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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☑ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ◻ No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
RETRACTABLE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2021
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
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PART I—FINANCIAL INFORMATION
Item 1.Financial Statements.
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(unaudited)
| September 30, 2021 |
| December 31, 2020 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Receivable from Technology Investment Agreement (TIA) | | | ||||
Investments in debt and equity securities, at fair value | | | ||||
Inventories |
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Other current assets |
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Total current assets |
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Property, plant, and equipment, net |
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Deferred tax asset | | | ||||
Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Current portion of long-term debt |
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Accrued compensation |
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Dividends payable |
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Accrued royalties to shareholder |
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Other accrued liabilities |
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Income taxes payable |
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Total current liabilities |
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Other long-term liabilities | | | ||||
Long-term debt, net of current maturities |
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Total liabilities |
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Commitments and contingencies – see Note 8 | ||||||
Stockholders’ equity: | ||||||
Preferred stock, $ | ||||||
Class B; authorized: | ||||||
Series II, Class B convertible; outstanding: |
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Series III, Class B convertible; outstanding: |
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Common Stock, |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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| ( | ||
Common stock in treasury – at cost | ( | — | ||||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
See accompanying notes to condensed unaudited financial statements
1
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months | Three Months | Nine Months | Nine Months | ||||||||||
Ended | Ended | Ended | Ended | ||||||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | ||||||
Sales, net | $ | | $ | | $ | | $ | | |||||
Cost of sales: | |||||||||||||
Cost of manufactured product |
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Royalty expense to shareholder |
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Total cost of sales |
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Gross profit |
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Operating expenses: | |||||||||||||
Sales and marketing |
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Research and development |
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General and administrative |
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Total operating expenses |
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Income from operations |
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Gain on forgiveness of PPP loan | — | — | | — | |||||||||
Interest and other income (loss) |
| ( |
| ( |
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Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Income before income taxes |
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Provision (benefit) for income taxes |
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| ( | |||||
Net income |
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Preferred Stock dividend requirements |
| ( |
| ( |
| ( |
| ( | |||||
Deemed contribution on extinguishment of preferred stock | — | | — | | |||||||||
Income applicable to common shareholders | $ | | $ | | $ | | $ | | |||||
Basic earnings per share | $ | | $ | | $ | | $ | | |||||
Diluted earnings per share | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding: | |||||||||||||
Basic |
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Diluted |
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See accompanying notes to condensed unaudited financial statements
2
`RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months | Nine Months | ||||||
Ended | Ended | ||||||
| September 30, 2021 |
| September 30, 2020 | ||||
Cash flows from operating activities | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Net unrealized gain on investments | ( | ( | |||||
Realized gains on investments | — | ( | |||||
Accreted interest | | — | |||||
Deferred taxes | ( | ( | |||||
Provision for doubtful accounts |
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Share-based compensation | | — | |||||
Gain on forgiveness of PPP loan | ( | — | |||||
(Increase) decrease in operating assets: | |||||||
Accounts receivable |
| ( |
| ( | |||
Inventories |
| ( |
| ( | |||
Other current assets |
| ( |
| ( | |||
Other assets | | | |||||
Increase (decrease) in operating liabilities: | |||||||
Accounts payable |
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Accrued liabilities |
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Income taxes payable |
| ( |
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Net cash provided by operating activities |
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Cash flows from investing activities | |||||||
Purchase of property, plant, and equipment |
| ( |
| ( | |||
Purchase of debt and equity securities | ( | ( | |||||
Proceeds from the sales of debt and equity securities | — | | |||||
Net cash used by investing activities |
| ( |
| ( | |||
Cash flows from financing activities | |||||||
Repayments of long-term debt |
| ( |
| ( | |||
Proceeds of long-term debt |
| — |
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Proceeds from Technology Investment Agreement (TIA) | | | |||||
Proceeds from the exercise of stock options |
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Payment of preferred stock redemption price payable | ( | — | |||||
Payment of preferred stock repurchase payable | ( | ( | |||||
Payment of preferred stock dividends |
| ( |
| ( | |||
Repurchase of common stock | ( | — | |||||
Net cash provided by financing activities |
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Net increase (decrease) in cash and cash equivalents |
| ( |
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Cash and cash equivalents at: |
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Beginning of period |
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End of period | $ | | $ | | |||
Supplemental schedule of cash flow information: | |||||||
Interest paid | $ | | $ | | |||
Income taxes paid | $ | | $ | — | |||
Supplemental schedule of noncash investing and financing activities: | |||||||
Preferred dividends declared, not paid | $ | | $ | | |||
Conversion of preferred stock to common stock | $ | | $ | | |||
Amounts receivable under Technology Investment Agreement | $ | ( | $ | — | |||
Preferred stock repurchase payable | $ | — | $ | | |||
See accompanying notes to condensed unaudited financial statements
3
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
The following shows the changes in stockholders’ equity for the three-month period ended September 30, 2021:
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| Series II |
| Series III |
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Class B | Class B | Additional | Treasury | ||||||||||||||||||
Common | Preferred | Preferred | Paid-In | Retained | Stock – | ||||||||||||||||
Stock | Stock | Stock | Capital | Earnings | at cost | Total | |||||||||||||||
