The following shows the changes in stockholders’
equity for the three-month period ended June 30, 2020:
The following shows the changes in stockholders’
equity for the three-month period ended June 30, 2019:
The following shows the changes in stockholders’
equity for the six-month period ended June 30, 2020:
The following shows the changes in stockholders’
equity for the six-month period ended June 30, 2019:
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1.
|
BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
|
Business of the Company
Retractable Technologies, Inc.
(the “Company”) was incorporated in Texas on May 9, 1994, and designs, develops, manufactures, and markets safety syringes
and other safety medical products for the healthcare profession. The Company began to develop its manufacturing operations in 1995.
The Company’s manufacturing and administrative facilities are located in Little Elm, Texas. The Company’s products
are the VanishPoint® 0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 0.5mL, 1mL, 2mL,
3mL, 5mL, and 10mL syringes; the blood collection tube holder; the small diameter tube adapter; the allergy tray; the IV safety
catheter; the Patient Safe® syringes; the Patient Safe® Luer Cap; the VanishPoint® Blood
Collection Set; and the EasyPoint® needle. The Company also sells VanishPoint® autodisable syringes
in the international market in addition to the Company’s other products.
Basis of presentation
The accompanying condensed financial
statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation
of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring
nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the
entire year. The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures
contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 30, 2020 for the year
ended December 31, 2019.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
Cash and cash equivalents
For purposes of reporting cash
flows, cash and cash equivalents include cash, money market accounts, and investments with original maturities of three months
or less.
Accounts receivable
The
Company records trade receivables when revenue is recognized. No product has been consigned to customers. The Company’s allowance
for doubtful accounts is primarily determined by review of specific trade receivables. Those accounts that are doubtful of collection
are included in the allowance. This provision is reviewed to determine the adequacy of the allowance for doubtful accounts. Trade
receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent
when payment has not been made within contract terms. The Allowance for bad debt was $271 thousand and $147 thousand as
of June 30, 2020 and December 31, 2019, respectively.
The Company requires certain
customers to make a prepayment prior to beginning production or shipment of their order. Customers may apply such prepayments to
their outstanding invoices or pay the invoice and continue to carry forward the deposit for future orders. Such amounts are included
in Other accrued liabilities on the Condensed Balance Sheets and are shown in Note 6, Other Accrued Liabilities.
The Company records an allowance
for estimated returns as a reduction to Accounts receivable and Gross sales. Historically, returns have been insignificant.
Inventories
Inventories are valued at the
lower of cost or net realizable value, with cost being determined using actual average cost. The Company compares the average cost
to the net realizable value and records the lower value. Net realizable value is the estimated selling price in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. Management considers such factors as
the amount of inventory on hand and in the distribution channel, estimated time to sell such inventory, the shelf life of inventory,
and current market conditions when determining excess or obsolete inventories. A reserve is established for any excess or obsolete
inventories or they may be written off.
Investments in debt and equity
securities
The
Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, equity securities, and debt securities as investments.
These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. Net unrealized
and realized gains or losses on investments in debt and equity securities are reflected as a component of Interest and other income.
Realized gains or losses on investments in debt and equity securities are recognized using the specific identification method.
Property, plant, and equipment
Property, plant, and equipment
are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Cost includes major expenditures
for improvements and replacements which extend useful lives or increase capacity and interest cost associated with significant
capital additions. Gains or losses from disposals are included in operations.
The Company's property, plant,
and equipment primarily consist of buildings, land, assembly equipment, molding machines, molds, office equipment, furniture, and
fixtures. Depreciation and amortization are calculated using the straight-line method over the following useful lives:
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 individual equity securities, exchange-traded and closed-end funds, and mutual
funds and are reported at their fair value based upon quoted prices in active markets. Investments in U.S. Treasury Notes
are reported at their fair value based upon quoted prices in active markets. Investments in certificates of deposit (CD) with original
maturities of greater than three months are reported at their estimated fair value based upon the duration of the CD and the interest
rate earned on the CD versus current interest rates of similar duration CDs. The fair value of long-term liabilities, based on
Management’s estimates, approximates their reported values.
Concentration risks
The Company’s
financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, certificates of
deposit, U.S. Treasury Notes, exchange-traded and closed-end funds, mutual funds, equity securities, and accounts receivable.
Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management
believes the institutions are of high credit quality. The Company assesses market risk in debt and equity securities through
consultation with its outside investment advisors. Management is responsible for directing investment activity based on
current economic conditions. The majority of accounts receivable are due from companies which are well-established entities.
In the second quarter of 2020, a significant portion of the Company’s sales were to the U.S. government, which Management does not
consider a credit risk. As a consequence, Management considers any exposure from concentrations of credit risks to be
limited.
The following table reflects
significant customers for the three- and six-month periods ending June 30, 2020 and 2019, respectively:
|
|
|
Three Months
ended
June 30, 2020
|
|
|
|
Three Months
ended
June 30, 2019
|
|
|
|
Six Months
ended
June 30, 2020
|
|
|
|
Six Months
ended
June 30, 2019
|
|
Number of significant customers
|
|
|
4
|
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
Aggregate dollar amount of net sales to significant customers
|
|
|
$6.0 million
|
|
|
|
$4.0 million
|
|
|
|
$6.9 million
|
|
|
|
$7.9 million
|
|
Percentage of net sales to significant customers
|
|
|
52.1
|
%
|
|
|
42.7
|
%
|
|
|
30.2
|
%
|
|
|
45.4
|
%
|
In
the second quarter of 2020, approximately $1.4 million of the Company’s sales were to the Department of Health and
Human Services of the United States in partial fulfillment of a recent $83.8 million delivery order to supply automated retraction
safety syringes. Management expects the U.S. government to remain a significant customer through the remainder of 2020, and increase
quarterly through May 2021.
The
Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China. The Company
obtained roughly 83.5% and 80.5% of its products in the first six months of 2020 and 2019, respectively, from its Chinese manufacturers.
Purchases from Chinese manufacturers aggregated 85.0% and 84.1% of products in the three-month periods ended June 30, 2020 and
2019, respectively. In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company
would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL
insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes, and would increase domestic production for the 1mL
and 3mL syringes and EasyPoint® needles.
Revenue recognition
The Company recognizes revenue
when it has satisfied all performance obligations to the customer, generally when title and risk of loss pass to the customer.
Payments from customers with approved credit terms are typically due 30 days from the invoice date. Under certain contracts, revenue
is recorded on the basis of sales price to distributors, less contractual pricing allowances. Contractual pricing allowances consist
of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the facility that purchased
the products, and (ii) a provision for estimated contractual pricing allowances for products for which the Company has not received
tracking reports. Rebates are recorded when issued and are applied against the customer’s receivable balance. Distributors
receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a
tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract,
there is a standard rebate (lower than a contracted rebate) given to the distributor. One of the purposes of the rebate is to encourage
distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is recognized in the period
the related sales are recognized and is reviewed at the end of each quarter and adjusted for changes in levels of products for
which there is no tracking report. Additionally, if it becomes clear that tracking reports will not be provided by individual distributors,
the provision is further adjusted. The estimated contractual allowance is included in Accounts payable in the Condensed Balance
Sheets and deducted from Revenues in the Condensed Statements of Operations. Accounts payable included estimated contractual allowances
for $5,275,825 and $3,586,726 as of June 30, 2020 and December 31, 2019, respectively. The terms and conditions of contractual
pricing allowances are governed by contracts between the Company and its distributors. Revenue for shipments directly to end-users
is recognized when title and risk of ownership pass from the Company. End-users do not receive any contractual allowances on their
purchases. Any product shipped or distributed for evaluation purposes is expensed.
The Company provides product
warranties that: i) the products are fit for medical use as generally defined within the boundaries of United States FDA approval;
ii) the products are not defective; and iii) the products will conform to the descriptions set forth in their respective labeling,
provided that they are used in accordance with such labeling and the Company’s written directions for use. The Company has
historically not incurred significant warranty claims.
The Company’s domestic
return policy provides that a customer may return incorrect shipments within 10 days following arrival at the distributor’s
facility. In all such cases, the distributor must obtain an authorization code from the Company and affix the code to the returned
product. The Company’s domestic return policy also generally provides that a customer may return product that is overstocked.
Overstocking returns are limited to two times in each 12-month period up to 1% of distributor’s total purchase of products
for the prior 12-month period. All product overstocks and returns are subject to inspection and acceptance by the Company.
The Company’s international
distribution agreements generally do not provide for any returns.
The Company requires certain
customers to pay in advance of product shipment. Such prepayments from customers are recorded in Other accrued liabilities and
are generally recognized as revenue within 30 to 60 days of shipment of the product.
