6,708,746
|
|
Certificates of deposit
|
|
|
1,050,000
|
|
|
|
12,914
|
|
|
|
—
|
|
|
|
1,062,914
|
|
|
|
$
|
7,642,345
|
|
|
$
|
129,315
|
|
|
|
—
|
|
|
$
|
7,771,660
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Aggregate
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
US Treasury Notes
|
|
$
|
1,411,156
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,411,156
|
|
Certificates of deposit
|
|
|
1,575,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,575,000
|
|
|
|
$
|
2,986,156
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,986,156
|
|
5.
|
PROPERTY, PLANT, AND EQUIPMENT
|
Property, plant, and equipment consist of
the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
261,893
|
|
|
$
|
261,893
|
|
Buildings and building improvements
|
|
|
11,566,115
|
|
|
|
11,566,115
|
|
Production equipment
|
|
|
19,903,236
|
|
|
|
19,948,303
|
|
Office furniture and equipment
|
|
|
3,527,577
|
|
|
|
3,540,846
|
|
Construction in progress
|
|
|
765,176
|
|
|
|
202,109
|
|
|
|
|
36,023,997
|
|
|
|
35,519,266
|
|
Accumulated depreciation
|
|
|
(25,391,940
|
)
|
|
|
(24,667,519
|
)
|
|
|
$
|
10,632,057
|
|
|
$
|
10,851,747
|
|
Depreciation expense for the years ended
December 31, 2019, 2018, and 2017 was $851,673; $883,610; and $830,715, respectively.
In 1995, the Company entered into a license
agreement with the Chief Executive Officer of the Company, Thomas J. Shaw, for the exclusive right to manufacture, market, and
distribute products utilizing automated retraction technology, which agreement has been amended twice. This technology is the subject
of various patents and patent applications owned by Mr. Shaw. The initial licensing fee of $500,000 was amortized over 17 years.
The license agreement also provides for quarterly payments of a 5% royalty fee on gross sales. Additionally, if the Company sublicenses
the technology and the sublicensee’s customers are not known to the Company, then Mr. Shaw shall be entitled to receive from
the Company fifty percent (50%) of the royalties actually paid to the Company by such sublicensee. The royalty fee expense is recognized
in the period in which it is earned. Royalty fees of $3,449,822; $2,944,102; and $2,864,188 are included in Cost of sales for the
years ended December 31, 2019, 2018, and 2017, respectively. Royalties payable under this agreement aggregated $921,445 and $769,324
at December 31, 2019, and 2018, respectively. Gross sales upon which royalties are based were $67,529,783; $58,882,042; and $57,283,780
for 2019, 2018, and 2017, respectively.
7.
|
OTHER ACCRUED LIABILITIES
|
Other accrued liabilities consist of the
following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepayments from customers
|
|
$
|
998,601
|
|
|
$
|
860,926
|
|
Accrued property taxes
|
|
|
—
|
|
|
|
170,568
|
|
Accrued professional fees
|
|
|
263,757
|
|
|
|
294,903
|
|
Other accrued expenses
|
|
|
124,791
|
|
|
|
141,538
|
|
Total
|
|
$
|
1,387,149
|
|
|
$
|
1,467,935
|
|
Long-term debt consists of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Loan from American First National Bank. Maturity date is April 10, 2028. The loan, in the original amount of $4,209,608, provided funding for the expansion of the warehouse, additional office space, and a new Controlled Environment. The loan is secured by the Company’s land and buildings. The interest rate is equal to prime rate plus 0.25%. The interest rate was 5.0% at December 31, 2019.
|
|
$
|
2,638,994
|
|
|
$
|
2,878,980
|
|
|
|
|
|
|
|
|
|
|
Note payable to Deutsche Leasing USA, Inc. The interest rate was 4.25%. The original amount of the note was $525,017 with a 36-month maturity ending in November 2019. Beginning December 2016, the loan became payable in equal installments of principal and interest of approximately $15,500. Collateralized by molding machines and ancillary equipment.
|
|
|
—
|
|
|
|
167,028
|
|
|
|
|
2,638,994
|
|
|
|
3,046,008
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(260,939
|
)
|
|
|
(406,361
|
)
|
|
|
$
|
2,378,055
|
|
|
$
|
2,639,647
|
|
The fair value of long-term liabilities,
based on Management’s estimates, approximates their reported values.