Balance at June 30, 2021 | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Dividends |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Stock Option Compensation | — | — | — | | — | — | | ||||||||||||||
Repurchase of Common Stock – at cost | — | — | — | — | — | ( | ( | ||||||||||||||
Net Income |
| — |
| — |
| — |
| — |
| |
| — |
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Balance at September 30, 2021 | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
The following shows the changes in stockholders’ equity for the three-month period ended September 30, 2020:
|
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| Series I |
| Series II |
| Series III |
| Series IV |
| Series V |
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Class B | Class B | Class B | Class B | Class B | Additional | ||||||||||||||||||||||
Common | Preferred | Preferred | Preferred | Preferred | Preferred | Paid-In | Accumulated | ||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Capital | Deficit | Total | |||||||||||||||||||
Balance at June 30, 2020 | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
Exchange of Preferred Stock for Common Stock | — |
| — |
| — |
| — |
| ( |
| — |
| ( |
| — |
| ( | ||||||||||
Conversion | — | — | ( | — | — | — | | — | — | ||||||||||||||||||
Stock Option Exercises | — |
| — |
| — |
| — |
| — |
| — |
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| — |
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Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||||
Net Income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
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Balance at September 30, 2020 | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
The following shows the changes in stockholders’ equity for the nine-month period ended September 30, 2021:
|
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| Series II |
| Series III |
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| Retained |
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Class B | Class B | Additional | Earnings | Treasury | |||||||||||||||||
Common | Preferred | Preferred | Paid-In | (Accumulated | Stock – | ||||||||||||||||
Stock | Stock | Stock | Capital | Deficit) | at cost | Total | |||||||||||||||
Balance at December 31, 2020 | $ | — | $ | | $ | | $ | | $ | ( | $ | — | $ | | |||||||
Conversion of Preferred Stock into Common Stock | — |
| — |
| ( |
| |
| — |
| — |
| — | ||||||||
Stock Option Exercises |
| — |
| — |
| — |
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| — |
| — |
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Dividends |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Stock Option Compensation | — | — | — | | — | — | | ||||||||||||||
Repurchase of Common Stock – at cost | — | — | — | — | — | ( | ( | ||||||||||||||
Net Income |
| — |
| — |
| — |
| — |
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| — |
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Balance at September 30, 2021 | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
The following shows the changes in stockholders’ equity for the nine-month period ended September 30, 2020:
|
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| Series I |
| Series II |
| Series III |
| Series IV |
| Series V |
|
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Class B | Class B | Class B | Class B | Class B | Additional | ||||||||||||||||||||||
Common | Preferred | Preferred | Preferred | Preferred | Preferred | Paid-In | Accumulated | ||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Capital | Deficit | Total | |||||||||||||||||||
Balance at December 31, 2019 | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
Exchange of Preferred Stock for Common Stock | — |
| — |
| — |
| ( |
| ( |
| — |
| ( |
| — |
| ( | ||||||||||
Conversion | — | — | ( | — | — | — | | — | — | ||||||||||||||||||
Stock Option Exercises | — |
| — |
| — |
| — |
| — |
| — |
| |
| — |
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Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||||
Net Income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
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Balance at September 30, 2020 | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||||
See accompanying notes to condensed unaudited financial statements
4
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Business of the Company
Retractable Technologies, Inc. (the “Company”) was incorporated in Texas on May 9, 1994, and designs, develops, manufactures, and markets safety syringes and other safety medical products for the healthcare profession. The Company began to develop its manufacturing operations in 1995. The Company’s manufacturing and administrative facilities are located in Little Elm, Texas. The Company’s products are the VanishPoint® 0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 0.5mL, 1mL, 2mL, 3mL, 5mL, and 10mL syringes; the blood collection tube holder; the small diameter tube adapter; the allergy tray; the IV safety catheter; the Patient Safe® syringes; the Patient Safe® Luer Cap; the VanishPoint® Blood Collection Set; and the EasyPoint® needle as well as a standard 3mL syringe packaged with an EasyPoint® needle. The Company also sells VanishPoint® autodisable syringes in the international market in addition to the Company’s other products.
Basis of presentation
The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 31, 2021 for the year ended December 31, 2020. Certain amounts in the prior period Condensed Balance Sheets have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported total current assets or total assets.
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. The amount reported as a contractual allowance for rebates involves examination of past historical trends related to sales to customers and the related credits issued once contractual obligations of the customers have been met. The establishment of a liability for future claims of rebates against sales in the current period requires that the Company has an understanding of the relevant sales with respect to product categories, sales distribution channels, and the likelihood of contractual obligations being satisfied.
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.
5
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 $
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.
Receivable from Technology Investment Agreement (TIA)
The amounts set forth as Receivable from Technology Investment Agreement (TIA) represent amounts receivable under a contractual agreement under the TIA. The amounts may represent advance requests or reimbursement requests for expenditures the Company makes or has made under its obligations with the federal government. For further explanation, please refer to Note 15 – Technology Investment Agreement.
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. Once inventory items are deemed to be either excess or obsolete, they are excluded from the stated net realizable value.
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 (loss). 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 Interest and other income.
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:
6
Production equipment |
| to |
Office furniture and equipment |
| to |
Buildings |
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Building improvements |
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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 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, exchange-traded and closed-end funds, mutual funds, equity securities, and accounts receivable. Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality. The Company assesses market risk in debt and equity securities through consultation with its outside investment advisors. Management is responsible for directing investment activity based on current economic conditions. The majority of accounts receivable are due from companies which are well-established entities. In the third quarter of 2021, 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.
