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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

** **

**AmendmentNo. 1**

 

**(MarkOne)**

 

**x****   ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the fiscal year ended December 31, 2009**

 

**or**

 

**o****   TRANSITION********REPORT********PURSUANT********TO********SECTION********13********OR********15(d)********OF********THE********SECURITIES********EXCHANGE********ACT********OF********1934**

 

**For the transition period from                      to**

** **

**Commission file number 000-30885**

 

**Retractable Technologies, Inc.**

(Exact name of registrant as specified in its charter)

** **

| **Texas**                                                             | ** ** | **75-2599762**                              |
|-----------------------------------------------------------------------|------------|---------------------------------------------|
| (State or other jurisdiction of

 incorporation or organization) |       | (I.R.S. Employer

 Identification No.) |
|                                                                  |       |                                        |
| **511 Lobo Lane**                                                     | ** ** | ** **                                  |
| **Little Elm, Texas**                                                 | ** ** | **75068-0009**                              |
| (Address of principal executive offices)                              |       | (Zip Code)                                  |

 

**972-294-1010**

Registrant’s telephone number, including area code

 

Securities registeredpursuant to Section 12(b) of the Act:

** **

| **Title of  each class** | ** ** | **Name of  each exchange on which registered** |
|--------------------------|------------|------------------------------------------------|
| Common                   |       | NYSE Amex LLC                                  |

 

Securities registeredpursuant to Section 12(g) of the Act:

 

**Preferred Stock**

(Title of class)

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-K orany amendment to the Form 10-K.     x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act:

 

| Large  accelerated filer o                                              |   | Accelerated  filer o         |
|-------------------------------------------------------------------------|--------|------------------------------|
|                                                                    |   |                         |
| Non-accelerated  filer o (Do not check  if a smaller reporting company) |   | Smaller  reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o  No  x

 

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliatesas of June 30, 2009 was $11,059,334.10, assuming a closing price of $0.90and outstanding shares held by non-affiliates of 12,288,149.

 

APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THEPRECEDING FIVE YEARS:

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13, or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.  Yes o  No o

 

(APPLICABLEONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date.  As ofMarch 1, 2010, there were 23,825,149 shares of our Common Stock issued andoutstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

List hereunder the followingdocuments if incorporated by reference and the Part of the Form 10-K(e.g., Part I, Part II, etc.) into which the document isincorporated:  (1) Any annual reportto security holders; (2) Any proxy or information statement; and(3) Any prospectus filed pursuant to Rule 424(b) or(c) under the Securities Act of 1933. The listed documents should be clearly described for identificationpurposes (e.g., annual report to security holders for fiscal year endedDecember 24, 1980).

 

None except exhibits.

 

 

 

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**Explanatory Note**

 

We are filing this Amendment No. 1 to ourAnnual Report on Form 10-K for the year ended December 31, 2009 whichwas filed with the U.S. Securities and Exchange Commission on March 31,2010 (the “Original Filing”). The primary purposes of this Amendment No. 1are to insert the following: (i) information with regard to the impact ofcertain nonrecurring charges on our Net earnings (see Item 7 of Part II ofthis Form 10-K/A); and (ii) additional information with regard to animpairment charge of $2,594,602 recognized in the fourth quarter of 2009 (seeItems 7 and 8 of Part II of this Form 10-K/A). No other materialchanges have been made. The complete text of Items 7 and 8 of Part II areset forth herein.  Certain exhibits andsignatures are also provided.

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-K/A**

**Amendment No. 1**

**For the Fiscal Year Ended December 31, 2009**

 

**TABLE OF CONTENTS**

 
| **PART II** |
|------------------|
|             |   |   |
| **Item 7.**      | **Management’s  Discussion and Analysis of Financial Condition and Results of Operation.** |   |
| **Item 8.**      | **Financial  Statements and Supplementary Data.** |   |
|             |   |   |
| **PART IV** |
|             |   |   |
| **Item 15.**     | **Exhibits,  Financial Statement Schedules.** |   |
| **SIGNATURE**    |   |

 

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**Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operation.**

 

FORWARD-LOOKINGSTATEMENT WARNING

 

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,”“intends,” “expects,” and similar such words constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Act.  Any forward-looking statements involve knownand unknown risks, uncertainties, and other factors that may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by such forward-lookingstatements.  Such factors include, amongothers, our ability to maintain liquidity, our maintenance of patentprotection, the impact of current litigation (as it affects our costs as wellas market access), our ability to maintain favorable supplier arrangements andrelationships, our ability to receive royalties from BTMD, our ability toquickly increase capacity in response to an increase in demand, our ability toaccess the market, our ability to maintain or lower production costs, our abilityto continue to finance research and development as well as operations andexpansion of production, the increased interest of larger market players,specifically BD, in providing devices to the safety market, and other factorsreferenced in **Item 1A. Risk Factors**of the Form 10-K.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

OVERVIEW

 

We have been manufacturing and marketing our productsinto the marketplace since 1997.  Wecurrently provide other safety medical products in addition to safety syringeproducts.  One such product is thePatient Safe® syringe, which is uniquely designed to reducethe risk of bloodstream infections resulting from catheter hubcontamination.  Patient Safe®’s unique luer guard reduces the risk of luer tipcontact contamination and the risk of contamination of intravenous fluid.  Safety syringes comprised 98.9% of our salesin 2009.

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  We expect the Swine Flu to have a longer worldwide immunizationduration than the seasonal flu.  Inthe third quarter of 2009, we were awarded a contract by the DHHS tosupply a portion of the safety engineered syringes to be used in the U.S.efforts to vaccinate the U.S. population against the Swine Flu.  Theimpact on us was material.  Sales to theDHHS comprised 52.0% and 24.4% of our revenues for the three months and twelvemonths ended December 31, 2009, respectively.  This program, whichwas estimated to run from August 2009 through March 2010, ended in December 2009.  Our revenue increased 142.1% in the fourthquarter principally due to the DHHS contract. We do not know if there will be a similar program in 2010.

 

Our products have been and continue to be distributednationally through numerous distributors. However, we have been blocked from access to the market by exclusivemarketing practices engaged in by BD, which dominates the market.  We believe that its monopolistic businesspractices continue despite: (i) its paying $100 million in 2004 to settlea prior lawsuit with us for anticompetitive practices, business disparagement,and tortious interference and (ii) the fact that a jury returned a verdictin November 2009 finding that all three patents asserted by us against BDare valid and infringed by BD (with regard to its IntegraTM product).  Although we have made limited progress insome areas, such as the alternate care and international markets, our volumesare not as high as they should be given the nature and quality of our productsand the federal and state legislation requiring the use of safe needle devices.

 

Wecontinue to pursue various strategies to have better access to the hospitalmarket, as well as other markets, including attempting to gain access to themarket through our sales efforts, our innovative technology, introduction ofnew products, and, when necessary, litigation. We are also marketing more products internationally.

 

Wesued OMI in April 2008 and separately sued BD in June 2007 for claimsof patent infringement (see **Item 3. Legal Proceedings**of the Form 10-K), and in December 2009and November 2009, respectively, such companies were found to infringe ourpatents.  These judgments could increasedemand for our product.  However, thereis no assurance when or if such increase will occur.

 

Beginningin 2004, we were given an award (from PATH) to supply syringes to variousAfrican countries under the President’s Emergency Plan for AIDS relief(PEPFAR).  Awards increased significantlyfrom 2004 to 2007.  The continuation ofPEPFAR has been reauthorized by Congress through 2013.  However, funding for the procurement ofsafety syringes in this program has not occurred to date.

 

As aresult of the introduction of VanishPoint® syringes through the PEPFAR initiative,African countries have begun to procure products outside of the U.S.-fundedprogram.  In 2007, the Director Generalof Nigeria’s National Agency for Food and Drug Administration and Control(NAFDAC), endorsed automated retraction syringes for use throughoutNigeria.  We are currently sellingsyringes to a Nigerian distributor for use in that country.  At the end of 2008, the Deputy Prime Ministerof Namibia also publically endorsed automated retraction syringes as a publicintervention that would “protect health workers and save their patient’slives”.  

 

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The number ofinternational distributors continues to increase.

 

In the event we continue to have only limited marketaccess, the cash provided by the litigation settlements and generated fromoperations becomes insufficient, and royalties from BTMD are notforthcoming,  we would take additionalcost cutting measures to reduce cash requirements.  Such measures could result in the reductionof units being produced, the reduction of workforce, the reduction of salariesof officers and other nonhourly employees, and the deferral of royaltypayments.  We took such actions at theend of the second quarter of 2009.

