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,
as well as a standard 3mL syringe packaged with an EasyPoint® needle. The Company also sells VanishPoint® autodisable
syringes in the international market in addition to the Company’s other products.
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, equity securities, 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 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 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. In 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 our significant
customers in 2020, 2019, and 2018:
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Number of significant customers
|
2
|
|
3
|
|
2
|
Aggregate dollar amount of net sales to significant customers
|
$41.6 million
|
|
$19.0 million
|
|
$13.1 million
|
Percentage of net sales to significant customers
|
50.6%
|
|
45.6%
|
|
39.2%
|
The Company increased its allowance
for doubtful accounts by approximately $125 thousand in 2020.
In 2020, approximately $31.6 million
of the Company’s sales were to the Department of Health and Human Services of the United States in partial fulfillment of a recent
$83.8 million delivery order to supply automated retraction safety syringes (the “HHS Order”). Management expects the U.S.
government to remain a significant customer through at least July 2021.
The
Company manufactures some of its products in Little Elm, Texas, as well as utilizing manufacturers in China. The Company obtained roughly
85.2% of its products in 2020 from its Chinese manufacturers. Purchases from Chinese manufacturers aggregated 82.6% and 85.3% of products
in 2019 and 2018, respectively. In the event that the Company becomes unable to purchase products from its Chinese manufacturers,
the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe,
0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and would increase domestic production for the 1mL and
3mL syringes and EasyPoint® needles. Regardless of vendor availability, the Company expects to increase its domestic syringe
production capacity at its facilities pursuant to the plans outlined in the TIA as hereinafter defined.
Revenue recognition
The
Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of loss
pass to the customer. Payments from customers with approved credit terms are typically due 30 days from the invoice date. Under
certain contracts, revenue is recorded on the basis of sales price to distributors, less contractual pricing allowances. Contractual
pricing allowances consist of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the
facility that purchased the products, and (ii) a provision for estimated contractual pricing allowances for products for which the
Company has not received tracking reports. Rebates are recorded when issued and are applied against the customer’s receivable
balance. Distributors receive a rebate for the difference between the Wholesale
Acquisition Cost and the appropriate contract
price as reflected on a tracking report provided by the distributor to the Company. If product is sold
by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the
distributor. One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision
for contractual pricing allowances is recognized in the period the related sales are recognized and is reviewed at the end of each
quarter and adjusted for changes in levels of products for which there is no tracking report. Additionally, if it becomes clear that
tracking reports will not be provided by individual distributors, the provision is further adjusted. The estimated contractual
allowance is included in Accounts payable in the Balance Sheets and deducted from revenues in the Statements of Operations. Accounts
payable included estimated contractual allowances for $3,435,352 and $3,586,726 as of December 31, 2020 and 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 upon 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 year ended December 31, 2020:
|
Geographic Segment
|
|
Syringes
|
|
Blood
Collection
Products
|
|
EasyPoint®
Needles
|
|
Other
Products
|
|
Total
Product
Sales
|
U.S. sales (excluding HHS Order)
|
$
|
30,446,858
|
$
|
2,116,108
|
$
|
9,542,122
|
$
|
64,375
|
$
|
42,169,463
|
HHS Order sales to U.S. government
|
|
31,634,343
|
|
—
|
|
—
|
|
—
|
|
31,634,343
|
North and South America sales (excluding U.S.)
|
|
5,733,116
|
|
8,450
|
|
86,816
|
|
1,064,768
|
|
6,893,150
|
Other international sales
|
|
917,478
|
|
239,329
|
|
235
|
|
8,455
|
|
1,165,497
|
Total
|
$
|
68,731,795
|
$
|
2,363,887
|
$
|
9,629,173
|
$
|
1,137,598
|
$
|
81,862,453
|
|
|
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
|
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. Penalties and interest
related to income taxes are classified as General and administrative expense and Interest expense, respectively. 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 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, 2020, the calculation of diluted EPS under the treasury stock method
included 131,347 shares of Common Stock underlying issued and outstanding stock options. Common stock issuable upon the conversion of
convertible preferred stock is excluded from the calculation of diluted EPS for 2020, 2019, and 2018 because the effect was antidilutive.