7
The following table reflects significant customers for the three- and nine-month periods of 2021 and 2020:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | |||||||||||||
Number of significant customers | 2 |
| 2 |
| 1 |
| 2 |
| ||||||||||||
Aggregate dollar amount of net sales to significant customers | $ | 22.6 | million | $ | 16.4 | million | $ | 83.6 | million | $ | 21.7 | million | ||||||||
Percentage of net sales to significant customers | 62.1% | 60.6% | 64.8% | 43.6% | ||||||||||||||||
In the first nine months of 2021, approximately $
The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China. The Company obtained roughly
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. When rebates are issued, they 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 $
8
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
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 periodically recognizes revenue from licensing agreements. 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 September 30, 2021: | |||||||||||||||
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| Blood |
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| Total | |||||||||
Collection | EasyPoint® | Other | Product | ||||||||||||
Geographic Segment | Syringes | Products | Needles | Products | Sales | ||||||||||
U.S. sales (excluding U.S. government) | $ | | $ | | $ | | $ | | $ | | |||||
Sales to U.S. government | | — | — | — | | ||||||||||
North and South America sales (excluding U.S.) |
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| — |
| | |||||
Other international sales |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
For the three months ended September 30, 2020: | |||||||||||||||
|
| Blood |
|
|
| Total | |||||||||
Collection | EasyPoint® | Other | Product | ||||||||||||
Geographic Segment | Syringes | Products | Needles | Products | Sales | ||||||||||
U.S. sales (excluding U.S. government) | $ | | $ | | $ | | $ | | $ | | |||||
Sales to U.S. government | | — | — | — | | ||||||||||
North and South America sales (excluding U.S.) |
| |
| |
| — |
| — |
| | |||||
Other international sales |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
For the nine months ended September 30, 2021: | |||||||||||||||
|
| Blood |
|
|
| Total | |||||||||
Collection | EasyPoint® | Other | Product | ||||||||||||
Geographic Segment | Syringes | Products | Needles | Products | Sales | ||||||||||
U.S. sales (excluding U.S. government) | $ | | $ | | $ | | $ | | $ | | |||||
Sales to U.S. government | | — | — | — | | ||||||||||
North and South America sales (excluding U.S.) |
| |
| |
| |
| |
| | |||||
Other international sales |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
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For the nine months ended September 30, 2020: | |||||||||||||||
|
| Blood |
|
|
| Total | |||||||||
Collection | EasyPoint® | Other | Product | ||||||||||||
Geographic Segment | Syringes | Products | Needles | Products | Sales | ||||||||||
U.S. sales (excluding U.S. government) | $ | | | | | $ | | ||||||||
Sales to U.S. government | | — | — | — | | ||||||||||
North and South America sales (excluding U.S.) |
| | | | |
| | ||||||||
Other international sales |
| | | | |
| | ||||||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
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 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 and/or common stock issuable upon the conversion of convertible preferred stock.
For the three and nine months ended September 30, 2021, the calculation of diluted EPS under the treasury stock method included
The calculation of diluted EPS under the treasury stock method included
The potential dilution, if any, is shown on the following schedule:
10
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | ||||||
Net income | $ | | $ | | $ | | $ | | |||||
Preferred stock dividend requirements |
| ( |
| ( |
| ( |
| ( | |||||
Deemed contribution on extinguishment of preferred stock | — | | — | | |||||||||
Income applicable to common shareholders | $ | | $ | | $ | | $ | | |||||
Average common shares outstanding |
| |
| |
| |
| | |||||
Average common and common equivalent shares outstanding — assuming dilution |
| |
| |
| |
| | |||||
Basic earnings per share | $ | | $ | | $ | | $ | | |||||
Diluted earnings per share | $ | | $ | | $ | | $ | | |||||
Shipping and handling costs
The Company classifies shipping and handling costs as part of Cost of sales in the Condensed Statements of Operations.
Share-based Compensation
The Company’s share-based payments are accounted for using the fair value method. The Company records share-based compensation expense on a straight-line basis over the requisite service period. The Company incurred the following share-based compensation costs:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | |||||
Cost of Sales | $ | — | $ | — | $ | — | $ | — | ||||
Sales and Marketing |
| — |
| — |
| — |
| — | ||||
Research and development | — | — | — | — | ||||||||
General and administrative | | — | | — | ||||||||
$ | | $ | — | $ | | $ | — | |||||
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.
11
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), as amended, for $
Recently Adopted Pronouncements
The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("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.
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.
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The Company has determined that the adoption of ASU 2019-12 did not have a material impact on its financial statements.