The Company recognizes revenue
from licensing agreements when collection of such amounts from third parties is reasonably assured. If the Company licenses its
products for sale, the Company is obligated to pay Thomas J. Shaw, the owner of certain patented technology, a certain percentage
of such revenue pursuant to the terms of the Technology License Agreement between the Company and Mr. Shaw.
Disaggregated information of
revenue recognized from contracts with customers and licensing fees recognized are as follows:
|
|
For the three months ended June 30, 2020:
|
|
Geographic Segment
|
|
|
Syringes
|
|
|
|
Blood
Collection
Products
|
|
|
|
EasyPoint®
Needles
|
|
|
|
Other
Products
|
|
|
|
Total
Product
Sales
|
|
U.S. sales
|
|
$
|
7,492,387
|
|
|
$
|
235,720
|
|
|
$
|
1,656,712
|
|
|
$
|
24,976
|
|
|
$
|
9,409,795
|
|
North and South America sales (excluding U.S.)
|
|
|
1,561,242
|
|
|
|
5,300
|
|
|
|
—
|
|
|
|
377,348
|
|
|
|
1,943,890
|
|
Other international sales
|
|
|
216,160
|
|
|
|
1,850
|
|
|
|
—
|
|
|
|
2,150
|
|
|
|
220,160
|
|
Total
|
|
$
|
9,269,789
|
|
|
$
|
242,870
|
|
|
$
|
1,656,712
|
|
|
$
|
404,474
|
|
|
$
|
11,573,845
|
|
|
|
For the three months ended June 30, 2019:
|
|
Geographic Segment
|
|
|
Syringes
|
|
|
|
Blood
Collection
Products
|
|
|
|
EasyPoint®
Needles
|
|
|
|
Other
Products
|
|
|
|
Total
Product
Sales
|
|
U.S. sales
|
|
$
|
6,168,886
|
|
|
$
|
476,733
|
|
|
$
|
1,193,485
|
|
|
$
|
12,997
|
|
|
$
|
7,852,101
|
|
North and South America sales
(excluding U.S.)
|
|
|
1,191,818
|
|
|
|
300
|
|
|
|
264
|
|
|
|
—
|
|
|
|
1,192,382
|
|
Other international sales
|
|
|
219,405
|
|
|
|
161,793
|
|
|
|
147
|
|
|
|
170,062
|
|
|
|
551,407
|
|
Total
|
|
$
|
7,580,109
|
|
|
$
|
638,826
|
|
|
$
|
1,193,896
|
|
|
$
|
183,059
|
|
|
$
|
9,595,890
|
|
|
|
For the six months ended June 30, 2020:
|
|
Geographic Segment
|
|
|
Syringes
|
|
|
|
Blood
Collection
Products
|
|
|
|
EasyPoint®
Needles
|
|
|
|
Other
Products
|
|
|
|
Total
Product
Sales
|
|
U.S. sales
|
|
$
|
14,465,322
|
|
|
$
|
815,843
|
|
|
$
|
2,422,572
|
|
|
$
|
42,855
|
|
|
$
|
17,746,592
|
|
North and South America sales
(excluding U.S.)
|
|
|
3,616,026
|
|
|
|
8,000
|
|
|
|
1,496
|
|
|
|
1,064,768
|
|
|
|
4,690,290
|
|
Other international sales
|
|
|
330,990
|
|
|
|
3,590
|
|
|
|
—
|
|
|
|
4,600
|
|
|
|
339,180
|
|
Total
|
|
$
|
18,412,338
|
|
|
$
|
827,433
|
|
|
$
|
2,424,068
|
|
|
$
|
1,112,223
|
|
|
$
|
22,776,062
|
|
|
|
For the six months ended June 30, 2019:
|
|
Geographic Segment
|
|
|
Syringes
|
|
|
|
Blood
Collection
Products
|
|
|
|
EasyPoint®
Needles
|
|
|
|
Other
Products
|
|
|
|
Total
Product
Sales
|
|
U.S. sales
|
|
$
|
11,794,228
|
|
|
$
|
927,847
|
|
|
$
|
1,241,963
|
|
|
$
|
27,974
|
|
|
$
|
13,992,012
|
|
North and South America sales
(excluding U.S.)