The aggregate maturities of long-term debt
as of December 31, 2019, are as follows:
2020
|
|
260,939
|
2021
|
|
274,858
|
2022
|
|
289,120
|
2023
|
|
304,122
|
2024
|
|
319,688
|
Thereafter
|
|
1,190,267
|
|
$
|
2,638,994
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
On November 7, 2019, the Company filed a
lawsuit in the 44th 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. The defendants have filed a
motion to dismiss and the Court has scheduled a hearing on such motion on April 24, 2020. Trial is currently scheduled for May
24, 2021.
The provision (benefit) for income taxes
consists of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(13,318
|
)
|
|
$
|
—
|
|
State
|
|
|
7,875
|
|
|
|
—
|
|
|
|
848
|
|
Total current provision (benefit)
|
|
|
7,875
|
|
|
|
(13,318
|
)
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
(188,456
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax provision (benefit)
|
|
|
—
|
|
|
|
—
|
|
|
|
(188,456
|
)
|
Total income tax provision (benefit)
|
|
$
|
7,875
|
|
|
$
|
(13,318
|
)
|
|
$
|
(187,608
|
)
|
The Company has $23.3 million
in tax benefits attributable to net operating losses for federal tax purposes. $21.5 million are net operating losses which were
generated before January 1, 2018 and begin to expire in 2028 for federal tax purposes. $1.8 million of net operating
losses were generated after January 1, 2018 and have an indefinite carryover period. The Company has state net
operating losses of $24.8 million which will begin to expire in 2021. The Company also has credits for alternative minimum taxes (“AMT”) paid of
$100 thousand as of December 31, 2019. The alternative minimum tax was repealed with the enactment of the Act. AMT credits
carried over may be used to offset regular tax liability for any tax year. Any unused credits are 50% refundable for tax
years 2018-2020, and 100% refundable for tax years beginning 2021. The Company has recorded the AMT credit as a tax
receivable on its financial statements rather than as a deferred tax asset, as this amount is a refundable credit.
Deferred taxes are provided for those items
reported in different periods for income tax and financial reporting purposes. The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities are presented below:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
5,748,724
|
|
|
$
|
6,668,238
|
|
Accrued expenses and reserves
|
|
|
573,382
|
|
|
|
436,627
|
|
Employee stock option expense
|
|
|
75,591
|
|
|
|
76,150
|
|
Nonemployee stock option expense
|
|
|
8,207
|
|
|
|
8,268
|
|
Inventory
|
|
|
110,455
|
|
|
|
132,114
|
|
Impairment
|
|
|
111,178
|
|
|
|
112,000
|
|
Unrealized Gain/Loss
|
|
|
30,434
|
|
|
|
—
|
|
Deferred tax assets
|
|
|
6,657,971
|
|
|
|
7,433,397
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,628,133
|
)
|
|
|
(1,281,999
|
)
|
Deferred tax liabilities
|
|
|
(1,628,133
|
)
|
|
|
(1,281,999
|
)
|
Net deferred assets
|
|
|
5,029,838
|
|
|
|
6,151,398
|
|
Valuation allowance
|
|
|
(5,029,838
|
)
|
|
|
(6,151,398
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Utilization of the net operating loss carry
forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions.
Deferred income tax calculations reflect
the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from
net operating loss carry forwards, and are stated at the U.S. tax rate of 21% beginning in 2018. Net operating losses incurred
after December 31, 2017 can only offset 80% of taxable income. However, these net operating losses may be carried forward indefinitely
instead of limited to twenty years under previous tax law. Carrybacks of these losses are no longer permitted. Deferred income
tax assets represent amounts available to reduce income taxes payable on taxable income in future years. The Company has fully
reserved these future tax deductions.
The valuation allowance decreased
by $1,121,560 for 2019 and increased by $325,444 for 2018.