 

At the end of the second quarter of 2009, we announcedthat in the interest of the long-term survival of the Company we wouldreorganize some of the Company’s functions and implement staff reductions, allin order to minimize our cash expenditures and conserve our resources.  Our workforce was reduced by 16% on July 1,2009.  However, due to the expectedincrease in production from sales to DHHS, we increased the workforce at theLittle Elm facility beginning in the latter part of the third quarter of 2009.  The rehiring only slightly affected our priorestimate that annual compensation costs and related expenses would be reducedby $2.1 million annually due to the layoffs. An anticipated reduction of inventory was estimated (at the time of theannouncement) to result in a minimum of $1.0 million reduction in cash outlaysover the subsequent twelve months. However, due to the orders from the DHHS, that particular initiative ison hold.  Our President and CEO, ThomasJ. Shaw, waived future royalty payments beginning July 1, 2009, for anaggregate savings of $1.0 million which affected royalty payments (notexpenses) in the third and fourth quarter of 2009.  Salaries for all personnel above a certainsalary level were cut by 10% in 2009 (subject to contract rights).  Such reduction, along with discontinuing the 401(k)matching, was estimated to save $600,000. We expect to save an additional $1.6 million by the following actions:moving most, if not all, of the molding of piece parts back to Little Elm;reducing professional fees; and various other cost cutting measures.  Professional fees have been reduced and wehave begun additional molding in Little Elm. These measures will remain in place as long as Management deems themnecessary.

 

We recorded a $200,000 charge in the second quarter of2009 for severance pay offered to the terminated employees.  All severance payments were paid in the thirdquarter of 2009. We incurred a noncash expense of $2.1 million related to theissuance of stock options. The remaining stock option expense will be fullyamortized by the end of the second quarter of 2010.** **We wrote off approximately $2.6million of catheter production equipment.

 

We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to reduce costs.  We believe our current capitalizationprovides the resources necessary to implement some of these changes and improveour manufacturing capacity and efficiency, thereby reducing our unit cost.

 

Product purchases from Double Dove, a Chinesemanufacturer, have enabled us to increase manufacturing capacity with littlecapital outlay and have provided a competitive manufacturing cost.  In 2009, Double Dove manufacturedapproximately 67.5% of the units we produced. The cost of production per unit has generally declined as volumesincreased.  We believe we could make up anylong-term disruption in these supplies by utilizing more of the capacity at theLittle Elm facility, except for the 0.5mL insulin syringe, the 5mL and 10mLsyringes, and the autodisable syringe which altogether comprised about 3.8% ofour 2009 revenues.

 

We previously entered into a License Agreement with BTMDas of May 13, 2005.  That licenseexpired on May 13, 2008 (prior to the manufacture and delivery of anyproducts).  Nevertheless, BTMD continuedto work toward completing the facility and gaining the necessary approvals inorder to manufacture and sell products. The facility has been completed and BTMD has met Chinese Governmentrequirements.  BTMD received aRegistration Certificate for Medical Device on August 24, 2009.  Production efforts are currently underway andare being tested.  We entered into a newagreement (effective as of July 1, 2009) with BTMD along similar terms asthe prior agreement.  This agreementexpires on July 1, 2010 which may automatically extend under certainconditions.  Such terms include grantingto BTMD a limited exclusive license to manufacture and a limited exclusiveright to sell syringes in the PRC having retractable needles that incorporateour technology.  This License Agreementis subject to the Technology License Agreement dated June 23, 1995 betweenMr. Thomas J. Shaw, our founder and CEO, as licensor, and the Company, aslicensee (as amended).  Accordingly, Mr. Shawwill receive 5% of the licensing proceeds we receive.  BTMD has agreed to manufacture and sell theseproducts in the PRC and to pay us a quarterly royalty of two and one-half centsper unit on 3mL and 5mL syringes and a royalty of three and one-half cents perunit on 0.5mL, 1mL, and 10mL syringes. The obligation to pay the royalties continues even if

 

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anyand all of our patent rights in the PRC are found to be invalid orunenforceable for any reason.  We stillcontinue to expect royalty payments although we are unable to predict the datewe will begin to receive such royalties.

 

With increased volumes, our manufacturing unit costshave generally tended to decline. Factors that could affect our unit costs include increases in costs bythird party manufacturers, changing production volumes, costs of petroleumproducts, and transportation costs. Increases in such costs may not be recoverable through price increasesof our products.

 

We completed the expansion of an existing warehouse inthe first quarter of 2009.  Thisexpansion increased our warehouse area, provided for additional office space,and added a second Controlled Environment. The additional Controlled Environment will enable us to do more moldingin-house.

 

**LIQUIDITY**

 

At the present time, Management does not intend toraise equity capital.  Due to the fundsreceived from prior litigation settlements, we have sufficient cash reservesand intend to rely on operations, cash reserves, and debt financing as theprimary ongoing sources of cash.

 

HistoricalSources of Liquidity

 

We have historically funded operations primarily fromthe proceeds from revenues, private placements, loans, and litigationsettlements.

 

InternalSources of Liquidity

 

*Margins and Market Access*

 

To achieve break even quarters, we need minimal accessto hospital markets which has been difficult to obtain due to the monopolisticmarketplace which was the subject of our initial lawsuit and now also includedin our second antitrust lawsuit against BD. ** **We will continue to attempt to gainaccess to the market through our sales efforts, innovative technology, theintroduction of new products, and, when necessary, litigation.

 

We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to reduce costs. ** **Webelieve our current capitalization provides the resources necessary toimplement some of these changes and improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

 

In the third quarter of2009, we were awardeda contract by the DHHS to supply a portion of the safety engineered syringes tobe used in the U.S. efforts to vaccinate the U.S. population against the SwineFlu.  The impact on us was material. Sales to the DHHS comprised 52.0% and 24.4% of our revenues for thethree months and twelve months ended December 31, 2009,respectively.  This program, which was estimated to run from August 2009through March 2010, ended in December 2009.  Our revenue increased 142.1% in the fourthquarter principally due to the DHHS contract. We do not know if there will be a similar program in 2010.

 

Beginning in early 2004, we began to receive shipmentof product from Double Dove which enabled us to lower our unit costs.  Fluctuations in the cost and availability ofraw materials and inventory and our ability to maintain favorable supplierarrangements and relationships could result in the need to manufacture all (asopposed to 32.0%) of our products in the U.S. This could temporarily increase unit costs as we ramp up domesticproduction.

 

The mix of domestic and international sales affectsthe average sales price of our products. Generally, the higher the ratio of domestic sales to internationalsales, the higher the average sales price will be.  Typically international sales are shippeddirectly from China to the customer. Purchases of product manufactured in China, if available, usuallydecrease the average cost of manufacture for all units as domestic costs, suchas indirect labor and overhead, remain relatively constant.  The number of units produced by the Companyversus manufactured in China can have a significant effect on the carryingcosts of inventory as well as Cost of sales. We will continue to evaluate the appropriate mix of productsmanufactured domestically and those manufactured in China to achieve economic 

 

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benefitsas well as to maintain our domestic manufacturing capability.  Currently, approximately 32.0%****of our products are produced domestically.

 

Fluctuations in the cost of oil (since our productsare petroleum based) and transportation and the volume of units purchased fromDouble Dove may have an impact on the unit costs of our product.  Increases in such costs may not berecoverable through price increases of our products.  Reductions in oil prices may not quicklyaffect petroleum product prices.

 

*Seasonality*

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  We expect the Swine Flu to have a longer worldwide immunizationduration than the seasonal flu.

 

*Licensing Agreement*

 

Wepreviously entered into a License Agreement with BTMD as of May 13,2005.  That license expired on May 13,2008 (prior to the manufacture and delivery of any products).  Nevertheless, BTMD continued to work towardcompleting the facility and gaining the necessary approvals in order tomanufacture and sell products.  Thefacility has been completed and BTMD has met Chinese governmentrequirements.  BTMD received aRegistration Certificate for Medical Device on August 24, 2009.  Production efforts are currently underway andare being tested.  We entered into a newagreement (effective as of July 1, 2009) with BTMD along similar terms asthe prior agreement.  This agreementexpires on July 1, 2010 which may automatically extend under certainconditions. Such terms include granting to BTMD a limited exclusive license tomanufacture and a limited exclusive right to sell syringes in the PRC havingretractable needles that incorporate our technology.  This License Agreement is subject to theTechnology License Agreement dated June 23, 1995 between Mr. ThomasJ. Shaw, our founder and CEO, as licensor, and the Company, as licensee (asamended).  Accordingly, Mr. Shawwill receive 5% of the licensing proceeds we receive.  BTMD has agreed to manufacture and sell theseproducts in the PRC and to pay us a quarterly royalty of two and one-half centsper unit on 3mL and 5mL syringes and a royalty of three and one-half cents perunit on 0.5mL, 1mL, and 10mL syringes. The obligation to pay the royalties continues even if any and all of ourpatent rights in the PRC are found to be invalid or unenforceable for anyreason.  We still continue to expectroyalty payments although we are unable to predict the date we will begin toreceive such royalties.

 

*Cash Requirements*

 

Due to funds received from prior litigationsettlements, we have sufficient cash reserves and intend to rely on operations,cash reserves, and debt financing as the primary ongoing sources of cash.  In the event we continue to have only limitedmarket access and cash generated from operations becomes insufficient tosupport operations, we would take additional cost cutting measures to reducecash requirements.  Such measures couldresult in the reduction of units being produced, the reduction of workforce,the reduction of salaries of officers and other nonhourly employees, and thedeferral of royalty payments.