|
|
|
2,522,148
|
|
|
|
4,163
|
|
|
|
516
|
|
|
|
925
|
|
|
|
2,527,752
|
|
Other international sales
|
|
|
460,649
|
|
|
|
372,492
|
|
|
|
147
|
|
|
|
175,312
|
|
|
|
1,008,600
|
|
Total
|
|
$
|
14,777,025
|
|
|
$
|
1,304,502
|
|
|
$
|
1,242,626
|
|
|
$
|
204,211
|
|
|
$
|
17,528,364
|
|
Income taxes
The Company evaluates tax positions
taken or expected to be taken in a tax return for recognition in the financial statements based on whether it is “more-likely-than-not”
that a tax position will be sustained based upon the technical merits of the position. Measurement of the tax position is based
upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The Company provides for deferred
income taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects
of differences between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in
effect when such differences reverse in future periods. Deferred tax assets are periodically reviewed for realizability. In prior
periods, the Company established a valuation allowance for its net deferred tax asset as future taxable income which could not
be reasonably assured. During the quarter ended June 30, 2020, the Company released its valuation allowance based on available
evidence supporting that its deferred tax assets will be realized in full.
Earnings per share
The Company computes basic earnings
or loss per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period)
by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS
and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock
issuable upon the conversion of convertible preferred stock. The calculation of diluted EPS included 347,950 shares of Common Stock
underlying issued and outstanding stock options for both the three and six months ended June 30, 2020, respectively. All common
stock issuable upon the conversion of convertible preferred stock is excluded from the calculation of diluted EPS as their effect
was antidilutive for all periods presented. The potential dilution, if any, is shown on the following schedule:
|
|
|
Three Months
Ended
June 30, 2020
|
|
|
|
Three Months
Ended
June 30, 2019
|
|
|
|
Six Months
Ended
June 30, 2020
|
|
|
|
Six Months
Ended
June 30, 2019
|
|
Net income
|
|
$
|
3,766,113
|
|
|
$
|
391,752
|
|
|
$
|
4,088,886
|
|
|
$
|
262,531
|
|
Preferred dividend requirements
|
|
|
(174,148
|
)
|
|
|
(175,456
|
)
|
|
|
(348,291
|
)
|
|
|
(351,705
|
)
|
Income (loss) applicable to common shareholders
|
|
$
|
3,591,965
|
|
|
$
|
216,296
|
|
|
$
|
3,740,595
|
|
|
$
|
(89,174
|
)
|
Weighted average common shares outstanding
|
|
|
32,789,047
|
|
|
|
32,673,537
|
|
|
|
32,735,126
|
|
|
|
32,669,996
|
|
Weighted average common and common equivalent shares outstanding — assuming dilution
|
|
|
32,985,381
|
|
|
|
32,673,537
|
|
|
|
32,856,003
|
|
|
|
32,669,996
|
|
Basic earnings (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.11
|
|
|
$
|
(0.00
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.11
|
|
|
$
|
(0.00
|
)
|
Shipping and handling costs
The Company classifies shipping
and handling costs as part of Cost of sales in the Condensed Statements of Operations.
Research and development
costs
Research and development costs
are expensed as incurred.
Leases
The Company determines if an
arrangement is a lease at inception. Operating and finance leases are included in Other assets, Other accrued liabilities, and
Other long-term liabilities on the Condensed Balance Sheets. Right-of-use (“ROU”) assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of
lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the incremental borrowing rate
based on information available at the commencement date was used in determining the present value of lease payments.
The operating lease ROU asset
also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the
lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized
on a straight-line basis over the lease term. Leases with an initial term of twelve months or less are not recorded on the Condensed
Balance Sheets; however, rent expense is recognized on a straight-line basis over the lease term.
Recently Adopted Pronouncements
The Company adopted ASU 2016-13,
“Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as
well as subsequent clarifying amendments on January 1, 2020. Among other things, these amendments require the measurement
of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Many of the loss estimation techniques applied previously will still be permitted,
although the inputs to those techniques will change to reflect the full amount of expected credit losses. The adoption of
ASU 2016-13, as well as the Targeted Transition Relief as provided by ASU 2019-05, “Financial Instruments – Credit
Losses (Topic 326) – Targeted Transition Relief” did not have a significant impact on the Company’s financial
statements.