At December 31, 2019 and December 31, 2018, the calculation of diluted EPS excluded 639,300 and 1,357,803 shares of common stock, respectively,
underlying issued and outstanding stock options, as the exercise prices of the stock options were greater than the average stock prices.
The potential dilution, if any, is shown on the following schedule:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net income (loss)
|
$
|
24,223,013
|
$
|
3,148,234
|
$
|
(1,339,943
|
)
|
Preferred stock dividend requirements
|
|
(573,868
|
)
|
(702,618
|
)
|
(704,996
|
)
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Deemed contribution on extinguishment of preferred stock
|
|
2,975,708
|
|
—
|
|
—
|
|
Income (loss) applicable to common stockholders
|
$
|
26,624,853
|
$
|
2,445,616
|
$
|
(2,044,939
|
)
|
|
|
|
|
|
|
|
|
Weighted Average common shares outstanding
|
|
33,169,307
|
|
32,672,475
|
|
32,666,454
|
|
Weighted Average common and common equivalent shares outstanding - assuming dilution
|
|
33,300,654
|
|
32,672,475
|
|
32,666,454
|
|
Basic earnings (loss) per share
|
$
|
0.80
|
$
|
0.07
|
$
|
(0.06
|
)
|
Diluted earnings (loss) per share
|
$
|
0.80
|
$
|
0.07
|
$
|
(0.06
|
)
|
The FASB Codification 260-10-S99-2,
Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, requires the gain
or loss on extinguishment of equity-classified preferred stock to be included in the net income per common stockholder used to calculate
earnings per share (similar to the treatment of dividends paid on preferred stock). The difference between (1) the fair value of the consideration
transferred to the holders of the preferred stock and (2) the carrying amount of the preferred stock (net of issuance costs) is subtracted
from (or added to) net income to arrive at income available to common stockholders in the calculation of earnings per share.
The Company has determined to apply
this guidance to its accounting treatment of the preferred stock transactions described in Note 19.
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
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 $100,000 and/or total plan claims in excess of $1,000,000 for the plan year.
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.
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.
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 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 Balance Sheets; however, rent
expense is recognized on a straight-line basis over the lease term.
Technology Investment Agreement
(TIA)
Effective July 1, 2020, the Company
entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense, U.S. Army
Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD)
on behalf of the Biomedical Advanced Research and Development Authority (BARDA) for $53,664,286 in government funding for expanding the
Company’s domestic production of needles and syringes. Pursuant to the terms of the TIA, the Company is expected to make significant
additions to its facilities which should allow the Company to increase domestic production. As reimbursements are received from the U.S.
government for such expenditures, the Company records a deferred liability. The deferred liability will be systematically amortized as
a gain over the life of the related property, plant, and equipment as to offset the related depreciation expense of the assets acquired.
The amortization will be presented separately from the depreciation expense on the Statements of Operations.
Recently Adopted Pronouncements
The Company adopted ASU 2016-13, “Financial
Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as well as subsequent clarifying
amendments on January 1, 2020. Among other things, these amendments require the measurement of all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
Many of the loss estimation techniques applied previously will still be permitted, although the inputs to those techniques will change
to reflect the full amount of expected credit losses. The adoption of ASU 2016-13, as well as the Targeted Transition Relief as
provided by ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326) – Targeted Transition Relief” did
not have a significant impact on the Company’s financial statements.
The Company adopted ASU 2018-15, “Intangibles—Goodwill
and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)” on January 1, 2020.
This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should be accounted for in
accordance with ASC 350-40 Internal-Use Software. Accordingly, costs incurred during the preliminary project and post-implementation
stages are expensed and costs associated with the application development phase are capitalized. The amendment also requires that
capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.
The adoption of this ASU did not have a significant impact on the Company’s financial statements or disclosures.
In August 2018, the FASB issued ASU
2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement.” The amendment modifies, among other things, disclosure requirements on fair value measurements and eliminates certain
disclosures related to transfers and valuation levels of Level 3 fair value measurements. Additionally, the amendment requires disclosure
of changes in unrealized gains and losses in other comprehensive income for Level 3 fair value measurements and certain qualitative factors
related to significant unobservable inputs used in Level 3 valuations. The amendment was effective for annual periods beginning after
December 15, 2019 and interim periods within the annual period. The adoption of ASU 2018-13 did not have a significant effect on the
Company’s
financial statements, as the Company does not currently have any investments classified as Level 3 fair value measurements.