 

ExternalSources of Liquidity

 

We have obtained several loans from our inception,which have, together with the proceeds from the sales of equities andlitigation efforts, enabled us to pursue development and production of ourproducts.  Given the current economicconditions, our ability to obtain additional funds through loans isuncertain.  Furthermore, the shareholderspreviously authorized an additional 5,000,000 shares of a Class CPreferred Stock that could, if necessary, be designated and used to raise fundsthrough the sale of equity.  Due to thecurrent market price of our Common Stock, it is unlikely we would choose toraise funds by the sale of equity.  Weobtained a loan from 1st International for $2,500,000, secured by the land andexisting buildings, which provided funding for the construction of the 47,250square foot warehouse placed in service in 2005.  This loan had a maturity date in late March2010.  We anticipate refinancing thisloan.

 

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**CAPITALRESOURCES**

 

MaterialCommitments for Expenditures

 

On August 29, 2008, we obtained a $4,210,000interim construction loan from Lewisville State Bank, a division of 1stInternational Bank.  The purpose of theloan was to expand the warehouse, including additional office space, andconstruct a new Controlled Environment. The interest rate was WSJPR plus 0.25%. The loan was renewed on December 10, 2009 with a 20 yearamortization and 10 year maturity.  Theinterest rate is 5.968%. The construction project has been completed.

 

Trendsin Capital Resources

 

Interest expense will increase due to the recent loan****of approximately $4.2 million, but will besomewhat mitigated by lower borrowing rates if current conditions in the creditmarkets continue.  Interest income may benegatively affected by lower interest rates and our prior movement of cash toU.S. Treasury bills and other U.S. government backed securities.** **Althoughwe believe that we have granted credit to credit-worthy firms, current economicconditions may affect the timing and/or collectability of some accounts.

 

**RESULTSOF OPERATIONS**

 

Thefollowing discussion contains trend information and other forward-lookingstatements that involve a number of risks and uncertainties.  Our actual future results could differmaterially from our historical results of operations and those discussed in theforward-looking statements.  All periodreferences are to our fiscal years ended December 2009, 2008, or2007.  Dollar amounts have been roundedfor ease of reading.

 

*Comparisonof Year Ended*

*December 31,2009, and Year Ended December 31, 2008*

 

Revenuesincreased 39.7%, due principally to sales under the DHHS contract.  Domestic sales were 88.4% of revenues withinternational sales comprising the remainder. Without the DHHS contract, our revenues would have increased 5.6%, withdomestic revenues increasing 7.3% and international revenues declining 3.0%.  Unit sales of the 1mL syringe increased 17.1%and 3mL unit sales increased 54.3%.  Unitsales of all products increased 27.3%. Domestic unit sales as well as average sales prices increased.  International unit sales decreased slightlyand average selling prices increased. Sales to two customers accounted for 38.4% of our revenues in 2009.  Only one of these two customers was acustomer in 2008, and such customer accounted for 17.1% of our revenues in2008.

 

Costof sales increased due to greater volumes. Royalty expenses were higher due to higher gross sales.

 

As aresult, gross profit margins increased from 29.5% in 2008 to 34.7% in 2009.

 

Operatingexpenses increased from the prior year due to litigation costs and stock optionexpense mitigated by the cost cutting measures beginning in the third quarterof 2009.

 

Salesand marketing expenses decreased due primarily to lower compensation due tostaff reduction and reduction in pay, lower advertising expenses and reduced travelcosts.  Stock option expense andconsulting costs increased.

 

Researchand development costs were lower.  We haddecreases in engineering costs due principally to reduction in staff and pay aswell as lower consulting cost.  Stockoption expense increased.

 

Generaland administrative costs increased due principally to litigation costs andstock option expense. Compensation costs decreased due to staff reductions andreductions in pay.

 

In the fourth quarter of 2009, we recognized animpairment charge of $2,594,602 associated with catheter productionequipment.  See Note 2, **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Long-lived assets**fora further discussion.

 

PreferredStock dividend requirements decreased slightly due to conversion of preferredstock in the first quarter of 2008.  Thedividend arrearage at December 31, 2009, on all classes of Preferred Stockwas approximately $15.3 million.

 

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Interestincome decreased due to lower interest rates and lower cash balances.  Interest expense decreased due to capitalizedinterest.  Interest expense is expectedto increase in 2010 due to completion of significant capital projects in 2009for which interest was being capitalized.

 

There are several charges to our Statement ofOperations in 2009 that are nonrecurring or are not typical of a manufacturingcompany.  These charges includelitigation costs, stock option expense (a noncash charge which will be fullyamortized at the end of the second quarter of 2010), and an impairment ofassets.  Additionally we recognized anincome tax benefit attributable to recent tax legislation which allows us tocarry back our net operating losses to a prior period.  Were it not for the charges and the taxbenefit described above, our Net earnings applicable to common shareholders forthe year would have been slightly above breakeven.  The removal of the same items, applicable tothe fourth quarter of 2009, would have provided a Net earnings applicable tocommon shareholders exceeding $4.0 million. There would be no federal income tax impact since we have net operatingloss carryforwards which would eliminate our tax obligation.  Based on the current status of legal matters,our litigation costs should decline sometime prior to the end of the secondquarter of 2010.

 

Cashflow from operations was a negative $12.3 million for 2009 due principally tooperating losses and increases in receivables. Most of the increase in receivables was related to billings in December2009 to DHHS and collected in January 2010. The increase in income taxes receivable is related to a refund forcarryback of our 2009 net operating loss. We will file for this refund early in the second quarter of 2010.  The effect of non-cash expenses and thechange in working capital was a negative $2.9 million.  Investing activities utilized $2.4 million incash.

 

*Comparisonof Year Ended*

*December 31,2008, and Year Ended December 31, 2007*

 

Revenuesincreased 6.1%, due principally to higher average sales prices and greatervolumes.  Domestic sales were 83.3% ofrevenues with international sales comprising the remainder.  Unit sales of the 1mL syringe increased 22.7%and 3mL unit sales decreased 4.0%.  Unitsales of all products increased 3.1%. Domestic unit sales as well as average sales prices increased.  International unit sales and average sellingprices declined.  Sales to onedistributor accounted for 17.1% and 13.7% of our revenues in 2008 and 2007, respectively.

 

Costof sales increased due to higher manufacturing costs and higher volumes.  Royalty expenses were higher due to anincrease in gross revenues.

 

As aresult, gross profit margins declined from 30.4% in 2007 to 29.5% in 2008.

 

Operatingexpenses increased from the prior year due to higher general and administrativeexpenses mitigated by lower Sales and marketing and Research and developmentcosts.

 

Salesand marketing expenses decreased due primarily to reduced travel andentertainment, trade shows and market expense, compensation and officesupplies.  Consulting expense alsodecreased.

 

Researchand development costs were flat.  We haddecreases in engineering costs due principally to higher costs of validationand engineering samples offset by higher compensation costs.

 

Generaland administrative costs increased due principally to increased legal costs(including a settlement of litigation whereby we obtained a patentlicense/assignment), office expenses, compensation, property taxes and freightcosts.  Travel and entertainment costsand fees to distributors decreased.

 

PreferredStock dividend requirements decreased due to conversion of Preferred Stock toCommon Stock.  The dividend arrearage at December 31,2008, on all classes of Preferred Stock was approximately $13.9 million.

 

Interestincome decreased due to lower interest rates and cash balances.  Interest expense decreased due to lowerinterest rates mitigated by higher debt balances and capitalized interest,principally due to the construction of the warehouse.

 

Otheraccrued liabilities increased due to prepayments from international customers.

 

Cashflow from operations was a negative $5.7 million for 2008 due principally toour losses.  The effect of non-cashexpenses and the change in working capital was a positive $4.0 million.  Investing activities utilized $2.2 million incash.

 

OFF-BALANCE SHEETARRANGEMENTS

 

None.

 

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CONTRACTUAL OBLIGATIONS

 

ContractualObligations and Commercial Commitments

 

Thefollowing chart summarizes our material obligations and commitments to makefuture payments under contracts for long-term debt as of December 31, 2009:

 
| ** **                                    | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| **Contractual  Obligations**                  | ** ** | **Total**                   | ** ** | **Less****Than  1 Year** | ** ** | **1-3****Years** | ** ** | **3-5****Years** | ** ** | **More****Than  5  Years** | ** ** |
|                                          |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term  debt, including current maturities |       | $                           | 7,505,789  |   | $ | 2,659,573 |   | $ | 988,749 |   | $ | 273,366 |   | $ | 3,584,101 |   |
|                                               |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

These amounts do not reflectthe effect of the beneficial conversion feature and therefore will be greaterthan the amounts in the financial statements.