The Company adopted ASU 2018-15,
“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues
Task Force)” on January 1, 2020. This amendment requires that implemented costs incurred in a hosting arrangement that
is a service contract should be accounted for in accordance with ASC 350-40 Internal-Use Software. Accordingly, costs incurred
during the preliminary project and post-implementation stages are expensed and costs associated with the application development
phase are capitalized. The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement
and that capitalized costs should be evaluated for impairment. The adoption of this ASU did not have a significant impact
on the Company’s financial statements or disclosures.
In August 2018, the FASB issued
ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement.” The amendment modifies, among other things, disclosure requirements on fair value measurements and
eliminates certain disclosures related to transfers and valuation levels of Level 3 fair value measurements. Additionally, the
amendment requires disclosure of changes in unrealized gains and losses in other comprehensive income for Level 3 fair value measurements
and certain qualitative factors related to significant unobservable inputs used in Level 3 valuations. The amendment is effective
for annual periods beginning after December 15, 2019 and interim periods within the annual period. The adoption of ASU 2018-13
did not have a significant effect on the Company’s financial statements, as the Company does not currently have any investments
classified as Level 3 fair value measurements.
Recently Issued Pronouncements
In December 2019, the FASB issued
ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”. The new standard 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:
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
Raw materials
|
|
$
|
1,498,063
|
|
|
$
|
1,254,313
|
|
Finished goods
|
|
|
8,194,751
|
|
|
|
6,493,487
|
|
|
|
|
9,692,814
|
|
|
|
7,747,800
|
|
Inventory reserve
|
|
|
(297,208
|
)
|
|
|
(297,208
|
)
|
|
|
$
|
9,395,606
|
|
|
$
|
7,450,592
|
|
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:
|
|
June 30, 2020
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Equity securities
|
|
$
|
2,894,835
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,894,835
|
|
Mutual funds and exchange traded funds
|
|
|
6,785,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,785,155
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
1,080,840
|
|
|
|
—
|
|
|
|
1,080,840
|
|
|
|
$
|
9,679,990
|
|
|
$
|
1,080,840
|
|
|
$
|
—
|
|
|
$
|
10,760,830
|
|
|
|
December 31, 2019
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
The
Company holds high-grade ETFs, mutual funds, individual equity stocks (predominately in the energy sector), and debt securities
as investments. These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance
Sheets. The Company intends to hold these assets for possible future operating requirements.
The following table summarizes
gross unrealized gains and losses from Investments in debt and equity securities:
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
Aggregate
|
|
|
|
|
Cost
|
|
|
|
Gains
|
|
|
|
Losses
|
|
|
|
Fair Value
|
|
Equity securities
|
|
$
|
2,039,148
|
|
|
$
|
855,687
|
|
|
$
|
—
|
|
|
$
|
2,894,835
|
|
Mutual funds and exchange traded funds
|
|
|
6,671,607
|
|
|
|
113,548
|
|
|
|
—
|
|
|
|
6,785,155
|
|
Certificates of deposit
|
|
|
1,050,000
|
|
|
|
30,840
|
|
|
|
—
|
|
|
|
1,080,840
|
|
|
|
$
|
9,760,755
|
|
|
$
|
1,000,075
|
|
|
|
—
|
|
|
$
|
10,760,830
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
Aggregate
|
|
|
|
|
Cost
|
|
|
|
Gains
|
|
|
|
Losses
|
|
|
|
Fair Value
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
Unrealized gains on investments
in debt and equity securities were $870,760 and $102,128 for the six months ended June 30, 2020 and 2019, respectively.
The Company’s effective
tax rate on the net income before income taxes was (85.1)% and (74.8)% for the three and six months ended June 30, 2020, respectively,
and approximately 1.0% for each of the three- and six-month periods ended June 30, 2019.
The effective tax rate for the
six months ended June 30, 2020 is different from the three months ended June 30, 2020 due primarily to the $1.8 million benefit
recorded as a discrete item in connection with the release of the valuation allowance on deferred tax assets expected to be realized
in future periods.
6.
|
OTHER ACCRUED LIABILITIES
|
Other accrued liabilities consist
of the following:
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
Prepayments from customers
|
|
$
|
302,380
|
|
|
$
|
998,601
|
|
Accrued property taxes
|
|
|
234,000
|
|
|
|
—
|
|
Accrued professional fees
|
|
|
381,200
|
|
|
|
263,757
|
|
Other accrued expenses
|
|
|
192,023
|
|
|
|
124,791
|
|
|
|
$
|
1,109,603
|
|
|
$
|
1,387,149
|
|
7.
|
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 September 10, 2020.