Recently Issued Pronouncements
In December 2019, the FASB issued ASU
2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”. The new standard is intended to simplify the accounting
for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating
income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also
simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020
and interim periods within the annual period, with early adoption permitted. Adoption of the standard requires certain changes primarily
be made prospectively, with some changes to be made retrospectively. The Company has determined that the adoption of ASU 2019-12 will
not have a material impact on its financial statements.
In March 2020, the FASB issued ASU
No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”,
to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients for contracts that
reference LIBOR, if certain criteria are met, that can be applied through December 31, 2022. As reference rate reform is still an ongoing
process, the Company will continue to evaluate the timing and potential impact of adoption for optional expedients when deemed necessary.
3. INVENTORIES
Inventories consist of the following:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw
materials
|
|
$
|
1,358,552
|
|
|
$
|
1,254,313
|
|
Finished
goods
|
|
|
9,173,302
|
|
|
|
6,493,487
|
|
|
|
|
10,531,854
|
|
|
|
7,747,800
|
|
Inventory
reserve
|
|
|
(297,208
|
)
|
|
|
(297,208
|
)
|
|
|
$
|
10,234,646
|
|
|
$
|
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:
|
|
|
December 31, 2020
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Equity securities
|
|
$
|
3,990,533
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,990,533
|
|
Mutual funds and exchange traded funds
|
|
|
4,013,956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,013,956
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
77,344
|
|
|
|
—
|
|
|
|
77,344
|
|
|
|
$
|
8,004,489
|
|
|
$
|
77,344
|
|
|
$
|
—
|
|
|
$
|
8,081,833
|
|
|
|
|
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
|
|
The Company holds high-grade ETFs,
mutual funds, individual equity stocks, 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, 2020
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
Aggregate
|
|
|
|
|
Cost
|
|
|
|
Gains
|
|
|
|
Losses
|
|
|
|
Fair Value
|
|
Equity securities
|
|
$
|
2,098,144
|
|
|
$
|
1,892,389
|
|
|
$
|
—
|
|
|
$
|
3,990,533
|
|
Mutual funds and exchange traded funds
|
|
|
3,909,364
|
|
|
|
104,592
|
|
|
|
—
|
|
|
|
4,013,956
|
|
Certificates of deposit
|
|
|
75,000
|
|
|
|
2,344
|
|
|
|
—
|
|
|
|
77,344
|
|
|
|
$
|
6,082,508
|
|
|
$
|
1,999,325
|
|
|
$
|
—
|
|
|
$
|
8,081,833
|
|
|
|
|
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
|
|
5. PROPERTY,
PLANT, AND EQUIPMENT
Property, plant, and equipment consist
of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Land
|
|
$
|
261,893
|
|
|
$
|
261,893
|
|
Buildings and building improvements
|
|
|
11,593,952
|
|
|
|
11,566,115
|
|
Production equipment
|
|
|
20,290,331
|
|
|
|
19,903,236
|
|
Office furniture and equipment
|
|
|
3,630,455
|
|
|
|
3,527,577
|
|
Construction in progress
|
|
|
21,365,915
|
|
|
|
765,176
|
|
|
|
|
57,142,546
|
|
|
|
36,023,997
|
|
Accumulated depreciation
|
|
|
(26,326,042
|
)
|
|
|
(25,391,940
|
)
|
|
|
$
|
30,816,504
|
|
|
$
|
10,632,057
|
|
Depreciation expense for the years
ended December 31, 2020, 2019, and 2018 was $832,069; $851,673; and $883,610, respectively.
6. LICENSE
AGREEMENT
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 license agreement 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 $5,476,306; $3,449,822; and $2,944,102 are included in Cost of sales for the years
ended December 31, 2020, 2019, and 2018, respectively. Royalties payable under this agreement aggregated $1,973,781 and $921,445 at December
31, 2020, and 2019, respectively. Gross sales upon which royalties are based were $109,526,118; $67,529,783; and $58,882,042; for 2020,
2019, and 2018, respectively.