Recently Issued Pronouncement
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:
| September 30, 2021 |
| December 31, 2020 | |||
Raw materials | $ | | $ | | ||
Finished goods | | | ||||
$ | | $ | | |||
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:
September 30, 2021 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Equity securities | $ | | $ | — | $ | — | $ | | ||||
Mutual funds and exchange traded funds | | — | — | | ||||||||
Certificates of deposit |
| — |
| |
| — |
| | ||||
$ | | $ | | $ | — | $ | | |||||
December 31, 2020 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Equity securities | $ | | $ | — | $ | — | $ | | ||||
Mutual funds and exchange traded funds | | — | — | | ||||||||
Certificates of deposit |
| — |
| |
| — |
| | ||||
$ | | $ | | $ | — | $ | | |||||
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 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:
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September 30, 2021 | ||||||||||||
Gross Unrealized | Aggregate | |||||||||||
| Cost |
| Gains |
| Losses |
| Fair Value | |||||
Equity securities | $ | | $ | | $ | — | $ | | ||||
Mutual funds and exchange traded funds | | | — | | ||||||||
Certificates of deposit |
| |
| |
| — |
| | ||||
$ | | $ | | $ | — | $ | | |||||
December 31, 2020 | ||||||||||||
Gross Unrealized | Aggregate | |||||||||||
| Cost |
| Gains |
| Losses |
| Fair Value | |||||
Equity securities | $ | | $ | | $ | — | $ | | ||||
Mutual funds and exchange traded funds | | | — | | ||||||||
Certificates of deposit |
| |
| |
| — |
| | ||||
$ | | $ | | $ | — | $ | | |||||
Unrealized gains on investments in debt and equity securities were $
5. INCOME TAXES
The Company’s effective tax rate on the net income before income taxes was
A reconciliation of the federal statutory corporate tax rate to the Company’s effective tax rate is as follows:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | ||
U.S. statutory federal tax rate |
| | % | | % | | % | | % |
Valuation Allowance |
| — | % | ( | % | — | % | ( | % |
Stock options | | % | — | % | ( | % | — | % | |
Other | ( | % | | % | ( | % | | % | |
PPP loan | — | % | — | % | ( | % | — | % | |
State taxes | | % | | % | | % | | % | |
Effective tax rate |
| | % | | % | | % | ( | % |
The Company uses the recognition and measurement provisions of the FASB ASC Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, the Company reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance at September 30, 2021 and 2020.
The effective tax rate for the nine months ended September 30, 2021 was different from the federal statutory rate due primarily to the apportionment of earnings across various state jurisdictions. The Company determined that
The effective tax rate for the nine months ended September 30, 2020 was different from the federal statutory rate due primarily to the release of the valuation allowance recorded on net operating losses in earlier periods.
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6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
| September 30, 2021 |
| December 31, 2020 | |||
Prepayments from customers | $ | | $ | | ||
Accrued property taxes | | — | ||||
Accrued professional fees | | | ||||
Current portion – preferred stock repurchase |
| |
| | ||
Other accrued expenses |
| |
| | ||
Total | $ | | $ | | ||
7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
| September 30, 2021 |
| December 31, 2020 | |||
Technology Investment Agreement (TIA) |
| $ | |
| $ | |
Stock repurchase |
| |
| | ||
Total | $ | | $ | | ||
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 $
8. 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 Locke Lord, LLP and Mr. Hardin’s motion to dismiss. Such order was affirmed on April 20, 2021 by the Court of Appeals, Fifth District of Texas at Dallas.
9. BUSINESS SEGMENT
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.
15
Revenues by geography are as follows:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||
| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 | |||||
U.S. sales (excluding U.S. government) | $ | | $ | | $ | | $ | | ||||
Sales to U.S. government | | | | | ||||||||
North and South America sales (excluding U.S.) |
| |
| |
| |
| | ||||
Other international sales |
| |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | $ | | ||||
Long-lived assets by geography are as follows:
| September 30, 2021 |
| December 31, 2020 | ||||
Long-lived assets | |||||||
U.S. | $ | | $ | | |||
International | | | |||||
Total | $ | | $ | | |||
10. 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 2020. Cumulatively, dividend payments of $
In June 2021, the Board of Directors approved payments to its Series II, Series III, and former Series IV and Series V Class B Preferred Shareholders in the cumulative amount of $
A cash dividend of $
11. LEASES
The Company has no finance leases and its operating leases for a warehouse and equipment terminated on August 15, 2021. The ROU asset value was determined based on the lease liability adjusted for lease incentives received. Lease expense has been recognized on a straight-line basis over the lease term. Certain costs incidental to the use of the property were separate from the minimum rent payment and were not considered in the determination of the lease liability and ROU asset. The Company elected the policy to not separate lease from non-lease components if they are
16
combined with the minimum rent payment. The option periods were not included in the determination of the lease liability and right-of-use asset.
The operating lease cost component of the lease expense was $
Assets and liabilities associated with these leases included in the Condensed Balance Sheets are as follows:
| September 30, 2021 |
| December 31, 2020 | |||
OPERATING LEASES |
|
|
|
| ||
$ | — | $ | | |||
$ | — | $ | | |||
| — |
| — | |||
Total operating lease liabilities | $ | — | $ | | ||
12. EXCHANGE OF COMMON STOCK FOR PREFERRED 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 all rights to unpaid dividends in arrears. The aggregate cash consideration equaled $
13. STOCK OPTIONS
Stock options were exercised by the Company’s employees and directors at various dates during the nine months ended September 30, 2021, and, consequently, a total of
On March 16, 2021, the Company’s Board of Directors approved the 2021 Stock Option Plan (the “Plan”) and set aside and reserved
14. PAYCHECK PROTECTION PROGRAM LOAN
On April 17, 2020, the Company entered into a promissory note in the principal amount of $
17
On May 13, 2021, the Company was informed that the SBA granted its request for loan forgiveness for the entire original principal and accrued interest, for a total of $
15. 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
As of September 30, 2021, the Company had negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $
16. STOCK REPURCHASE PLAN
The Company entered into a repurchase plan (the “Plan”) dated June 4, 2021 with an independent broker for the purchase of up to $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENT WARNING
Certain statements included by reference in this filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others: the impact of COVID-19 on all facets of logistics and operations as well as costs; our ability to complete capital improvements and produce products in response to government agreements; potential tariffs; our ability to maintain liquidity; our maintenance of patent protection; our ability to maintain favorable third party manufacturing and supplier arrangements and relationships; foreign trade risk; our ability to access the market; production costs; the impact of larger market players, specifically Becton, Dickinson and Company, in providing devices to the safety market; and any
18
other factors referenced in Item 1A. Risk Factors in Part II. Given these uncertainties, undue reliance should not be placed on forward-looking statements.
MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We have been manufacturing and marketing our products since 1997. VanishPoint® syringes comprised 92.6% of our sales in the first nine months of 2021. EasyPoint® products accounted for 6.0% of sales in the first nine months of 2021. We also manufacture and market a blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set.
Our products have been and continue to be distributed nationally and internationally through numerous distributors. Some of our popular syringe products provide low dead-space. Low dead-space syringes reduce residual medication remaining in the syringe after the dose has been administered. In some instances, the low dead-space allows for additional doses of medication to be obtained from the vials.
On May 1, 2020, we were awarded a delivery order under an existing contract by the Department of Health and Human Services of the United States to supply automated retraction safety syringes for COVID-19 vaccination efforts, which order was in the amount of $83.8 million plus $10 million in expedited freight costs. The period of performance for this order will end in March 2022.
The Department of Health and Human Services awarded us another contract on February 12, 2021 to supply low dead-space safety syringes for COVID-19 vaccination efforts. The base price for the contract and purchase order was $54.2 million for the five-month base period of performance (February 15, 2021 to July 14, 2021). We have received notice that the contract would be extended for seven additional months beyond the base period of performance with a total contract price during such period of approximately $92.8 million. To date, we have received a commitment to exercise the first four option periods which extend through the end of December 2021. For each period, the freight reimbursement cost is included in total overall contract value and is estimated at approximately 25% of the overall price.
Our sales under both of the foregoing orders from the U.S. government were $83.6 million during the first nine months of 2021, representing 64.8% of our total sales for such period. Both of the above-mentioned orders as well as the TIA (as defined below) from the U.S. government are material events particular to the COVID-19 pandemic and may not be indicative of future operations. While the addition of manufacturing equipment and facilities will greatly increase our production capacity, we cannot be assured that there will be increased demand for our products once orders from the U.S. government have been filled. If future orders are not placed by the U.S. government and orders from new and existing customers do not materialize, we would have significant excess productive capabilities.
Effective July 1, 2020, we entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense, U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA) for $53.7 million in government funding for expanding our domestic production of needles and syringes. Effective May 12, 2021 we entered into an amendment to the TIA providing an additional $27.4 million in funding. The amendment calls for an increase in existing domestic manufacturing capabilities by a minimum of 50% in order to meet ongoing and future U.S. COVID-19 medical countermeasures demands. In order to satisfy this new objective, we are required to further expand our facilities and add new assembly lines by January 31, 2022. As of September 30, 2021, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $44.6 million and have substantially completed the $6.7 million 27,800 square foot controlled environment which was funded by the U.S. government. We have also substantially completed the new $5.9 million 55,000 square foot warehouse space which is our financial responsibility. In furtherance of the May 2021 amendment, we have issued purchase orders for approximately $16.7 million for the purchase of two additional assembly lines, the necessary molds and molding equipment to support the additional assembly lines, as well as some of the necessary accessory equipment.
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To date, our 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, we have implemented certain safety precautions at our facility to reduce the risk of the potential spread of the novel coronavirus. All of our employees are required to be vaccinated. We continue to monitor the evolving situation and will work to further mitigate risks to staff and to customers. We are continuing to evaluate the ever-changing circumstances surrounding this pandemic as it relates to our ability to continue to source materials and products, maintain a workforce, and operate our business effectively and efficiently. We have faced and continue to deal with the logistical challenges of sourcing raw materials and finished goods, particularly finished goods from China. We utilize multiple transportation providers to ensure we can meet our delivery schedules, but we are subject to the global supply chain and its complexities.
On April 17, 2020, we entered into the PPP Loan in the principal amount of $1.4 million in favor of Independent Bank pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act, administered by the U.S. Small Business Administration (“SBA”). On May 13, 2021, we were informed that the SBA granted our request for loan forgiveness for the entire original principal amount and accrued interest, for a total of $1.4 million.
We have engaged a construction company and architect to explore the possibility of expanding our existing administrative offices. We currently expect that the cost of expansion will be approximately $5.0 million and will be completed in the first half of 2022. To date, we have spent approximately $212 thousand.
As detailed in Note 4 to the financial statements, we held $13.6 million in debt and equity securities as of September 30, 2021, which represented 15.4% of our current assets. We continually monitor our invested balances.
In response to, among other factors, the global COVID-19 pandemic, our delivery orders from the U.S. government, and the TIA, employee headcount and related salary and benefits costs have increased significantly. As of September 30, 2021, the Company employed approximately 243 full-time, part-time, and temporary employees. This represents approximately a 35.0% increase in our workforce since September 2020.
On March 16, 2021, the Board 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 was approved by the shareholders 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 Compensation and Benefits Committee approved option grants to purchase 1,000,000, 250,000, and 100,000 shares of Common Stock to our chief executive officer, general counsel, and chief financial officer, respectively. These shares will vest in their entirety three years from the grant date.