A reconciliation of income taxes based on
the federal statutory rate and the effective income tax rate is summarized as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income tax at the federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State tax, net of federal tax
|
|
|
2.0
|
|
|
|
3.5
|
|
|
|
2.9
|
|
Change in valuation allowance
|
|
|
(35.6
|
)
|
|
|
(24.3
|
)
|
|
|
(85.9
|
)
|
Permanent differences
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
|
5.7
|
|
Return-to-provision and other
|
|
|
12.9
|
|
|
|
—
|
|
|
|
(37.6
|
)
|
Tax Reform and Jobs Act tax rate change
|
|
|
—
|
|
|
|
0.1
|
|
|
|
(81.1
|
)
|
Incentive stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
(6.0
|
)
|
Effective tax rate
|
|
|
0.3
|
%
|
|
|
—
|
%
|
|
|
4.8
|
%
|
The Company files income tax returns in
the U.S. federal jurisdiction and in various state and local jurisdictions. The Company's federal income tax returns for all tax
years ended on or after December 31, 2016, remain subject to examination by the Internal Revenue Service. The Company's state and
local income tax returns are subject to examination by the respective state and local authorities over various statutes of limitations,
most ranging from three to five years from the date of filing.
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 6, 2017, April 24, 2017, July 20, 2017, October 20, 2017, January 19, 2018, April 24, 2018, July 20, 2018, October 23,
2018, 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, and January
22, 2020.
Preferred Stock
The Company is authorized to issue 5,000,000
shares of Preferred Stock Class A with a par value of One Dollar ($1.00) per share; 5,000,000 shares of Preferred Stock Class B
with a par value of One Dollar ($1.00) per share; and 5,000,000 shares of Preferred Stock Class C with a par value of One Dollar
($1.00) per share.
The Company has one class of Preferred Stock
outstanding: Class B Convertible Preferred Stock (“Class B Stock”). The Class B Stock has five series: Series I, Series
II, Series III, Series IV, and Series V.
The Class B Stock has been allocated among
Series I, II, III, IV, and V in the amounts of 96,000; 171,200; 129,245; 342,500; and 34,000 shares, respectively as of December
31, 2019. The remaining 4,227,055 authorized shares had not been assigned a series. Please see “Subsequent Events”
for recent information regarding the Preferred Stock.
Series I Class B Stock
There were 96,000 and 98,500 shares of $1
par value Series I Class B Stock outstanding at December 31, 2019 and 2018, respectively. Holders of Series I Class B Stock are
entitled to receive a cumulative annual dividend of $0.50 per share, payable quarterly if declared by the Board of Directors. The
Company paid dividends of $48,312 in 2019 and $49,250 in 2018 and 2017. At December 31, 2019, no dividends were in arrears.
Series I Class B Stock is redeemable at
the option of the Company at a price of $7.50 per share, plus all unpaid dividends. Each share of Series I Class B Stock may, at
the option of the stockholder, be converted to
one share of Common Stock. 2,500 shares
of Series I Class B Stock were converted into Common Stock in 2019. No shares of Series I Class B Stock were converted into Common
Stock in 2018. In the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series
I Class B Stock then outstanding are entitled to $6.25 per share, plus all unpaid dividends prior to any distributions to holders
of Series II Class B Stock, Series III Class B Stock, Series IV Class B Stock, Series V Class B Stock, or Common Stock.
Series II Class B Stock
There were 171,200 shares of $1 par value
Series II Class B Stock outstanding at December 31, 2019 and 2018. Holders of Series II Class B Stock are entitled to receive a
cumulative annual dividend of $1.00 per share, payable quarterly if declared by the Board of Directors. Holders of Series II Class
B Stock generally have no voting rights until dividends are in arrears and unpaid for twelve consecutive quarters. In such case,
the holders of Series II Class B Stock have the right to elect one-third of the Board of Directors of the Company. The Company
paid dividends of $171,200 in each of 2019, 2018, and 2017. At December 31, 2019, no dividends were in arrears.
Series II Class B Stock is redeemable at
the option of the Company at a price of $15.00 per share plus all unpaid dividends. Each share of Series II Class B Stock may,
at the option of the stockholder, be converted to one share of Common Stock. No shares were converted in 2019 or 2018. In the event
of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series II Class B Stock then outstanding
are entitled to $12.50 per share, plus all unpaid dividends, after distribution obligations to holders of Series I Class B Stock
have been satisfied and prior to any distributions to holders of Series III Class B Stock, Series IV Class B Stock, Series V Class
B Stock, or Common Stock.