7. OTHER
ACCRUED LIABILITIES
Other accrued liabilities consist of
the following:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Prepayments from customers
|
|
$
|
1,686,868
|
|
|
$
|
998,601
|
|
Accrued professional fees
|
|
|
331,204
|
|
|
|
263,757
|
|
Current portion – preferred stock repurchase
|
|
|
1,092,282
|
|
|
|
—
|
|
Other accrued expenses
|
|
|
288,550
|
|
|
|
124,791
|
|
Total
|
|
$
|
3,398,904
|
|
|
$
|
1,387,149
|
|
8. LONG-TERM
DEBT
Long-term debt consists of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
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, 2020.
|
|
$
|
2,378,100
|
|
|
$
|
2,638,994
|
|
|
|
|
|
|
|
|
|
|
Loan from Independent Bank pursuant to the Paycheck Protection Program. Original maturity date is April 17, 2022. The interest rate is equal to 1.0% per annum.
|
|
|
1,363,000
|
|
|
|
—
|
|
|
|
|
3,741,100
|
|
|
|
2,638,994
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(1,030,763
|
)
|
|
|
(260,939
|
)
|
|
|
$
|
2,710,337
|
|
|
$
|
2,378,055
|
|
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, 2020, are as follows:
2021
|
$
|
1,030,763
|
|
2022
|
|
896,210
|
|
2023
|
|
304,120
|
|
2024
|
|
319,685
|
|
2025
|
|
336,488
|
|
Thereafter
|
|
853,834
|
|
|
$
|
3,741,100
|
|
9. OTHER
LONG-TERM LIABILITIES
Other long-term liabilities consists
of the following:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Technology Investment Agreement (TIA)
|
|
|
22,444,324
|
|
|
|
—
|
|
Stock repurchase
|
|
|
2,034,373
|
|
|
|
—
|
|
Total
|
|
$
|
24,478,697
|
|
|
$
|
—
|
|
The TIA provides for reimbursement
to the Company for the purchase of equipment and supplies related to the expansion of the Company’s domestic production of needles
and syringes. Under the TIA, reimbursable amounts will be reflected as a liability until the time its deferred income can be systematically
amortized over a period matching the useful life of the purchased assets.
The stock repurchase liability represents
the long-term portion, at net present value, of $3,303,330 gross payable by the Company to former preferred shareholders as a result of
private stock purchases in 2020 of 320,333 shares of Class B Series IV preferred stock and 25,000 shares of Class B Series V preferred
stock. The purchase price is payable in three annual installments of $1,101,110.
10. 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. On October 6, 2020, the Court dismissed
Defendants’ motion to dismiss, which order was appealed by the Defendants on October 9, 2020 to the Court of Appeals, Fifth District
of Texas at Dallas. Oral argument for the appeal has been set for April 7, 2021
11. INCOME
TAXES
The provision (benefit) for income
taxes consists of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,431,590
|
|
|
$
|
—
|
|
|
$
|
(13,318
|
)
|
State
|
|
|
2,049,850
|
|
|
|
7,875
|
|
|
|
—
|
|
Total current provision (benefit)
|
|
|
6,481,440
|
|
|
|
7,875
|
|
|
|
(13,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,428,399
|
)
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
(1,202,807
|
)
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax provision (benefit)
|
|
|
(4,631,206
|
)
|
|
|
—
|
|
|
|
—
|
|
Total income tax provision (benefit)
|
|
$
|
1,850,234
|
|
|
$
|
7,875
|
|
|
$
|
(13,318
|
)
|
The Company had $23.3 million in tax
benefits attributable to net operating losses for federal tax purposes as of December 31, 2019, which were fully utilized as of December
31, 2020. The Company has state net operating losses of $3.6 million as of December 31, 2020 which will begin to expire in 2029. The Company
also had 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 Tax Cuts and Jobs Act. The Company recorded the AMT credit as a tax receivable on its financial
statements as of December 31, 2019 rather than as a deferred tax asset, as this amount is a refundable credit. The AMT credit refund receivable
at December 31, 2019 was claimed on the Company’s 2019 corporate income tax return and was received in 2020.
Utilization of the state net operating
loss carry forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by
state rules that are similar to the Internal Revenue Code of 1986, as amended.