On March 16, 2021, the Compensation and Benefits Committee modified the annual salaries of our chief executive officer, general counsel, and chief financial officer to $1,000,000, $400,000, and $300,000, respectively. Such salaries are retroactively effective as of January 1, 2021. On March 16, 2021, the Compensation and Benefits Committee also approved issuances of cash bonuses of $300,000, $100,000, and $100,000 to our chief executive officer, general counsel, and chief financial officer, respectively.
On June 4, 2021, the Board of Directors approved payment to Class B Convertible Preferred shareholders of all current dividends, dividends in arrears, as well as dividends still owed to shareholders who converted their preferred stock in the past. The total amount authorized for dividends payable was $5.1 million. The dividends were paid on July 22, 2021 to all shareholders who had been contacted and confirmed as the rightful owner entitled to payment. We have not yet established contact with all former shareholders, most of whom converted their shares prior to 2001. As of November 5, 2021, we are continuing to establish contact with approximately 90 former shareholders who are entitled to approximately $1.4 million.
Effective June 4, 2021, we entered into a repurchase plan (the “Plan”) for the purchase of up to $10 million of our Common Stock. Under the Plan, open market purchases of our Common Stock commenced June 18, 2021 and 362,854 shares were purchased as of November 10, 2021 for an aggregate purchase price of approximately $4.0 million.
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Historically, unit sales have increased during the flu season. Seasonal trends in 2020 and the first nine months of 2021 have been less pronounced due to demand related to the COVID-19 vaccine.
Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost. In the first nine months of 2021, our Chinese manufacturers produced approximately 90.9% of our products. In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.
In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales of products subject to the license and he receives fifty percent (50%) of the royalties paid to us by certain sublicensees of the technology subject to the license.
We have experienced significant cost pressure with respect to transportation costs, particularly freight costs for importing products from our overseas manufacturers. In addition, we have experienced an increase in raw materials costs, principally the cost of petroleum-based plastics used in our molded components. These costs contribute significantly to the cost of manufactured products and have significantly reduced our gross margins for the 2021 periods presented. With increased volumes, our manufacturing unit costs have generally tended to decline. Other factors that could affect our unit costs include increases in tariffs, costs by third party manufacturers, and changing production volumes. Increases in such costs may not be recoverable through price increases of our products.
RESULTS OF OPERATIONS
The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties. Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements. All period references are to periods ended September 30, 2021 or 2020. Dollar amounts have been rounded for ease of reading.
Comparison of Three Months Ended September 30, 2021 and September 30, 2020
Domestic sales, including sales to the U.S. government, accounted for 93.7% and 94.2% of the revenues for the three months ended September 30, 2021 and 2020, respectively. Domestic revenues increased 33.5% principally due to increased volumes primarily attributable to orders from the U.S. government. Domestic unit sales increased 34.1%. Domestic unit sales were 90.6% of total unit sales for the three months ended September 30, 2021. Domestic unit sales excluding the U.S. government rose approximately 32.6%. International revenues increased approximately 45.5% due to an increase in products available for international shipment. Our international orders may be subject to significant fluctuation over time and may not be reflective of the full year’s sales. Overall unit sales increased 34.2%. Other than the U.S. government, our increased sales are predominantly attributable to existing customers as well as several new smaller customers who do not operate as distributors. As discussed above, our gross margins were significantly impacted during the third quarter of 2021 due to the global demand for, and rising costs of, cargo freight transportation. Despite the increase in revenues for the third quarter of 2021, our gross profit decreased, both on a per unit basis and in the aggregate.
Cost of manufactured product increased 78.4% principally due to both an increase in units sold and higher materials and transportation costs. Royalty expense increased 36.6% due to increased gross sales.
Operating expenses increased 56.0% from the prior year. This is substantially due to increased headcount and other employee-related expenses, as well as consulting expenses. Each of these is attributable to the larger volume of orders and the expansion activities required by the TIA. Included in the increased employee expenses were $1.2 million of share-based compensation expense and $338 thousand from general salary increases and larger headcount. Sales and marketing expenses decreased due to a reduction in marketing samples and bonus expense.
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Income from operations was $8.0 million compared to income from operations of $10.3 million for the same period last year. The decrease was due to lower gross margins as mentioned above and an increase in general and administrative expenses.
Interest and other income (loss) was ($319) thousand for the quarter ended September 30, 2021 as compared to ($87) thousand for the same period last year principally due to a decrease in investment balances from unrealized losses from the prior quarter. Interest expense for the third quarter of 2021 increased by approximately 46.4% from the same period in the prior year. The increase is primarily attributable to imputed interest associated with amounts payable for the repurchase of preferred stock from former shareholders. See Note 7 to the financial statements for further discussion of the repurchase terms.
Comparison of Nine Months Ended September 30, 2021 and September 30, 2020
Domestic sales, including sales to the U.S. government, accounted for 95.3% and 86.8% of the revenues for the nine months ended September 30, 2021 and 2020, respectively. Domestic revenues increased 184.0% principally due to higher average pricing and increased volumes primarily attributable to orders from the U.S. government. Domestic unit sales increased 160.9%. Domestic unit sales were 92.7% of total unit sales for the nine months ended September 30, 2021. Domestic unit sales excluding the U.S. government rose approximately 36.6%. International revenues decreased approximately 8.6%. Our international orders may be subject to significant fluctuation over time and may not be reflective of the full year’s sales. Overall unit sales increased 129.9%. As a result of product mix and customer base for the 2021 nine-month period, our average net revenue per unit sold increased by 12.5%. Other than the U.S. government, our increased sales are predominantly attributable to existing customers as well as several new smaller customers who do not operate as distributors.