Series III Class B Stock
There were 129,245 shares of $1 par value
Series III Class B Stock outstanding at December 31, 2019 and 2018. Holders of Series III Class B Stock are entitled to receive
a cumulative annual dividend of $1.00 per share, payable quarterly if declared by the Board of Directors. At December 31, 2019,
approximately $4,404,000 of dividends which have not been declared were in arrears. Please see “Subsequent Events”
for recent information regarding Series III Class B Stock.
Series III Class B Stock is redeemable at
the option of the Company at a price of $15.00 per share, plus all unpaid dividends. Each share of Series III Class B Stock may,
at the option of the stockholder, be converted to one share of Common Stock. No shares were converted in 2019 or 2018. In the event
of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series III Class B Stock then outstanding
are entitled to $12.50 per share, plus all unpaid dividends, after distribution obligations to Series I Class B Stock and Series
II Class B Stock have been satisfied and prior to any distributions to holders of Series IV Class B Stock, Series V Class B Stock,
or Common Stock.
Series IV Class B Stock
There were 342,500 shares of $1 par value
Series IV Class B Stock outstanding at December 31, 2019 and 2018. Holders of Series IV Class B Stock are entitled to receive a
cumulative annual dividend of $1.00 per share, payable quarterly, if declared by the Board of Directors. At December 31, 2019,
approximately $6,826,000 of dividends which have not been declared were in arrears. Please see “Subsequent Events”
for recent information regarding Series IV Class B Stock.
Series IV Class B Stock is redeemable at
the option of the Company at a price of $11.00 per share plus all unpaid dividends. Each share of Series IV Class B Stock may,
at the option of the stockholder any time, be converted into one share of Common Stock. No shares of Series IV Class B Stock were
converted into Common Stock in 2019 or 2018. In the event of voluntary or involuntary liquidation, dissolution, or winding up of
the Company, holders of Series IV Class B Stock then outstanding are entitled to receive liquidating distributions of $11.00 per
share, plus all unpaid dividends after distribution obligations to Series I Class B
Stock, Series II Class B Stock, and Series
III Class B Stock have been satisfied and prior to any distribution to holders of Series V Class B Stock or Common Stock.
Series V Class B Stock
There were 34,000 and 40,000 shares of $1
par value Series V Class B Stock outstanding at December 31, 2019 and 2018, respectively. Holders of Series V Class B Stock are
entitled to receive a cumulative annual dividend of $0.32 per share, payable quarterly, if declared by the Board of Directors.
At December 31, 2019, approximately $1,020,000 of dividends which have not been declared were in arrears.
Series V Class B Stock is redeemable at
the option of the Company at a price of $4.40 per share plus all unpaid dividends. Each share of Series V Class B Stock may, at
the option of the stockholder any time be converted into Common Stock. 6,000 shares of Series V Class B Stock were converted into
Common Stock in 2019. No shares of Series V Class B Stock were converted into Common Stock in 2018. In the event of voluntary or
involuntary liquidation, dissolution, or winding up of the Company, holders of Series V Class B Stock then outstanding are entitled
to receive liquidating distributions of $4.40 per share, plus all unpaid dividends after distribution obligations to Series I Class
B Stock, Series II Class B Stock, Series III Class B Stock, and Series IV Class B Stock have been satisfied and prior to any distribution
to the holders of the Common Stock.
Common stock
The Company is authorized to issue 100,000,000
shares of no par value Common Stock, of which 32,674,954 and 32,666,454 shares were outstanding at December 31, 2019 and 2018,
respectively. Additionally, as of December 31, 2019, a total of 1,412,245 shares of Common Stock were issuable upon the conversion
of Preferred Stock and the exercise of stock options.
13.
|
RELATED PARTY TRANSACTIONS
|
The Company has a license agreement with
the Chief Executive Officer of the Company. See Note 6.
Stock options
Options for the purchase of 3,649,508 shares
of Common Stock have been issued under the 2008 Stock Option Plan. Options for the purchase of 639,300 shares under the 2008 Stock
Option Plan were outstanding as of December 31, 2019. No shares are available for future issuance under the 2008 Stock Option Plan,
which expired July 25, 2018.
The Compensation and Benefits Committee
administered the Company’s stock option plan prior to its termination.