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,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
198,675
|
|
|
$
|
5,748,724
|
|
Accrued expenses and reserves
|
|
|
824,920
|
|
|
|
573,382
|
|
Employee stock option expense
|
|
|
15,188
|
|
|
|
75,591
|
|
Nonemployee stock option expense
|
|
|
8,515
|
|
|
|
8,207
|
|
Inventories
|
|
|
98,748
|
|
|
|
110,455
|
|
Impairment
|
|
|
—
|
|
|
|
111,178
|
|
Deferred income – TIA contract
|
|
|
5,675,617
|
|
|
|
—
|
|
Unrealized gains/losses
|
|
|
—
|
|
|
|
30,434
|
|
Deferred tax assets
|
|
|
6,821,663
|
|
|
|
6,657,971
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains/losses
|
|
|
(508,197
|
)
|
|
|
—
|
|
Property, plant, and equipment
|
|
|
(1,682,260
|
)
|
|
|
(1,628,133
|
)
|
Deferred tax liabilities
|
|
|
(2,190,457
|
)
|
|
|
(1,628,133
|
)
|
Net deferred assets
|
|
|
4,631,206
|
|
|
|
5,029,838
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(5,029,838
|
)
|
Net deferred tax assets
|
|
$
|
4,631,206
|
|
|
$
|
—
|
|
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%. Deferred income tax assets represent amounts available to reduce income
taxes payable on taxable income in future years.
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. The valuation allowance was fully released during the year ended December 31, 2020. The
valuation allowance was decreased by $5,029,838 for 2020 and decreased by $1,121,560 for 2019.
Under the Tax Cuts and Jobs Act, 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. Carryback of these losses is no longer permitted.
The CARES Act temporarily removed the
80% of taxable income limitation to allow NOL carryforwards to fully offset income. For tax years beginning before 2021, the Company can
take an NOL deduction equal to 100% of taxable income. For tax years beginning after 2021, the Company can take: (1) a 100% deduction
of NOLs arising in tax years prior to 2018, and (2) a deduction limited to 80% of modified taxable income for NOLs arising in tax years
after 2017.
A reconciliation of income taxes based
on the federal statutory rate and the effective income tax rate is summarized as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Income tax at the federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State tax, net of federal tax
|
|
|
4.2
|
|
|
|
2.0
|
|
|
|
3.5
|
|
Change in valuation allowance
|
|
|
(19.2
|
)
|
|
|
(35.6
|
)
|
|
|
(24.3
|
)
|
Permanent differences
|
|
|
(0.6
|
)
|
|
|
—
|
|
|
|
(0.3
|
)
|
Return-to-provision and other
|
|
|
1.7
|
|
|
|
12.9
|
|
|
|
(0.9
|
)
|
Tax Reform and Jobs Act tax rate change
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Effective tax rate
|
|
|
7.1
|
%
|
|
|
0.3
|
%
|
|
|
(0.9
|
)%
|
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, 2017, 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.
12. DIVIDENDS
The Board declared and the Company
paid cash dividends to Series I and Series II Class B Preferred Shareholders within one month of the end of each quarter in 2018, 2019,
and 2020, resulting in cumulative annual payments of: $49,250, and $171,200 to Series I and Series II preferred shareholders, respectively,
in 2018; $48,625, and $171,200 to Series I and Series II preferred shareholders, respectively, in 2019; $48,000, and $168,642 to Series
I and Series II preferred shareholders, respectively, in 2020; and one payment of $10,041, and $39,050 to Series I and Series II preferred
shareholders, respectively, in 2021.
13. STOCKHOLDERS’
EQUITY
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 two series: Series II and
Series III. Series I, Series IV, and Series V were cancelled by Board resolution effective March 16, 2021.
The Class B Series II and III stock
had 156,200 and 106,745 shares outstanding, respectively, at December 31, 2020. The remaining 4,737,055 authorized shares have not been
assigned a series.
Series I Class B Stock
There were 0 and 96,000 shares of $1
par value Series I Class B Stock outstanding at December 31, 2020 and 2019, respectively. Holders of Series I Class B Stock were 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 $48,000 in 2020 and $48,625 in 2019. At December 31, 2020, no dividends were in arrears.