Cost of manufactured product increased 137.1% principally due to an increase in overall units sold as well as higher inventory carrying costs. Royalty expense increased 123.3% due to increased gross sales.
An increase in operating expenses of 83.6% over the previous year is primarily attributable to an increase in headcount, employee-related expenses, and consulting fees. These increases are due to the growth in order volume and expansion activities required by the TIA. Included in the increased employee expenses were bonuses and retroactive salary increases for the named executive officers of approximately $650 thousand, $2.2 million in other employee bonuses, and $2.5 million of share-based compensation expense. Sales and marketing expenses increased due to employee bonuses and an increase of GPO fees on the basis of the increase in sales.
Income from operations was $44.1 million compared to $11.8 million for the same period last year. The increase was due to the increase in net revenues and resulting gross profit.
Interest and other income (loss) increased 15.1% for the nine months ended September 30, 2021 compared to the same period last year principally due to unrealized gains from our investments. Interest expense for the first nine months of 2021 increased by approximately 63.0% from the same period in the prior year. The increase is primarily attributable to imputed interest associated with amounts payable for the repurchase of preferred stock from former shareholders. See Note 7 to the financial statements for further discussion of the repurchase terms.
The 2021 recognition of the gain from the forgiveness PPP Loan and the 2020 release of the valuation allowance for approximately $1.8 million in deferred tax assets affect the comparability of the nine-month periods ended September 30, 2021 and 2020.
Discussion of Balance Sheet and Cash Flow Items
Cash comprises 9.2% of total assets. Cash flow from operations was $18.1 million for the nine months ended September 30, 2021. Additionally, we have recorded deferred taxes of $8.5 million which is material to the adjustments to total cash flow from operations. The deferred tax asset represents amounts available to reduce income taxes payable on taxable income in future years. Inventory levels have increased significantly since the end of last year due to higher
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volumes of raw materials on hand for production, as well as an increase in finished goods. Overall values are up by approximately $8.5 million, including finished goods in transit from our overseas manufacturers.
During 2020, we engaged in private purchase agreements to purchase shares of outstanding preferred stock in exchange for cash consideration and the issuance of new common stock. In addition to payment in Common Stock, we paid cash consideration equaling $3,786,000, of which $482,670 was paid in 2020 with the remainder payable over a three-year period which began in February 2021. In February 2021, we paid the first of three installments of $1,101,110. Amounts payable as the result of our purchase of preferred stock comprises a small portion of the long-term liabilities set forth on our Balance Sheets. Amounts related to reimbursements from the U.S. government in connection with the TIA make up most of the other long-term liabilities of $60.3 million.
Cash used by investing activities was $51.2 million for the nine months ended September 30, 2021 due primarily to the purchase of property, plant and equipment and the purchase of equity securities. The $46.5 million impact to cash from the purchase of fixed assets primarily reflects down payments on orders for certain assets as discussed in Note 15 to the financial statements. Of the $46.5 million, $3.8 million was spent on assembly equipment outside the TIA reimbursement provisions. Additionally, predominantly in the first quarter of 2021, we increased our invested cash position by approximately $4.7 million.
Cash provided by financing activities was $31.9 million for the nine months ended September 30, 2021. This was primarily due to proceeds from the government under the TIA for down payments on our orders for fixed assets but was offset by payments under the preferred stock repurchase agreements from 2020. While a total of $5.0 million was declared as dividends to current and former shareholders, only $3.4 million was paid during the third quarter of 2021. The remainder will be paid upon our successfully contacting certain former shareholders. As of the end of the third quarter of 2021, we had spent approximately $2.8 million for the repurchase of Common Stock, as previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Historical Sources of Liquidity
We have historically funded operations primarily from the proceeds from revenues, private placements, litigation settlements, and loans.
Internal Sources of Liquidity
Margins
The mix of domestic and international sales affects the average sales price of our products. Generally, the higher the ratio of domestic sales to international sales, the higher the average sales price will be. Some international sales of our products are shipped directly from China to the customer. The number of units produced by us versus manufactured in China can have a significant effect on the carrying costs of Inventory as well as Cost of sales. Generally, an overall increase in units sold can positively affect our margins. The cost of raw materials used in manufacturing and transportation costs can also significantly affect our margins. We will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in China to achieve economic benefits as well as to maintain our domestic manufacturing capability.
Cash Requirements
We have sufficient cash reserves, received the proceeds from a PPP Loan, and have begun to realize income from operations. We also have access to our investments which may be liquidated in the event that we need to access the funds for operations.
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Contracts with the U.S. Government
As discussed above, we were awarded a material delivery order by the Department of Health and Human Services of the United States in the total amount of approximately $83.8 million, plus certain expedited freight expenses. In February 2021, we received another contract from the Department of Health and Human Services for additional safety syringes representing expected revenues and reimbursable freight costs of $54.2 million for a five-month period ending July 14, 2021 and approximately $92.8 million for seven monthly option periods. To date, we have received a commitment to exercise the first four option periods which extend through the end of December 2021.