 

SIGNIFICANTACCOUNTING POLICIES

 

We consider the following to be our most significantaccounting policies.  Carefulconsideration and review is given to these and all accounting policies on aroutine basis to ensure that they are accurately and consistently applied.

 

**AccountsReceivable**

 

Werecord trade receivables when revenue is recognized.  No product has been consigned tocustomers.  Our allowance for doubtfulaccounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful ofcollection are included in the allowance. An additional allowance has been established based on a percentage ofreceivables outstanding.  Theseprovisions are reviewed to determine the adequacy of the allowance for doubtfulaccounts.  Trade receivables are chargedoff when there is certainty as to their being uncollectible.  Trade receivables are considered delinquentwhen payment has not been made within contract terms.

 

**RevenueRecognition**

 

Revenueis recognized for sales to distributors when title and risk of ownership passesto the distributor, generally upon shipment. Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of (i) rebates granted todistributors who provide tracking reports which show, among other things, thefacility that purchased the products, and (ii) a provision for estimatedcontractual pricing allowances for products that we have not received trackingreports.  Rebates are recorded whenissued and are applied against the customer’s receivable balance.  The provision for contractual pricingallowances is reviewed at the end of each quarter and adjusted for changes inlevels of products for which there is no tracking report.  Additionally, if it becomes clear thattracking reports will not be provided by individual distributors, the provisionis further adjusted.  The estimatedcontractual allowance is netted against individual distributors’ accountsreceivable balances for financial reporting purposes.  The resulting net balance is reflected inaccounts receivable or accounts payable, as appropriate.  The terms and conditions of contractualpricing allowances are governed by contracts between us and ourdistributors.  Revenue for shipmentsdirectly to end-users is recognized when title and risk of ownership passesfrom us.  Any product shipped ordistributed for evaluation purposes is expensed.

 

Ourdomestic return policy is set forth in our standard DistributionAgreement.  This policy provides that acustomer may return incorrect shipments within 10 days following arrival at thedistributor’s facility.  In all suchcases the distributor must obtain an authorization code from us and affix thecode to the returned product.  We willnot accept returned goods without a returned goods authorization number.  We may refund the customer’s money or replacethe product minus a 10% restocking fee and all applicable freight charges.

 

Ourreturn policy also provides that a customer may return product that isoverstocked.  Overstocking returns arelimited to two times in each 12 month period up to 1% of distributor’s totalpurchase of products for the prior 12 month period.  All product overstocks and returns aresubject to inspection and acceptance by manufacturer.

 

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Table ofContents

 

Ourinternational Distribution Agreements do not provide for any returns.

 

Werecord an allowance for estimated returns as a reduction to accounts receivableand gross sales.  Historically, returnshave been less than 0.5% of net sales.

 

**Inventories**

 

Inventoriesare valued at the lower of cost or market, with cost being determined usingactual average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**MarketingFees**

 

Undera sales and marketing agreement with Abbott, we paid marketing fees until weterminated the contract for breach.  Thecontracted services were to include participation in promotional activities,development of educational and promotional materials, representation at tradeshows, clinical demonstrations, inservicing and training, and tracking reportsdetailing the placement of our products to end-users.  Marketing fees were accrued at the time ofthe sale of product to Abbott.  Thesefees were paid after Abbott provided us a tracking report of product sales toend-users.  These costs were included inSales and marketing expense in the Statements of Operations.  No marketing fees have been accrued since October 15,2003, the date the National Marketing and Distribution Agreement with Abbottwas terminated.  We filed suit againstAbbott in August 2005 for breach of contract and trial is scheduled for May 2010.  We do not expect the eventual liability formarketing fees, if any, to exceed the amount accrued.

 

8

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# **Table of Contents**

 

# **Item 8. Financial Statements and SupplementaryData.**

# ** **

**RETRACTABLE TECHNOLOGIES, INC.**

 

**FINANCIAL STATEMENTS AND**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**DECEMBER 31, 2009 AND 2008**

 

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**RETRACTABLETECHNOLOGIES, INC.**

I**NDEX TO FINANCIAL STATEMENTS**

 
| ** **                                                                                                              | ** ** | **Page of Form 10-K** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| Report  of Independent Registered Public Accounting Firm                                                                |       | F-3                   |
|                                                                                                                    |       |                  |
| Financial  Statements:                                                                                                  |       |                  |
|                                                                                                                    |       |                  |
| Balance Sheets as of December 31, 2009 and 2008                                                                    |       | F-4                   |
|                                                                                                                    |       |                  |
| Statements  of Operations for the years ended

December 31, 2009, 2008 and 2007                                    |       | F-5                   |
|                                                                                                                    |       |                  |
| Statements of Changes in Stockholders’ Equity

for the years ended December 31, 2009, 2008 and  2007          |       | F-6                   |
|                                                                                                                    |       |                  |
| Statements  of Cash Flows for the years ended

December 31,  2009, 2008 and 2007                                   |       | F-8                   |
|                                                                                                                    |       |                  |
| Notes to Financial Statements                                                                                           |       | F-9                   |
|                                                                                                                    |       |                  |
| Selected Quarterly Financial Data - Unaudited                                                                           |       | F-24                  |
|                                                                                                                    |       |                  |
| Financial  Statement Schedule:                                                                                          |       |                  |
|                                                                                                                    |       |                  |
| Schedule II: Schedule of Valuation and Qualifying  Accounts

for the years ended December 31, 2009, 2008 and  2007 |       | 48                    |

 

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Table of Contents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Stockholders

of RetractableTechnologies, Inc.

 

Wehave audited the accompanying balance sheets of Retractable Technologies, Inc.as of December 31, 2009 and 2008, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2009.  Our audits also included the financialstatement schedule of Retractable Technologies, Inc., listed in Item15(a).  These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Retractable Technologies, Inc.as of December 31, 2009 and 2008, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2009 in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Wewere not engaged to examine management’s assertion about the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2009 included in Item 9A of the Company’s December 31, 2009 Form 10-Kand, accordingly, we do not express an opinion thereon.

 
|                                                                                                                                                  | /s/ CF &  Co., L.L.P. |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|--------|
|                                                                                                                                                  | CF &  Co., L.L.P.     |   |
| Dallas, Texas                                                                                                                                         |                           |
| March 31,  2010, except for Note 2, (SUMMARY OF SIGNIFICANT ACCOUNTING  POLICIES, Long-lived assets) as to which  the date is April 7, 2010 |                           |   |
|                                                                                                                                                       |                                |        |  |

 

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Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**BALANCE SHEETS**

 
| ** **                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                                                                                                                                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                             |       |                  |       |   |   |
| Current assets:                                                                                                                                                                        |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                              |       | $                     | 18,126,084 |   | $ | 33,283,740 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $681,966 and $499,966, respectively                                                                                    |       | 9,948,210             |       | 3,288,942 |   |
| Inventories, net                                                                                                                                                                       |       | 6,907,369             |       | 6,641,532 |   |
| Income taxes receivable                                                                                                                                                                |       | 3,655,637             |       | — |   |
| Other current assets                                                                                                                                                                   |       | 624,393               |       | 400,113 |   |
| Total current assets                                                                                                                                                                   |       | 39,261,693            |       | 43,614,327 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Property, plant, and equipment, net                                                                                                                                                    |       | 14,234,181            |       | 14,435,667 |   |
| Intangible assets, net                                                                                                                                                                 |       | 426,675               |       | 470,115 |   |
| Other assets                                                                                                                                                                           |       | 18,750                |       | 18,750 |   |
| Total assets                                                                                                                                                                           |       | $                     | 53,941,299 |   | $ | 58,538,859 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                          |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                   |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                       |       | $                     | 6,997,310  |   | $ | 6,144,435 |   |
| Current portion of long-term debt                                                                                                                                                      |       | 2,628,652             |       | 451,865 |   |
| Accrued compensation                                                                                                                                                                   |       | 561,484               |       | 650,704 |   |
| Marketing fees payable                                                                                                                                                                 |       | 1,419,760             |       | 1,419,760 |   |
| Accrued royalties to shareholders                                                                                                                                                      |       | 843,327               |       | 620,987 |   |
| Other accrued liabilities                                                                                                                                                              |       | 745,460               |       | 949,770 |   |
| Total current liabilities                                                                                                                                                              |       | 13,195,993            |       | 10,237,521 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Long-term debt, net of current maturities                                                                                                                                              |       | 4,824,833             |       | 6,095,535 |   |
| Total liabilities                                                                                                                                                                      |       | 18,020,826            |       | 16,333,056 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                             |       |                  |       |   |   |
| Preferred Stock $1 par value:                                                                                                                                                          |       |                  |       |   |   |
| Class B; authorized: 5,000,000 shares                                                                                                                                             |       |                  |       |   |   |
| Series I, Class B; issued: 1,000,000  shares; outstanding: 144,000 and 144,000 shares, respectively (liquidation  preference of $900,000 and $900,000 respectively)          |       | 144,000               |       | 144,000 |   |
| Series II, Class B; issued: 1,000,000  shares; outstanding: 219,700 and 219,700, respectively (liquidation  preference of $2,746,250 and $2,746,250, respectively)           |       | 219,700               |       | 219,700 |   |
| Series III, Class B; issued: 1,160,445  shares; outstanding: 130,245 and 130,245 shares, respectively (liquidation  preference of $1,628,063 and $1,628,063, respectively)   |       | 130,245               |       | 130,245 |   |
| Series IV, Class B; issued: 1,133,800  shares; outstanding: 552,500 and 552,500 shares (liquidation preference of  $6,077,500 and $6,077,500, respectively)                  |       | 552,500               |       | 552,500 |   |
| Series V, Class B; issued: 2,416,221  shares; outstanding: 1,238,821 and 1,238,821 shares, respectively  (liquidation preference of $5,450,812 and $5,450,812, respectively) |       | 1,238,821             |       | 1,238,821 |   |
| Common Stock, no par value; authorized: 100,000,000  shares; issued and outstanding: 23,825,149 and 23,800,064 shares,  respectively                                                   |       | —                |       | — |   |
| Additional paid-in capital                                                                                                                                                             |       | 57,089,153            |       | 53,952,183 |   |
| Retained deficit                                                                                                                                                                       |       | (23,453,946           |  )    | (14,031,646 |  ) |
| Total stockholders’ equity                                                                                                                                                        |       | 35,920,473            |       | 42,205,803 |   |
| Total liabilities and stockholders’ equity                                                                                                                                        |       | $                     | 53,941,299 |   | $ | 58,538,859 |   |