Director, officer, and employee options
A summary of Director, officer, and employee
options granted and outstanding under the 2008 Stock Option Plan is presented below:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at beginning of period
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
|
|
1,805,519
|
|
|
$
|
1.51
|
|
|
|
1,817,919
|
|
|
$
|
1.52
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(661,003
|
)
|
|
$
|
(1.05
|
)
|
|
|
(505,216
|
)
|
|
$
|
(1.36
|
)
|
|
|
(12,400
|
)
|
|
$
|
(2.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
639,300
|
|
|
$
|
2.12
|
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
|
|
1,805,519
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
639,300
|
|
|
$
|
2.12
|
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
|
|
1,803,119
|
|
|
$
|
1.51
|
|
No options were issued in 2019, 2018, or
2017 to employees or non-employee directors.
The following table summarizes information
about Director, officer, and employee options outstanding under the stock option plan at December 31, 2019:
Exercise
Prices
|
|
|
Shares
Outstanding
|
|
|
Weighted Average
Remaining Contractual Life
|
|
|
Shares
Exercisable
|
|
$
|
1.05
|
|
|
|
200,000
|
|
|
|
6.99
|
|
|
|
200,000
|
|
$
|
1.46
|
|
|
|
50,000
|
|
|
|
3.37
|
|
|
|
50,000
|
|
$
|
2.75
|
|
|
|
389,300
|
|
|
|
6.70
|
|
|
|
389,300
|
|
Non-employee options
A summary of options outstanding and held
by non-employees is as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(57,500
|
)
|
|
$
|
(0.81
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
In 2017, the Company recognized stock-based
compensation expense of $672 thousand. The Company recorded no stock-based compensation expense in 2018 or 2019. At December 31,
2019, there were 250,000 stock options with exercise prices lower than the closing market price. The intrinsic value of these options
at December 31, 2019 was $92,000.
Options Pricing Models – Assumptions
The expected life is based on the Company’s
historical experience with option exercise trends. The assumptions for expected volatility are based on a calculation of volatility
over the five-years preceding the grant date. Risk-free interest rates are set using grant-date U.S. Treasury yield curves. In
its calculations, the Company assumed no dividends. The Company elected a policy to account for forfeitures as they occur, rather
than on an estimated basis.
The Company implemented an employee savings
and retirement plan (the “401(k) Plan”) in 2005 that is intended to be a tax-qualified plan covering substantially
all employees. The 401(k) Plan is available to all employees on the first day of the month after 90 days of service. Under the
terms of the 401(k) Plan, employees may elect to contribute up to 88% of their compensation, or the statutory prescribed limit,
if less. The Company may, at its discretion, match employee contributions. For 2017, 2018, and 2019, the Company matched each participant’s
elective deferrals up to 2% of the participant’s compensation for the pay period. The total match was $145,474, $145,146,
and $117,917 in 2017, 2018, and 2019, respectively.
The following is a summary of the Company’s
sales and long-lived assets by geography:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S. sales
|
|
$
|
31,897,924
|
|
|
$
|
28,646,574
|
|
|
$
|
27,015,712
|
|
North and South America sales (excluding U.S.)
|
|
|
8,248,990
|
|
|
|
3,597,444
|
|
|
|
6,380,745
|
|
Other international sales
|
|
|
1,650,265
|
|
|
|
1,030,684
|
|
|
|
1,097,381
|
|
Total sales
|
|
$
|
41,797,179
|
|
|
$
|
33,274,702
|
|
|
$
|
34,493,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
|
U.S.
|
|
$
|
10,542,688
|
|
|
$
|
10,738,253
|
|
|
|
|
|
International
|
|
$
|
89,369
|
|
|
$
|
113,494
|
|
|
|
|
|
The Company does not operate in separate
reportable segments. The Company has minimal long-lived assets in foreign countries. Shipments to international customers generally
require a prepayment either by wire transfer or an irrevocable confirmed letter of credit. 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.
17.
|
STORM DAMAGE AND INSURANCE PROCEEDS
|
On March 26, 2017, a hail storm passed through
Little Elm, Texas, resulting in damage to the Company’s two buildings. During April 2017, the Company performed an inspection
of its facilities and determined that possible roof damage had been sustained. In late April 2017, the Company’s insurance
carrier inspected the two buildings and confirmed that damage occurred from the hail storm. This damage was principally to the
roofs of the buildings but also many of the HVAC units and a wall alongside one of the buildings were also damaged.