As discussed above, we entered into a TIA with the U.S. government for a total value of approximately $81.0 million in government funding for expanding our domestic production of needles and syringes. As of November 5, 2021, we have received approximately $54.8 million for down payments on the purchase of certain fixed assets. As of November 5, 2021, we have contributed approximately $5.9 million towards the completion of the new 55,000 square foot warehouse as a portion of the cost sharing agreement. The Company will continue to fund the expansion efforts primarily through providing the necessary workforce to implement the addition of new assets, as well as provide the ongoing necessary support.
External Sources of Liquidity
We received a PPP Loan in the principal amount of $1.4 million. On May 13, 2021, we were informed that the entire original principal amount of $1.4 million would be forgiven.
We consider our investment portfolio a source of liquidity as well. As of September 30, 2021, $13.6 million was invested in third party securities.
Capital Resources
Since the execution of the TIA on July 1, 2020, we have begun construction for significant expansion to our facilities. As of September 30, 2021, we had substantially completed initial construction of expanded facilities consisting of approximately 27,800 square feet of additional controlled environment within existing properties and 55,000 square feet of new warehouse space. In August 2021, construction began on an additional 12,500 square feet of controlled environment space. As of November 5, 2021, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, under the original TIA and the modification for approximately $61.4 million. To fund the purchase of the automated assembly equipment, auxiliary equipment, and construction of the controlled environment, we are reimbursed by the U.S. government according to the terms in the TIA. The TIA also allows us to request an advance of funds for larger purchases when necessary. The expenditures which are not reimbursable from the U.S. government under the TIA are funded with cash from operations. The capital assets funded by us under the TIA include the construction of the new warehouse as well as certain accessory equipment.
Additionally, we have engaged a construction company and architect to explore the possibility of expanding our existing administrative offices. We currently expect that the cost of expansion will be approximately $5.0 million and will be completed in the first half of 2022. To date, we have spent approximately $212 thousand.
CRITICAL ACCOUNTING ESTIMATES
We are responsible for developing estimates for amounts reported as assets and liabilities, and revenues and expenses in conformity with U.S. generally accepted accounting principles (“GAAP”). Those estimates require that we develop assumptions of future events based on past experience and expectations of economic factors. Among the more critical estimates management makes is the estimate for customer rebates. The amount reported as a contractual allowance for rebates involves examination of past historical trends related of our sales to customers and the related credits issued once contractual obligations of the customers have been met. The establishment of a liability for future claims of rebates against sales in the current period requires that we have an understanding of the relevant sales with respect to product categories, sales distribution channels, and the likelihood of contractual obligations being satisfied. We examine the results
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of estimates against actual results historically and use the determination to further develop our basis for assumptions in future periods, as well as the accuracy of past estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, Management, with the participation of our President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”), and our Vice President and Chief Financial Officer, John W. Fort III (the “CFO”), acting in their capacities as our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in our periodic reports is: i) recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and ii) accumulated and communicated to our Management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes during the third quarter of 2021 or subsequent to September 30, 2021 in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Please refer to Note 8 to the financial statements for a complete description of all legal proceedings.
Item 1A. Risk Factors.
There were no material changes in our Risk Factors as set forth in our most recent annual report which is available on EDGAR.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities
Period |
| Total Number of Shares (or Units) Purchased(1) |
| Average Price Paid Per Share (or Unit) |
| Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
June 18, 2021 through June 30, 2021 | 13,500 | $11.44 | 13,500 | $9,845,576 | ||||
July 1, 2021 through July 31, 2021 | 70,577 | $11.08 | 70,577 | $9,063,332 | ||||
August 1, 2021 through August 31, 2021 | 78,947 | $11.99 | 78,947 | $8,116,667 | ||||
September 1, 2021 through September 30, 2021 | 81,797 | $11.69 | 81,797 | $7,160,674 | ||||
Total | 231,321 | $11.61 | 231,321 |
(1)These shares were purchased pursuant to our Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, announced on June 7, 2021. On June 4, 2021, the Board of Directors authorized the repurchase of up to $10 million of Common Stock subject to Rule 10b-18 limitations as well as certain market value constraints specified in the plan. Notwithstanding the terms of the plan, the exact dollar amount and number of shares which may be purchased pursuant to the plan is difficult to predict. The plan will expire on June 18, 2022 at the latest.
Item 3. Defaults Upon Senior Securities.
Working Capital Restrictions and Limitations on the Payment of Dividends
The certificates of designation for both of the outstanding series of Class B Convertible Preferred Stock each currently provide that, if a dividend upon any shares of Preferred Stock is in arrears, no dividends may be paid or declared upon any stock ranking junior to such stock. If Series II Class B preferred stock dividends are in arrears, Common Stock may generally not be purchased by the Company. If Series III Class B preferred stock dividends are in arrears, the Company may generally purchase Common Stock if the funds used to purchase stock do not exceed 25% of the value of the prior period’s cash assets.
For the nine months ended September 30, 2021, the amount of dividends in arrears payable to Series III preferred shareholders was $20,061.
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Item 6. Exhibits.
Exhibit No. |
| Description of Document |
31.1 | ||
31.2 | ||
32 | ||
101 | The following materials from Retractable Technologies, Inc.’s Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Condensed Statements of Operations for the three and nine months ended September 30, 2021 and 2020, (iii) Condensed Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (iv) Condensed Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020; and (v) Notes to Condensed Financial Statements | |
104 | Interactive Data File (formatted Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: November 15, 2021 | RETRACTABLE TECHNOLOGIES, INC. | |
(Registrant) | ||
By: | /s/ John W. Fort III | |
JOHN W. FORT III | ||
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