 

 

See accompanying notes to financial statements

 

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**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTS OF OPERATIONS**

 
|                                       | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------|------------|-----------------------------------|-------------|
|                                       | ** ** | **2009**                          | ** **  | **2008** | ** ** | **2007** | ** ** |
| Sales, net                                 |       | $                                 | 38,981,837  |   | $ | 27,899,318 |   | $ | 26,289,720 |   |
| Cost of Sales                              |       |                              |        |   |   |   |   |
| Costs of manufactured product              |       | 22,659,437                        |        | 17,504,842 |   | 16,212,609 |   |
| Royalty expense to shareholders            |       | 2,806,223                         |        | 2,168,268 |   | 2,087,596 |   |
| Total cost of sales                        |       | 25,465,660                        |        | 19,673,110 |   | 18,300,205 |   |
| Gross profit                               |       | 13,516,177                        |        | 8,226,208 |   | 7,989,515 |   |
|                                       |       |                              |        |   |   |   |   |
| Operating expenses:                        |       |                              |        |   |   |   |   |
| Sales and marketing                        |       | 4,372,163                         |        | 4,835,272 |   | 5,299,157 |   |
| Research and development                   |       | 1,030,622                         |        | 1,066,068 |   | 1,071,143 |   |
| General and administrative                 |       | 18,814,392                        |        | 12,769,774 |   | 11,565,144 |   |
| Impairment of assets                       |       | 2,594,602                         |        | — |   | — |   |
| Total operating expenses                   |       | 26,811,779                        |        | 18,671,114 |   | 17,935,444 |   |
| Loss from operations                       |       | (13,295,602                       |  )     | (10,444,906 |  ) | (9,945,929 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Interest and other income                  |       | 57,604                            |        | 855,685 |   | 1,870,512 |   |
| Interest expense, net                      |       | (21,892                           |  )     | (54,359 |  ) | (326,304 |  ) |
| Loss before income taxes                   |       | (13,259,890                       |  )     | (9,643,580 |  ) | (8,401,721 |  ) |
| Benefit for income taxes                   |       | (3,837,590                        |  )     | — |   | (1,453,617 |  ) |
| Net loss                                   |       | (9,422,300                        |  )     | (9,643,580 |  ) | (6,948,104 |  ) |
| Preferred Stock dividend requirements      |       | (1,370,868                        |  )     | (1,373,019 |  ) | (1,399,062 |  ) |
| Net loss applicable to common shareholders |       | $                                 | (10,793,168 |  ) | $ | (11,016,599 |  ) | $ | (8,347,166 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Loss per share                             |       | $                                 | (0.45       |  ) | $ | (0.46 |  ) | $ | (0.35 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Weighted average common shares outstanding |       | 23,806,533                        |        | 23,794,566 |   | 23,727,029 |   |

 

 

See accompanying notes to financial statements

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

** **
|                                                                        | ** ** | ** Series I Class B** | ** ** | **Series II Class B** | ** ** | **Series III Class B** |       | **Series IV Class B** |       | ** Series V Class B** |       | ** Common** |       |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|------------------|------------|
|                                                                        | ** ** | **Shares**                           | ** ** | **Amount**                      | ** ** | **Shares**                       | ** ** | **Amount**                      | ** ** | **Shares**                           | ** ** | **Amount**       | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | ** Shares** | ** ** | **Amount** | ** ** |
| Balance as of December 31, 2006                                             |       | 164,000                              |       | $164,000                        |       | 224,700                          |       | $224,700                        |       | 135,245                              |       | $135,245         |       | 553,500 |   | $553,500 |   | 1,363,721 |   | $ 1,363,721 |   | 23,644,164 |   | $          — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Preferred Stock into Common Stock                             |       | (20,000                              | )          | (20,000                         | )          | (5,000                           | )          | (5,000                          | )          | (5,000                               | )          | (5,000           | )          | — |   | — |   | (81,250 | ) | (81,250 | ) | 111,250 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option compensation                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared and paid on Series I  Class B Preferred Stock  |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared and paid on Series II  Class B Preferred Stock |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2007                                             |       | 144,000                              |       | 144,000                         |       | 219,700                          |       | 219,700                         |       | 130,245                              |       | 130,245          |       | 553,500 |   | 553,500 |   | 1,282,471 |   | 1,282,471 |   | 23,755,414 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Preferred Stock into Common Stock                             |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | (1,000 | ) | (1,000 | ) | (43,650 | ) | (43,650 | ) | 44,650 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option compensation                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2008                                             |       | 144,000                              |       | 144,000                         |       | 219,700                          |       | 219,700                         |       | 130,245                              |       | 130,245          |       | 552,500 |   | 552,500 |   | 1,238,821 |   | 1,238,821 |   | 23,800,064 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option exercise                                        |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | 25,085 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Royalty waiver                                                              |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option compensation                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2009                                             |       | 144,000                              |       | $144,000                        |       | 219,700                          |       | $219,700                        |       | 130,245                              |       | $130,245         |       | 552,500 |   | $552,500 |   | 1,238,821 |   | $ 1,238,821 |   | 23,825,149 |   | $          — |   |

 

See accompanying notes to financial statements

 

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**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                                                        | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-------------|------------|
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of December 31, 2006                                        |       | $                                | 54,709,108 |                              | $          | 2,560,038   |       | $ | 59,710,312 |   |
|                                                                        |       |                             |       |                              |       |        |       |
| Conversion of Preferred Stock into Common Stock                             |       | 111,250                          |       | —                            |       | —      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option compensation                                    |       | 52,173                           |       | —                            |       | 52,173      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Dividends declared and paid on Series I  Class B Preferred Stock  |       | (262,819                         |  )    | —                            |       | (262,819    | )          |
|                                                                        |       |                             |       |                              |       |        |       |
| Dividends declared and paid on Series II  Class B Preferred Stock |       | (790,725                         |  )    | —                            |       | (790,725    |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Net loss                                                                    |       | —                           |       | (6,948,104                        |  )    | (6,948,104  |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of  December 31, 2007                                       |       | 53,818,987                       |       | (4,388,066                        | )          | 51,760,837  |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Conversion of Preferred Stock into Common Stock                             |       | 44,650                           |       | —                            |       | —      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option compensation                                    |       | 88,546                           |       | —                            |       | 88,546      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Net loss                                                                    |       | —                           |       | (9,643,580                        |  )    | (9,643,580  |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of December 31, 2008                                        |       | 53,952,183                       |       | (14,031,646                       |  )    | 42,205,803  |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option exercise                                        |       | 25,610                           |       | —                            |       | 25,610      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Royalty waiver                                                              |       | 1,000,000                        |       | —                            |       | 1,000,000   |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option compensation                                    |       | 2,111,360                        |       | —                            |       | 2,111,360   |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Net loss                                                                    |       | —                           |       | (9,422,300                        |  )    | (9,422,300  |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of December 31, 2009                                        |       | $                                | 57,089,153 |                              | $          | (23,453,946 |  )    | $ | 35,920,473 |   |

 

 

See accompanying notes to financial statements

 