The Company does not operate
in separate reportable segments. Shipments to international customers generally require a prepayment either by wire transfer or
an irrevocable confirmed letter of credit. The Company does extend credit to international customers on some occasions depending
upon certain criteria, including, but not limited to, the credit worthiness of the customer, the stability of the country, banking
restrictions, and the size of the order. All transactions are in U.S. currency.
Revenues by geography are as
follows:
|
|
|
Three Months
Ended
June 30, 2020
|
|
|
|
Three Months
Ended
June 30, 2019
|
|
|
|
Six Months
Ended
June 30, 2020
|
|
|
|
Six Months
Ended
June 30, 2019
|
|
U.S. sales
|
|
$
|
9,409,795
|
|
|
$
|
7,852,101
|
|
|
$
|
17,746,592
|
|
|
$
|
13,992,012
|
|
North and South America sales
(excluding U.S.)
|
|
|
1,943,890
|
|
|
|
1,192,382
|
|
|
|
4,690,290
|
|
|
|
2,527,752
|
|
Other international sales
|
|
|
220,160
|
|
|
|
551,407
|
|
|
|
339,180
|
|
|
|
1,008,600
|
|
Total sales, net
|
|
$
|
11,573,845
|
|
|
$
|
9,595,890
|
|
|
$
|
22,776,062
|
|
|
$
|
17,528,364
|
|
Long-lived assets by geography
are as follows:
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
10,509,390
|
|
|
$
|
10,542,688
|
|
International
|
|
|
77,307
|
|
|
|
89,369
|
|
Total
|
|
$
|
10,586,697
|
|
|
$
|
10,632,057
|
|
The Board declared and the Company
paid dividends to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,313 and $42,800, respectively,
on January 18, 2019 and April 22, 2019. The Board declared and the Company paid dividends to Series I and Series II Class B Preferred
Shareholders in the following amounts: $12,000 and $42,800, respectively, on July 19, 2019, October 21, 2019, January 22, 2020,
April 20, 2020, and July 20, 2020.
The Company has operating leases
for a corporate office and equipment. The leases have a remaining lease term of less than one year. The Company currently
has no finance leases. The right-of-use (“ROU”) asset is determined based on the lease liability adjusted for
lease incentives received. Lease expense is recognized on a straight-line basis over the lease term. The leases may
include various expenses incidental to the use of the property, such as common area maintenance, property taxes and insurance.
These costs are separate from the minimum rent payment and are not considered in the determination of the lease liability and ROU
asset. The Company has not noted any material instances in its leases where these costs were combined with the minimum rent
payment and has therefore elected the policy to not separate lease from non-lease components if they are combined with the minimum
rent payment. The option periods are not included in the determination of the lease liability and right-of-use asset as the
Company is not reasonably certain if it will extend at the time of lease commencement.
The operating lease cost component
of the lease expense was $40,768 for the six-month period ended June 30, 2020. The cash paid for amounts included in the
measurement of lease liabilities as a component of cash flows related to leases was $40,768 for the six months ended June 30, 2020.
The operating lease cost component of the lease expense was $39,912 for the six months ended June 30, 2019. The cash paid for amounts
included in the measurement of lease liabilities as a component of cash flows related to leases was $39,912 for the six months
ended June 30, 2019.
Assets and liabilities associated
with these leases included in the Condensed Balance Sheets are as follows:
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
OPERATING LEASES
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
41,591
|
|
|
$
|
82,359
|
|
Other accrued liabilities
|
|
$
|
41,591
|
|
|
$
|
82,359
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
Total operating lease liabilities
|
|
$
|
41,591
|
|
|
$
|
82,359
|
|
The weighted average remaining
lease term is six months and the weighted average discount rate is 4.0%.
Future minimum payments under
non-cancelable operating leases and financing leases consist of the following at June 30, 2020:
Year ending December 31, 2020
|
|
$
|
42,077
|
|
Less imputed interest
|
|
|
(486
|
)
|
Total
|
|
$
|
41,591
|
|
11.
|
EXCHANGE OF COMMON STOCK FOR PREFERRED STOCK
|
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.