Series I Class B Stock was redeemable
at the option of the Company at a price of $7.50 per share, plus all unpaid dividends. Such a redemption took place effective December
31, 2020. Each share of Series I Class B Stock was, at the option of the stockholder, convertible to one share of Common Stock. 81,700
shares of Series I Class B Stock was converted to Common Stock in 2020 and the remaining 14,300 shares were redeemed by the Company as
of December 31, 2020 for a total redemption price payable of $107,250. 2,500 shares of Series I Class B Stock were converted into Common
Stock in 2019. In the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, holders of Series I Class
B Stock then outstanding would have been 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 156,200 and 171,200 shares
of $1 par value Series II Class B Stock outstanding at December 31, 2020 and 2019, respectively. 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 $168,642 in 2020 and $171,200 in 2019. At December 31, 2020, 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. 15,000 shares were converted into Common Stock in 2020. No shares
were converted in 2019. 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, prior to any distributions to holders of
Series III Class B Stock or Common Stock.
Series III Class B Stock
There were 106,745 and 129,245 shares
of $1 par value Series III Class B Stock outstanding at December 31, 2020 and 2019. 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, 2020,
approximately $4,037,000 of dividends which have not been declared were in arrears.
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 2020 or 2019. 22,500 shares were
exchanged for Common Stock in private transactions in 2020. Please see Note 19 for a description of private exchange transactions in 2020.
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 II Class B Stock have
been satisfied and prior to any distributions to holders of Common Stock.
Series IV Class B Stock
There were 0 and 342,500 shares of
$1 par value Series IV Class B Stock outstanding at December 31, 2020 and 2019, respectively. Holders of Series IV Class B Stock were
entitled to receive a cumulative annual dividend of $1.00 per share, payable quarterly, if declared by the Board of Directors. At December
31, 2020, approximately $101,000 of dividends which have not been declared were in arrears.
Series IV Class B Stock was 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 was, at the
option of the stockholder any time, convertible into one share of Common Stock. No shares of Series IV Class B Stock were converted into
Common Stock in 2020 or 2019. 342,500 shares were exchanged for Common Stock in private transactions in 2020. Please see Note 19 for a
description of private exchange transactions in 2020. In the event of voluntary or involuntary liquidation, dissolution, or winding up
of the Company, holders of Series IV Class B Stock then outstanding would have been 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 0 and 34,000 shares of $1
par value Series V Class B Stock outstanding at December 31, 2020 and 2019, respectively. Holders of Series V Class B Stock were entitled
to receive a cumulative annual dividend of $0.32 per share, payable quarterly, if declared by the Board of Directors. At December 31,
2020, approximately $830,000 of dividends which have not been declared were in arrears.
Series V Class B Stock was 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 was, at the
option of the stockholder any time, convertible into Common Stock. 0 and 6,000 shares of Series V Class B Stock were converted into Common
Stock in 2020 and 2019, respectively. 34,000 shares were exchanged for Common Stock in private transactions in 2020. Please see Note 19
for a description of private exchange transactions in 2020. In the event of voluntary or involuntary liquidation, dissolution, or winding
up of the Company, holders of Series V Class B Stock then outstanding would have been 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 33,957,204 and 32,674,954 shares were outstanding at December 31, 2020 and 2019,
respectively. Additionally, as of December 31, 2020, a total of 462,395 shares of Common Stock were issuable upon the conversion of Preferred
Stock and the exercise of stock options.
14. RELATED
PARTY TRANSACTIONS
The Company has a license agreement
with the Chief Executive Officer of the Company. See Note 6.
15. STOCK
OPTIONS
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 199,450 shares under the 2008 Stock
Option Plan were outstanding as of December 31, 2020. 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.
Stock option exercises
Stock options were exercised by the
Company’s employees and directors during 2020, and, consequently, a total of 431,550 shares of Common Stock were issued for an aggregate
payment to the Company of $922,512 to exercise such options.