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**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** |   |
| **Cash flows from operating  activities:**                                   |       |                              |       |   |   |   |   |
| Net loss                                                                     |       | $                                 | (9,422,300 |  ) | $ | (9,643,580 |  ) | $ | (6,948,104 |  ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                |       | 1,396,793                         |       | 1,397,333 |   | 1,430,072 |   |
| Stock option compensation                                                    |       | 2,111,360                         |       | 32,629 |   | 6,478 |   |
| Provision for inventory valuation                                            |       | —                            |       | — |   | 155,600 |   |
| Provision for doubtful accounts                                              |       | 182,000                           |       | 224,633 |   | 169,223 |   |
| Impairment of assets                                                         |       | 2,594,602                         |       | — |   | — |   |
| Accreted interest                                                            |       | 43,151                            |       | 54,387 |   | 120,486 |   |
| (Increase) decrease in assets:                                               |       |                              |       |   |   |   |   |
| Inventories                                                                  |       | (265,837                          |  )    | 395,597 |   | (806,949 |  ) |
| Accounts receivable                                                          |       | (6,841,268                        |  )    | (1,845,939 |  ) | 119,897 |   |
| Income taxes receivable                                                      |       | (3,655,637                        |  )    | 2,345,041 |   | 10,691 |   |
| Other current assets                                                         |       | (224,280                          |  )    | (41,306 |  ) | (91,100 |  ) |
| Other assets                                                                 |       | —                            |       | (12,725 |  ) | — |   |
| Increase (decrease) in liabilities:                                          |       |                              |       |   |   |   |   |
| Accounts payable                                                             |       | 852,875                           |       | 609,070 |   | 1,287,735 |   |
| Other accrued liabilities                                                    |       | 1,015,505                         |       | 798,578 |   | 506,386 |   |
| Increase (decrease) in income taxes payable                                  |       | (86,695                           |  )    | — |   | — |   |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash used by operating activities                                        |       | (12,299,731                       |  )    | (5,686,282 |  ) | (4,039,585 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| **Cash flows from investing  activities:**                                   |       |                              |       |   |   |   |   |
| Purchase of property, plant, and equipment                                   |       | (2,383,867                        |  )    | (2,580,516 |  ) | (641,501 |  ) |
| Investment in LLC                                                            |       | —                            |       | 497,690 |   | — |   |
| Acquisitions of patents, trademarks, licenses, and  intangibles              |       | —                            |       | (89,152 |  ) | (188,168 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash used by investing activities                                        |       | (2,383,867                        |  )    | (2,171,978 |  ) | (829,669 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| **Cash flows from financing  activities:**                                   |       |                              |       |   |   |   |   |
| Repayments of long-term debt and notes payable                               |       | (499,668                          |  )    | (489,160 |  ) | (384,460 |  ) |
| Proceeds from long-term debt                                                 |       | —                            |       | 1,123,729 |   | — |   |
| Proceeds from the exercise of stock options                                  |       | 25,610                            |       | — |   | — |   |
| Payment of Preferred Stock dividends                                         |       | —                            |       | — |   | (1,053,544 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash provided (used) by financing activities                             |       | (474,058                          | )          | 634,569 |   | (1,438,004 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net decrease in cash and cash equivalents                                    |       | (15,157,656                       |  )    | (7,223,691 |  ) | (6,307,258 |  ) |
| Cash and cash equivalents at:                                                |       |                              |       |   |   |   |   |
| Beginning of period                                                          |       | 33,283,740                        |       | 40,507,431 |   | 46,814,689 |   |
| End of period                                                                |       | $                                 | 18,126,084 |   | $ | 33,283,740 |   | $ | 40,507,431 |   |
|                                                                         |       |                                   |       |   |   |   |   |
| Supplemental schedule of cash flow information:                              |       |                              |       |   |   |   |   |
| Interest paid                                                                |       | $                                 | 184,018    |   | $ | 236,932 |   | $ | 382,901 |   |
| Income taxes paid                                                            |       | $                                 | —     |   | $ | — |   | $ | — |   |
| Supplemental schedule of noncash investing and  financing activities:        |       |                              |       |   |   |   |   |
| Debt assumed to construct a warehouse                                        |       | $                                 | 1,362,602  |   | $ | 1,723,277 |   | $ | — |   |
| Forgiveness of royalties by shareholder                                      |       | $                                 | 1,000,000  |   | $ | — |   | $ | — |   |

See accompanying notes to financial statements

 

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**NOTES TO FINANCIAL STATEMENTS**

 

**1.**                **BUSINESS OF THE COMPANYAND BASIS OF PRESENTATION**

 

**Business of the Company**

 

RetractableTechnologies, Inc. (the “Company”) was incorporated in Texas on May 9,1994, and designs, develops, manufactures, and markets safety syringes andother safety medical products for the healthcare profession.  The Company began to develop itsmanufacturing operations in 1995.  TheCompany’s manufacturing and administrative facilities are located in LittleElm, Texas.  The Company’s primaryproducts with Notice of Substantial Equivalence to the FDA are the VanishPoint® 0.5mL insulinsyringe; 1mL tuberculin, insulin, and allergy antigen syringes; the 0.5mL, 3mL,5mL, and 10mL syringes; the small diameter tube adapter; the blood collectiontube holder; the allergy tray; the IV safety catheter; and the Patient Safe® syringe.

 

**2.**                **SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Accounting estimates**

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles (“GAAP”) requires Management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer significantly from those estimates.

 

**Cash and cash equivalents**

 

Forpurposes of reporting cash flows, cash and cash equivalents includeunrestricted cash, money market accounts, and investments with originalmaturities of three months or less.

 

**Accounts receivable**

 

TheCompany records trade receivables when revenue is recognized.  No product has been consigned tocustomers.  The Company’s allowance fordoubtful accounts is primarily determined by review of specific tradereceivables.  Those accounts that aredoubtful of collection are included in the allowance.  An additional allowance has been establishedbased on a percentage of receivables outstanding.  These provisions are reviewed to determinethe adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when thereis certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not beenmade within contract terms.

 

**Inventories**

 

Inventoriesare valued at the lower of cost or market, with cost being determined usingactual average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**Property, plant, and equipment**

 

Property,plant, and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations asincurred.  Cost includes majorexpenditures for improvements and replacements which extend useful lives orincrease capacity and interest cost associated with significant capitaladditions.  For the years ended December 31,2009, 2008, and 2007, the Company capitalized interest of approximately$205,000; $237,000; and $177,000.  Gainsor losses from property disposals are included in income.

 

Depreciationand amortization are calculated using the straight-line method over thefollowing useful lives:

 

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| Production equipment            |   | 3 to 13 years |
|---------------------------------|--------|---------------|
| Office furniture and  equipment |   | 3 to 10 years |
| Buildings                       |   | 39 years      |
| Building improvements           |   | 15 years      |
| Automobiles                     |   | 7 years       |

 

**Long-lived assets**

 

TheCompany assesses the recoverability of long-lived assets using an assessment ofthe estimated undiscounted future cash flows related to such assets.  In the event that assets are found to becarried at amounts which are in excess of estimated gross future cash flows,the assets will be adjusted for impairment to a level commensurate with adiscounted cash flow analysis of the underlying assets.

 

During the fourth quarter of 2009, the Companyrecognized an impairment charge of $2,594,602 associated with its catheterproduction equipment.  The Company hasdetermined it is more cost effective to outsource the majority of thisproduction through overseas manufacturers, and thus the Company’s catheterproduction equipment will be utilized less. Minimal cash flows are expected to be generated by this equipment.  Accordingly, the Company has reduced thecarrying value of the catheter production equipment to an estimated fair valueof zero.  The Company’s managementestimated the fair value of the equipment based on guidance established by the *Fair Value Measurements and Disclosures*Topic of the FASBAccounting Standards Codification.  Inthis instance, the Company’s management determined the impairment charge byutilizing observable market data, a Level 2 input under the FASB AccountingStandards Codification.  A Level 1 inputwould require quoted prices, which were not available in this matter.

 

**Reclassifications**

 

Certain prior yearamounts have been reclassified to conform with the current year’s presentation.

 

**Intangible assets**

 

Intangibleassets are stated at cost and consist primarily of patents, a license agreementgranting exclusive rights to use patented technology, and trademarks which areamortized using the straight-line method over 17 years.

 

**Financial instruments**

 

The Company estimates thefair market value of financial instruments through the use of public marketprices, quotes from financial institutions, and other availableinformation.  Judgment is required ininterpreting data to develop estimates of market value and, accordingly,amounts are not necessarily indicative of the amounts that could be realized ina current market exchange.  Short-termfinancial instruments, including cash and cash equivalents, accounts receivable,accounts payable and other liabilities, consist primarily of instrumentswithout extended maturities, the fair value of which, based on Management’sestimates, equals their recorded values.

 

**Concentration risks**

 

TheCompany’s financial instruments exposed to concentrations of credit riskconsist primarily of cash, cash equivalents, and accounts receivable.  Cash balances, some of which exceed federallyinsured limits, are maintained in financial institutions; however, Managementbelieves the institutions are of high credit quality.  The majority of accounts receivable are duefrom companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.  Two customers, DHHS and Cardinal Health,comprised 68.4% of the Company’s accounts receivable at December 31, 2009.  The Company had a high concentration of saleswith two significant customers.  For theyear ended December 31, 2009, the aforementioned customers accounted for$15.0 million, or 38.4% of net sales.** **Sales to the DHHS comprised 52.0%and 24.4% of the Company’s revenues for the three months and twelve monthsended December 31, 2009, respectively. This program, which was estimatedto run from August 2009 through March 2010, ended in December 2009.  The Company does not know if there will be asimilar program in 2010.