Effective May 18, 2020, the
Company agreed to purchase 2,500 shares of Series IV Preferred Stock from one shareholder for $25,000 and 2,500 shares of Common
Stock. Such preferred stockholder agreed to waive all unpaid dividends in arrears associated with its Preferred Stock, which resulted
in a waiver of a total of $50,370 in unpaid dividends in arrears.
Stock options were exercised
by the Company’s employees and directors at various dates during the quarter ended June 30, 2020, and, consequently, a total
of 284,850 shares of Common Stock were issued for an aggregate payment to the Company of $626,687 to exercise such options.
To
date, the Company’s manufacturing facility in Little Elm, Texas has continued to operate due to its status as an
essential business. As a result of the COVID-19 pandemic, the Company has implemented certain safety precautions at its
facility to reduce the risk of the potential spread of the novel coronavirus. The Company has implemented arrangements to
reduce the number of office staff employees working on-site at the production facility, as well as instituting personal
distancing policies and monitoring of essential production staff to minimize the risk of infection. The Company continues to
monitor the evolving situation and will work to further mitigate risks to staff and to customers. The Company is continuing
to evaluate the ever-changing circumstances surrounding this pandemic as relates to its ability to continue to source
materials and products, maintain a workforce, and operate its business effectively and efficiently. Despite the global
disruption of the coronavirus pandemic, the Company has not experienced a significant disruption to its supply chain.
During 2020, the Company has experienced an increase in demand for its products and has been able to meet such demand with
increased volumes despite the pandemic. The Company is unable to predict with certainty its ability to maintain its current
operational functionality.
14.
|
PAYCHECK PROTECTION PROGRAM LOAN
|
On
April 17, 2020, the Company entered into a promissory note in the principal amount of $1,363,000 (the “PPP Loan”) in
favor of Independent Bank (the “Lender”) pursuant to the Paycheck Protection Program (the “PPP”) of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration
(“SBA”). The PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.0% per annum. Commencing November
17, 2020, the Company is required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize
the principal amount outstanding by the maturity date. The PPP Loan may be prepaid by the Company at any time prior to maturity
with no prepayment penalties. The PPP Loan is unsecured and is a non-recourse obligation. PPP loan recipients can apply
for and be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined,
subject to limitations, based on the use of the loan proceeds for payment of payroll costs, rent, utilities, and interest on debt.
The terms of any forgiveness may also be subject to further requirements in any regulations and guidelines the SBA may adopt.
As of June 30, 2020, the
Company believes it has incurred qualifying expenses equal to or greater than the principal amount of the PPP Loan; however,
the Company is not able to determine the amount, if any, that might be forgiven.
On June 5, 2020, the PPP Flexibility
Act was signed into law which, among other things, (i) extended the covered period from 8 weeks after the date of PPP funding to
24 weeks after the date of PPP funding, (ii) reduced the required amount of payroll expenditures from 75% to 60%, (iii) removed
the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and (iv) extended the repayment deferral
period to be the earlier of (a) the date forgiveness funds are received or (b) ten months from the end of the covered period. The
Company is evaluating the impact of these changes on the PPP Loan, including the payment date and the amounts available for forgiveness.
Assuming the PPP Loan is not
forgiven, the Company’s obligations thereunder are as follows as of June 30, 2020 for years ending December 31:
2020
|
|
$
|
151,244
|
|
2021
|
|
|
912,826
|
|
2022
|
|
|
298,930
|
|
|
|
$
|
1,363,000
|
|
Effective July 1, 2020, the
Company entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense,
U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG,
NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA) (“Government”) for $53,664,286
in Government funding for expanding the Company’s domestic production of needles and syringes. The principle purpose of the
TIA is to fund increasing the Company’s manufacturing capacity for hypodermic safety needles and corresponding syringes in
response to the worldwide COVID-19 global pandemic. The Government award is an expenditure-type TIA, whereby the Government will
make payments to the Company for the Company’s expenditures for equipment and supplies in carrying out the expansion of the
Company’s domestic production. The Company’s contributions under the terms of the TIA to enhance domestic capacity
of pandemic-essential technology include providing facilities, technical expertise, labor and maintenance of the TIA-funded equipment
for a ten-year term.
As of August 14, 2020, the Company
has negotiated contracts for the purchase of automated assembly equipment, as well as portions of auxiliary equipment for approximately
$20 million. The Company has engaged architects and general construction contractors for the completion of new controlled environment
facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional
controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space
in conjunction with the overall production capacity expansion.