The Company’s insurance carrier assessed
damages of $1,009,960 and the Company’s deductible was $5,000. The Company received these funds from its carrier in the second
quarter of 2017. Repairs commenced during the third quarter of 2017. All repairs were completed in the fourth quarter of 2018.
During 2017, the Company incurred and recognized
$538,667 in repairs due to the storm damage. Repair expense during 2018 was $203,289. This repair expense was offset by the insurance
proceeds, resulting in no impact to the Statements of Operations. The remaining insurance proceeds of $261 thousand were recognized
as income in the fourth quarter of 2018.
The Company has operating leases for a corporate
office and equipment. The leases have a remaining lease term of 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 $80,648 and $79,331 for the years ended December 31, 2019 and 2018, respectively. The cash paid for amounts
included in the measurement of lease liabilities as a component of cash flows related to leases was $80,648 and $79,331 for the
years ended December 31, 2019 and 2018, respectively.
Assets and liabilities associated with these
leases included in the Balance Sheets are as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
OPERATING LEASES
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
82,359
|
|
|
$
|
163,007
|
|
Other accrued liabilities
|
|
$
|
82,359
|
|
|
$
|
80,648
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
82,359
|
|
Total operating lease liabilities
|
|
$
|
82,359
|
|
|
$
|
163,007
|
|
The weighted average remaining lease term
is 1.0 year and the weighted average discount rate is 4.0% at December 31, 2019.
Future minimum payments under non-cancelable
operating leases and financing leases consist of the following at December 31, 2019:
Year ending December 31,2020
|
|
$
|
84,155
|
|
|
|
|
|
|
Less imputed interest
|
|
|
(1,796
|
)
|
Total
|
|
$
|
82,359
|
|
19.
|
HELD-TO-MATURITY SECURITIES – CORRECTION OF ERRORS
|
The Balance Sheet as of December 31, 2018
has been revised to reflect a correction of an error to the classification of investments previously recorded as Held-to-Maturity.
During the quarter ended June 30, 2019, the Company determined that, during 2018, it had incorrectly classified certain investments
as Held-to-Maturity that should have been classified as Available-for-Sale. The Company views the correction of the classification
error to be immaterial to previously filed financial statements. Nonetheless, the Company has revised the presentation of
the Balance Sheet at December 31, 2018 to reflect the reclassification of all previously recorded Held-to-Maturity investments
as Available-for-Sale. The effect on the Balance Sheet as of December 31, 2018 is to reclassify $2,986,156 from Held-to-Maturity
securities to Investments in debt and equity securities, at fair value. In addition, Total current assets at December 31,
2018 were increased by $1,989,923 as a result of this reclassification. There was no impact to the Statement of Operations
for 2018 as a result. The Company will continue to revise its previously-issued financial statements on a prospective basis
for this classification error as well as the related disclosures of the fair value of financial instruments.
Effective January 13, 2020, the Company
agreed with two preferred stockholders to purchase outstanding Class B Convertible Preferred Stock (the “Preferred Stock”)
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.
Subsequent to December 31, 2019, the World
Health Organization (WHO) declared the novel coronavirus outbreak a public health emergency. On March 11th, 2020, the
WHO Director-General declared that COVID-19 be characterized as a pandemic. Since that time, the situation surrounding the pandemic
and the effects on the world economy, public health across the globe and U.S. businesses has been, and continues to be, a fluid
situation. The Company is continuing to monitor the situation, including our outsourcing of products from China, the availability
of materials and other resources used in production in the United States, the availability of necessary transportation of products
from our vendors and to our customers, available labor force needed to continue operations, and the ability to meet the demand
requirements of our existing customers. These factors, and numerous other factors which are not yet known, present challenges and
uncertainties which the Company cannot quantify at this time. It is possible that these factors may have a materially adverse impact
to the Company.
|
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
|
The selected quarterly financial data for
the periods ended December 31, 2019, and 2018, have been derived from the Company's unaudited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim
periods. Certain quarterly amounts may differ from full year totals due to rounding.