 

Consideringthe current economic climate, the Company increased its Provision for doubtfulaccounts by approximately $182,000 this year.

 

TheCompany manufactures syringes in Little Elm, Texas as well as utilizingmanufacturers in China.  The Companypurchases most of its product components from single suppliers, includingneedle adhesives and packaging materials. There are multiple sources of these materials.  The Company obtained roughly 67.5% of itsfinished products in 2009 through Double Dove, a Chinese manufacturer.  In the event that the Company becomes unableto purchase such product from Double Dove, the Company would need to find analternate 

 

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supplierfor its 0.5mL insulin syringe, its 5mL and 10mL syringes, and its autodisablesyringe and increase domestic production for 1mL and 3mL syringes to avoid adisruption in supply.

 

**Revenue recognition**

 

Revenueis recognized for sales to distributors when title and risk of ownership passesto the distributor, generally upon shipment. Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of: (i) rebates granted todistributors who provide tracking reports which show, among other things, thefacility that purchased the products, and (ii) a provision for estimatedcontractual pricing allowances for products that the Company has not receivedtracking reports.  Rebates are recordedwhen issued and are applied against the customer’s receivable balance.  The provision for contractual pricingallowances is reviewed at the end of each quarter and adjusted for changes inlevels of products for which there is no tracking report.  Additionally, if it becomes clear thattracking reports will not be provided by individual distributors, the provisionis further adjusted.  The estimatedcontractual allowance is netted against individual distributor’s accountsreceivable balances for financial reporting purposes.  The resulting net balance is reflected inaccounts receivable or accounts payable, as appropriate.  The terms and conditions of contractualpricing allowances are governed by contracts between the Company and itsdistributors.  Revenue for shipmentsdirectly to end-users is recognized when title and risk of ownership pass fromthe Company.  Any product shipped ordistributed for evaluation purposes is expensed.

 

TheCompany’s domestic return policy is set forth in its standard DistributionAgreement.  This policy provides that acustomer may return incorrect shipments within 10 days following arrival at thedistributor’s facility.  In all suchcases the distributor must obtain an authorization code from the Company andaffix the code to the returned product. The Company will not accept returned goods without a returned goodsauthorization number.  The Company mayrefund the customer’s money or replace the product.

 

TheCompany’s return policy also provides that a customer may return product thatis overstocked.  Overstocking returns arelimited to two times in each 12-month period up to 1% of distributor’s totalpurchase of products for the prior 12-month period.  All product overstocks and returns aresubject to inspection and acceptance by manufacturer.

 

TheCompany’s international distribution agreements do not provide for any returns.

 

TheCompany records an allowance for estimated returns as a reduction to Accountsreceivable and Gross sales. Historically, returns have been less than 0.5% of net sales.

 

**Marketing fees**

 

Undera sales and marketing agreement with Abbott Laboratories (“Abbott”), theCompany paid marketing fees until the Company terminated the contract forbreach.  The contracted services were toinclude participation in promotional activities, development of educational andpromotional materials, representation at trade shows, clinical demonstrations,inservicing and training, and tracking reports detailing the placement of theCompany’s products to end-users. Marketing fees were accrued at the time of the sale of product toAbbott.  These fees were paid afterAbbott provided the Company a tracking report of product sales toend-users.  These costs were included inSales and marketing expense in the Statements of Operations.  No marketing fees have been accrued since October 15,2003, the date the National Marketing and Distribution Agreement with Abbott wasterminated.  The Company filed suitagainst Abbott in August 2005 for breach of contract.  The District Court has issued a schedulingorder calling for trial in May 2010. See Note 8 **COMMITMENTS ANDCONTINGENCIES** for further discussion.

 

**Litigation Proceeds**

 

Proceeds from litigation, if any, are recognizedwhen realizable. Generally, realization is not reasonably assured and expecteduntil proceeds are collected.

 

**Income taxes**

 

TheCompany evaluates tax positions taken or expected to be taken in a tax returnfor recognition in the financial statements based on whether it is“more-likely-than-not” that a tax position will be sustained based upon thetechnical merits of the position. Measurement of the tax position is based upon the largest amount ofbenefit that is greater than 50% likely of being realized upon ultimatesettlement.

 

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TheCompany provides for deferred income taxes through utilizing an asset andliability approach for financial accounting and reporting based on the taxeffects of differences between the financial statement and tax bases of assetsand liabilities, based on enacted rates expected to be in effect when suchdifferences reverse in future periods. Deferred tax assets are periodically reviewed for realizability.  The Company had sufficient taxable incomefrom prior carryback years to realize all of its taxable losses through December 31,2006.  Taxable losses for 2007 andthereafter are subject to loss carryforwards. The Company has established a valuation allowance for its net deferredtax asset as future taxable income cannot be reasonably assured.  Penalties and interest on uncertain taxpositions are classified as income taxes in the Statements of Operations.  Under recent tax law changes, companies areallowed to carry back taxable losses from either 2008 or 2009.  The Company will file for a tax refundutilizing its 2009 taxable losses which will result in a minimum of a $3.7million refund.

 

**Earnings per share**

 

TheCompany computes basic earnings per share by dividing net earnings for theperiod (adjusted for any cumulative dividends for the period) by the weightedaverage number of common shares outstanding during the period.  The Company’s potentially dilutive CommonStock equivalents, consisting of options, convertible debt, and convertiblePreferred Stock, are all antidilutive for all periods presented.  Accordingly, basic loss per share is equal todiluted earnings per share.  Annualcumulative preferred dividends have been added to net losses for the yearsended December 31, 2009, 2008 and 2007 to arrive at net loss per share.

 

**Shipping and handling costs**

 

TheCompany classifies shipping and handling costs as part of Cost of sales in theStatements of Operations.

 

**Research and development costs**

 

Researchand development costs are expensed as incurred.

 

**Share-based compensation**

 

On September 26,2008, the Company’s shareholders approved the 2008 Stock Option Plan and alsoapproved an Offer to Exchange Stock Options (the “Exchange Offer”) wherebyemployees, including executive officers, and Directors exchanged certainoutstanding underwater options for options issued under the 2008 Stock OptionPlan.** **Pursuantto the****Exchange Offer, eligible participants(totaling 103) tendered, and the Company accepted for cancellation, eligibleoptions to purchase an aggregate of 1,925,365 shares of the Company’s CommonStock representing 99.4% of the total shares of Common Stock underlying optionseligible to exchange in the Exchange Offer. The Company issued new options under the 2008 Stock Option Plan topurchase an aggregate of 962,683 shares of Common Stock in exchange for thecancellation of the tendered options. Options issued to employees vested after one year.  Options issued to non-employee Directorsvested immediately.

 

Priorto 2008, the Company had issued options under three stock-based Director,independent contractor and employee compensation plans as well as severalindividual option agreements.  Two ofthese plans and one individual option agreement have terminated and theunissued and unsold stock under these terminated plans has been deregisteredpursuant to Post-Effective Amendment No. 1 to Form S-8 RegistrationStatement, filed December 2, 2008. As earlier mentioned, in 2008, the 2008 Stock Option Plan was approvedand options have been issued under it pursuant to the Exchange Offer.  In July 2009, the Company issued optionsfor the purchase of a total of 1,886,425 shares to Directors, ExecutiveOfficers, employees, and consultants under the 2008 Stock Option Plan.  Of this amount, incentive stock options forthe purchase of 269,956 shares of Common Stock and Non Qualified Stock Optionsfor the purchase of 229,494 shares of Common Stock were issued to ExecutiveOfficers and Directors.  Additionally, in2009, an option to purchase Three Million (3,000,000) shares issued to ThomasJ. Shaw outside these plans was approved by shareholders.

 

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TheCompany’s share-based payments are accounted for using the fair valuemethod.  The Company records share-basedcompensation expense on a straight-line basis over the requisite serviceperiod.  The Company incurred thefollowing share-based compensation costs:

 
|                        | ** ** | **Years  Ended December 31,** |       |
|-----------------------------|------------|------------------------------------|------------|
|                        | ** ** | **2009**                           | ** ** | **2008** |   | **2007** |   |
|                        |       |                               |       |   |   |   |   |
| Cost  of sales              | $          | 317,644                            | $          | (1,797 | ) | $ | 6,648 |   |
|                        |       |                               |       |   |   |   |   |
| Sales  and marketing        |       | 242,509                            |       | (2,156 | ) | 3,086 |   |
|                        |       |                               |       |   |   |   |   |
| Research  and Development   |       | 47,168                             |       | (281 | ) | (7,863 | ) |
|                        |       |                               |       |   |   |   |   |
| General  and administrative |       | 1,504,039                          |       | 36,863 |   | 4,607 |   |
|                        |       |                               |       |   |   |   |   |
|                        | $          | 2,111,360                          | $          | 32,629 | $ | 6,478 |   |
|                             |            |                                    |            |  |  |  |  |  |

 

Optionsawarded to employees in 2009 and 2008 were amortized over twelve months.  The Company amortized one month’s expense foroptions granted in 2008 in the fourth quarter of 2008.  The Company expensed five months of expensefor options issued in 2009.  Non-employeeDirectors’ option expense was all expensed in the third quarter of 2009.