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of period
|
|
|
639,300
|
|
|
$
|
2.12
|
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
|
|
1,805,519
|
|
|
$
|
1.51
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
(431,550
|
)
|
|
$
|
(2.14
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(8,300
|
)
|
|
$
|
(2.75
|
)
|
|
|
(661,003
|
)
|
|
$
|
(1.05
|
)
|
|
|
(505,216
|
)
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
199,450
|
|
|
$
|
2.05
|
|
|
|
639,300
|
|
|
$
|
2.12
|
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
199,450
|
|
|
$
|
2.05
|
|
|
|
639,300
|
|
|
$
|
2.12
|
|
|
|
1,300,303
|
|
|
$
|
1.57
|
|
No options were issued in 2020, 2019,
or 2018 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, 2020:
Exercise Prices
|
|
|
Shares Outstanding
|
|
|
Weighted Average
Remaining Contractual Life
|
|
|
Shares Exercisable
|
|
$
|
1.05
|
|
|
|
82,500
|
|
|
|
5.99
|
|
|
|
82,500
|
|
$
|
2.75
|
|
|
|
116,950
|
|
|
|
5.70
|
|
|
|
116,950
|
|
Non-employee options
A summary of options outstanding and
held by non-employees is as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
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
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(57,500
|
)
|
|
$
|
(0.81
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
57,500
|
|
|
$
|
0.81
|
|
The Company recorded no stock-based
compensation expense in 2018, 2019, or 2020. At December 31, 2020, there were 199,450 stock options with exercise prices lower than the
closing market price. The intrinsic value of these options at December 31, 2020 was $1,733,856.
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.
16. 401(k)
PLAN
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 2020, 2019, and 2018, the Company matched each participant’s elective
deferrals up to 2% of the participant’s compensation for the pay period. The total match was $162,008; $117,917; and $145,146 in
2020, 2019, and 2018, respectively.
17. BUSINESS
SEGMENT
The following is a summary of the Company’s
sales and long-lived assets by geography:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
U.S. sales
|
|
$
|
73,803,806
|
|
|
$
|
31,897,924
|
|
|
$
|
28,646,574
|
|
North and South America sales
(excluding U.S.)
|
|
|
6,893,150
|
|
|
|
8,248,990
|
|
|
|
3,597,444
|
|
Other
international sales
|
|
|
1,165,497
|
|
|
|
1,650,265
|
|
|
|
1,030,684
|
|
Total
sales
|
|
$
|
81,862,453
|
|
|
$
|
41,797,179
|
|
|
$
|
33,274,702
|
|
Long-lived
assets
|
|
2020
|
|
|
2019
|
|
U.S.
|
|
$
|
30,751,259
|
|
|
$
|
10,542,688
|
|
International
|
|
$
|
65,245
|
|
|
$
|
89,369
|
|
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.
18. LEASES
The Company has operating leases for
a warehouse and equipment. The leases have a remaining lease term of less than one year. The Company currently has no finance
leases. The 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 $103,312 and $80,648 for the years ended December 31, 2020 and 2019, respectively. The cash paid for amounts
included in the measurement of lease liabilities as a component of cash flows related to leases was $106,101 and $80,648 for the years
ended December 31, 2020 and 2019, respectively.
Assets and liabilities associated with
these leases included in the Balance Sheets are as follows:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
OPERATING LEASES
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
38,892
|
|
|
$
|
82,359
|
|
Other accrued liabilities
|
|
$
|
38,892
|
|
|
$
|
82,359
|
|
Other long-term liabilities
|
|
|
—
|
|
|
|
—
|
|
Total operating lease liabilities
|
|
$
|
38,892
|
|
|
$
|
82,359
|
|
19. PRIVATE
EXCHANGES AND REDEMPTION
Private Exchanges of Preferred Stock
for Common Stock
In 2020, the Company entered into several
agreements with shareholders to purchase its outstanding Class B Convertible Preferred Stock. The consideration for these purchases consisted
of both cash and Common Stock. In addition, in each such transaction, the preferred shareholder counterparty waived their rights to unpaid
dividends
in arrears. In total, 22,500 shares of Series III Class B Convertible Preferred Stock, 342,500 shares of Series IV Class B Convertible
Preferred Stock, and 34,000 shares of Series V Class B Convertible Preferred Stock were purchased by the Company. The aggregate cash
consideration equaled $3,786,000, of which $482,670 was paid in 2020 with the rest payable over a three-year period beginning February
2021. The aggregate stock consideration was 754,000 shares of Common Stock. As a result of the transactions, $7,642,049 in unpaid dividends
in arrears were waived, as measured from the effective date of each transaction.