|
|
(In thousands, except for per share and outstanding stock amounts)
2019
|
|
|
|
Quarter 1
|
|
|
Quarter 2
|
|
|
Quarter 3
|
|
|
Quarter 4
|
|
Sales, net
|
|
$
|
7,932
|
|
|
$
|
9,596
|
|
|
$
|
11,640
|
|
|
$
|
12,629
|
|
Cost of sales
|
|
|
5,442
|
|
|
|
6,665
|
|
|
|
7,872
|
|
|
|
7,680
|
|
Gross profit
|
|
|
2,490
|
|
|
|
2.931
|
|
|
|
3,768
|
|
|
|
4,949
|
|
Total operating expenses
|
|
|
2,665
|
|
|
|
2,602
|
|
|
|
2,789
|
|
|
|
3,110
|
|
Income (loss) from continuing operations
|
|
|
(175
|
)
|
|
|
329
|
|
|
|
979
|
|
|
|
1,839
|
|
Interest and other income
|
|
|
91
|
|
|
|
110
|
|
|
|
91
|
|
|
|
59
|
|
Interest expense
|
|
|
(46
|
)
|
|
|
(44
|
)
|
|
|
(41
|
)
|
|
|
(36
|
)
|
Provision (benefit) for income taxes
|
|
|
—
|
|
|
|
3
|
|
|
|
4
|
|
|
|
1
|
|
Net income (loss)
|
|
|
(130
|
)
|
|
|
392
|
|
|
|
1,025
|
|
|
|
1,861
|
|
Preferred stock dividend requirements
|
|
|
(176
|
)
|
|
|
(175
|
)
|
|
|
(175
|
)
|
|
|
(177
|
)
|
Income (loss) applicable to common shareholders
|
|
$
|
(306
|
)
|
|
$
|
217
|
|
|
$
|
850
|
|
|
$
|
1,684
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
Weighted average common shares outstanding - basic
|
|
|
32,666,454
|
|
|
|
32,674,954
|
|
|
|
32,674,954
|
|
|
|
32,674,954
|
|
Weighted average common shares outstanding - diluted
|
|
|
32,666,454
|
|
|
|
32,674,954
|
|
|
|
32,674,954
|
|
|
|
32,710,248
|
|
Gross profit margin
|
|
|
31.4
|
%
|
|
|
30.5
|
%
|
|
|
32.4
|
%
|
|
|
39.2
|
%
|
|
|
(In thousands, except for per share and outstanding stock amounts)
2018
|
|
|
|
Quarter 1
|
|
|
Quarter 2
|
|
|
Quarter 3
|
|
|
Quarter 4
|
|
Sales, net
|
|
$
|
7,673
|
|
|
$
|
7,475
|
|
|
$
|
9,863
|
|
|
$
|
8,264
|
|
Cost of sales
|
|
|
4,813
|
|
|
|
5,407
|
|
|
|
7,067
|
|
|
|
5,766
|
|
Gross profit
|
|
|
2,860
|
|
|
|
2,068
|
|
|
|
2,796
|
|
|
|
2,498
|
|
Total operating expenses
|
|
|
3,017
|
|
|
|
3,007
|
|
|
|
2,856
|
|
|
|
2,932
|
|
Income from insurance proceeds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
261
|
|
Loss from continuing operations
|
|
|
(157
|
)
|
|
|
(939
|
)
|
|
|
(60
|
)
|
|
|
(173
|
)
|
Interest and other income
|
|
|
28
|
|
|
|
35
|
|
|
|
39
|
|
|
|
51
|
|
Interest expense
|
|
|
(50
|
)
|
|
|
(44
|
)
|
|
|
(42
|
)
|
|
|
(41
|
)
|
Provision (benefit) for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
Net loss
|
|
|
(179
|
)
|
|
|
(948
|
)
|
|
|
(63
|
)
|
|
|
(150
|
)
|
Preferred stock dividend requirements
|
|
|
(176
|
)
|
|
|
(176
|
)
|
|
|
(176
|
)
|
|
|
(177
|
)
|
Loss applicable to common shareholders
|
|
$
|
(355
|
)
|
|
$
|
(1,124
|
)
|
|
$
|
(239
|
)
|
|
$
|
(327
|
)
|
Basic loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Loss per share from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Weighted average common shares outstanding - basic
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
Weighted average common shares outstanding - diluted
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
|
|
32,666,454
|
|
Gross profit margin
|
|
|
37.3
|
%
|
|
|
27.7
|
%
|
|
|
28.3
|
%
|
|
|
30.2
|
%
|