Redemption of Class B Series I Preferred
Stock
The Company caused a redemption of
its Class B Series I Preferred Stock on December 31, 2020 pursuant to the terms of the Certificate of Designation for such series of preferred
stock which required a redemption price of $7.50 per share. Pursuant to such redemption, all shares of the Class B Series I Preferred
Stock existing on December 31, 2020 (14,300 shares) were cancelled.
20. 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 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’s original
maturity date is April 17, 2022 and bears interest at a rate of 1.0% per annum. 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. The Company has requested
forgiveness for the PPP Loan but cannot be assured that such request will be granted.
Assuming the PPP Loan is not forgiven,
the Company’s obligations thereunder are as follows at December 31, 2020:
2021
|
|
$
|
755,907
|
|
2022
|
|
|
607,093
|
|
|
|
$
|
1,363,000
|
|
21. COVID-19
To
date, the Company’s manufacturing facility in Little Elm, Texas has continued to operate due to its status as an essential business.
As a result of the COVID-19 pandemic, the Company has implemented certain safety precautions at its facility to reduce the risk of the
potential spread of the novel coronavirus. The Company has implemented arrangements to reduce the number of office staff employees working
on-site at the production facility, as well as instituting personal distancing policies and monitoring of essential production staff to
minimize the risk of infection. The Company continues to monitor the evolving situation and will work to further mitigate risks to staff
and to customers. The Company is continuing to evaluate the ever-changing circumstances surrounding this pandemic as it relates to its
ability to continue to source materials and products, maintain a workforce, and operate its business effectively and efficiently. Despite
the global disruption of the coronavirus pandemic, the Company has not experienced a significant disruption to its supply chain. During
2020, the Company has experienced an increase in demand for its products and has been able to meet such demand with increased volumes
despite the pandemic. The Company is unable to predict with certainty its ability to maintain its current operational functionality.
22. TECHNOLOGY
INVESTMENT AGREEMENT
Effective July 1, 2020, the Company
entered into the TIA with the U.S. government. The principal purpose of the TIA is to fund the expansion of the Company’s manufacturing
capacity for hypodermic safety needles and corresponding syringes in response to the worldwide COVID-19 global pandemic. The award is
an expenditure-type TIA, whereby the U.S. 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 December 31, 2020, the Company
has negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary
equipment, for approximately $41.5 million. As of March 2021, the Company has substantially completed construction of expanded facilities
consisting of approximately 27,800 square feet of additional controlled environment within existing properties and is expected to complete
approximately 55,000 square feet of new warehouse space within the second quarter of 2021. The estimated cost of the controlled environment
within existing properties is $6.4 million. The increase from the original $6 million estimate is due to change orders and an expedited
completion date in order to receive certain manufacturing equipment at an earlier date. The new warehouse space is estimated to cost $5.8
million. The cost of the controlled environment will be funded by the U.S. government under the TIA, while the cost of the new warehouse
will be funded by the Company.
23. SUBSEQUENT
EVENTS
The Department of Health and Human
Services entered into a contract with the Company on February 12, 2021 to supply low dead space safety syringes. The base price for the
contract and purchase order is $54,217,800 for the five-month base period of performance from February 15, 2021 to July 14, 2021. Such
price includes both the fixed price for the products as well as cost reimbursement for freight. The terms of the contract allow for extensions
at the option of the U.S. government for up to seven additional one-month periods. If all option periods are exercised, the value of the
contract could increase by an additional $92,772,680, including the price of the products and freight reimbursement.
On March 16, 2021, the Company approved
the 2021 Stock Option Plan (the “Plan”) and set aside and reserved 2,000,000 shares of Common Stock for issuance pursuant
to the Plan. The Plan is subject to shareholder approval at the May 11, 2021 shareholder meeting. The Plan provides for the granting of
incentive stock options and non-qualified stock options at a price equal to at least 100% of the fair market value of the Company’s
Common Stock as of the date of grant. Participants in the Plan may include employees, consultants, and non-employee Directors. On March
16, 2021, the Company approved option grants to purchase 1,000,000, 250,000, and 100,000 shares of Common Stock to the Company’s
chief executive officer, general counsel, and chief financial officer, respectively. These shares will vest in their entirety three years
from the grant date. No award shall be exercisable unless and until the Plan has been approved by the shareholders.