 

**Recent****Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 168, *The FASB AccountingStandards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162* (“SFAS 168”) (FASB ASC 105-10).  SFAS 168 replaces all previously issuedaccounting standards and establishes the *FASB Accounting StandardsCodification**TM** *(“FASB ASC” or the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with U.S. GAAP.  SFAS 168 iseffective for all interim and annual periods ending after September 15,2009.  The FASB ASC is not intended tochange existing U.S. GAAP.  The adoptionof this pronouncement only resulted in changes to the Company’s financial statementdisclosure references.  As such, theadoption of this pronouncement had no effect on the Company’s financialposition, results of operations, or cash flows.

 

In order to facilitatethe transition to the FASB ASC, the Company has elected to show all referencesto FASB ASC within this report on Form 10-K/A along with a parentheticalreference to the previous accounting standard.

 

In April 2008,the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “*Determination of the Useful Life of Intangible Assets*”included in the Codification under FASB ASC 350.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“*Goodwill and Other Intangible Assets*”(“SFAS 142”).  The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under the Business Combinations Topic of theCodification and other GAAP.  FSP FAS142-3 was effective for the Company beginning January 1, 2009.  The adoption of FSP FAS 142-3 did not have amaterial impact on the Company’s financial position, results of operations, orcash flows.

 

In May 2009,the FASB issued SFAS No. 165, *Subsequent Events*,included in the Codification under FASB ASC 855, which establishes generalstandards of accounting for and disclosure of events occurring after the 

 

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balancesheet date, but before the financial statements are issued or available to beissued.  In February 2010, FSAB ASC855 was amended, removing certain disclosure requirements for public companiesthat conflicted with certain SEC disclosure requirements.  Adoption of this standard and its amendmentdid not have a material impact on the Company’s financial position, results ofoperations, or cash flows.

 

**3.**                **INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **         | ** ** | **Year  Ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
|               | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Raw  materials     |       | $                                 | 2,424,818  |   | $ | 1,885,158 |   |
| Finished  goods    |       | 4,688,151                         |       | 4,961,974 |   |
|               |       | 7,112,969                         |       | 6,847,132 |   |
| Inventory  reserve |       | (205,600                          | )          | (205,600 | ) |
|               |       | $                                 | 6,907,369  |   | $ | 6,641,532 |   |

** **

**4.**                **PROPERTY, PLANT, ANDEQUIPMENT**

 

Property, plant, andequipment consist of the following**:**
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                 |       |                  |       |   |   |
| Land                                 |       | $                     | 261,893    |   | $ | 261,893 |   |
| Buildings  and building improvements |       | 11,079,905            |       | 5,319,732 |   |
| Production  equipment                |       | 14,428,077            |       | 14,270,577 |   |
| Office  furniture and equipment      |       | 2,148,622             |       | 1,825,781 |   |
| Construction  in progress            |       | 1,198,856             |       | 6,287,503 |   |
| Automobiles                          |       | 102,321               |       | 102,321 |   |
|                                 |       | 29,219,674            |       | 28,067,807 |   |
| Accumulated  depreciation            |       | (14,985,493           | )          | (13,632,140 | ) |
|                                 |       | $                     | 14,234,181 |   | $ | 14,435,667 |   |

 

Depreciation expense forthe years ended December 31, 2009, 2008, and 2007 was $1,353,353;$1,351,547; and $1,370,228, respectively.

 

**5.**                **INTANGIBLE ASSETS**

 

Intangible assets consistof the following:
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                      |       |                  |       |   |   |
| License  agreement        |       | $                     | 500,000    |   | $ | 500,000 |   |
| Trademarks  and patents   |       | 508,743               |       | 508,743 |   |
|                      |       | 1,008,743             |       | 1,008,743 |   |
| Accumulated  amortization |       | (582,068              | )          | (538,628 | ) |
|                      |       | $                     | 426,675    |   | $ | 470,115 |   |

 

In 1995,the Company entered into a license agreement with the Chief Executive Officerof the Company for the exclusive right to manufacture, market, and distributeproducts utilizing automated retraction technology.  This license agreement was amended July 3,2008 to include certain additional patent applications owned by such officer inthe definition of “Patent Properties” so that such additional patentapplications would be covered by the license. This technology is the subject of various patents and patentapplications owned by 

 

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suchofficer of the Company.  The initiallicensing fee of $500,000 is being amortized over 17 years.  The license agreement also provides forquarterly payments of a 5% royalty fee on gross sales.  The royalty fee expense is recognized in theperiod in which it is earned.  Royaltyfees of $2,806,223; $2,168,268; and $2,087,596 are included in Cost of salesfor the years ended December 31, 2009, 2008, and 2007, respectively.  Royalties payable under this agreementaggregated $843,327 and $620,987 at December 31, 2009 and 2008,respectively.  Gross sales upon whichroyalties are based were $56,124,453; $43,365,361; and $41,751,897 for 2009,2008, and 2007, respectively.

 

In the third quarter of 2009, the Company announcedseveral cost cutting and cash saving initiatives to conserve its cash.  As a part of those initiatives, the ChiefExecutive Officer waived payment to him of $1,000,000 in royalty fees.  Therefore, the royalty fees of $2,806,223 for2009 resulted in a cash outlay of $1,806,223.

 

Amortization expense forthe years ended December 31, 2009, 2008, and 2007, was $43,440; $43,597;and $43,454, respectively.  Futureamortization expense for the years 2010 through 2014 is estimated to be $43,000per year.

 

**6.**                **OTHER ASSETS**

 

In2006, the Company invested $500,000 in a limited liability company.  The Company exercised its option to have thatinvestment returned.  The investment wasreturned in April 2008.

 

**7.**    **LONG-TERM DEBT**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **December 31,** | ** **      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **2009**              | ** **      | **2008** | ** ** |
| Long-term  debt consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                  |            |   |   |
| Note  payable to Katie Petroleum.  Interest  accrues at prime plus 1%, which was 4.25% and 5.0%, at December 31, 2009  and 2008, respectively.  Interest only  was payable monthly through February 1, 2004.  The original amount of the note of  $3,000,000 was discounted for presentation purposes by $299,346 for stock  options issued in conjunction with the debt and $412,500 for the intrinsic  value of a beneficial conversion feature of the debt.  Beginning March 1, 2004, the loan has  been payable in equal installments of principal and interest payments (except  for changes in the interest rate) of approximately $37,000 and matures on September 30,  2012.  Guaranteed by an officer.  Approximately $163,736 of the principal  payment was converted into 40,934 shares of Common Stock as of March 1,  2006.  Not otherwise  collateralized.  Convertible into  Common Stock at $4.00 per share at the option of the holder.                              |       | $                     |  1,097,112 |   | $ |  1,437,977 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| Note  payable to 1st International Bank for $2,500,000.  The proceeds from the loan paid off the  remaining $475,000 of a revolving credit agreement and funded a warehouse and  related infrastructure.  Payments were  interest only during the first 12 months.   After 12 months, payments are based on a 20-year amortization with a  five-year maturity on March 29, 2010.   The interest rate at December 31, 2009 and 2008 was 4.25% and  4.25%, respectively, and is based on the amount of funds kept on deposit with  the bank.  Accordingly, interest will  vary from the Wall Street Journal Prime Rate (the “WSJPR”) to the WSJPR plus  1%, with floors that may range from 4.25% to 6.50%.** **Compensating balances at 1st  International affecting the interest rate will range from $0 to  $500,000.  The Company had in excess of  $500,000 on deposit with 1st International Bank throughout the year.  The note is secured by the Company’s land  and buildings. |       | 2,141,998             |            | 2,241,145 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| Note  payable to DaimlerChrysler Services North America LLC.  Sixty (60) monthly payments at $1,009.  Interest is 5.49%.  Collateralized by a  2005 Freightliner truck.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 1,005                 |            | 12,711 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| Note  payable to GMAC.  Sixty (60) monthly  payments at $427.  Interest is zero  percent.  Collateralized by a 2005  Chevrolet van.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 3,762                 |            | 8,561 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |                       |                 |  |  |  |  |

 

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2009**   | ** ** | **2008**  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|-----------|--------|
| Interim construction loan from Lewisville State  Bank, a division of 1st International Bank, for a maximum of $4,210,000,  which provided funding for the expansion of the warehouse, additional office  space, and a new Controlled Environment.   The note bore interest at WSJPR plus 0.25%.  The loan was renewed on December 10,  2009 with a 20 year amortization and 10 year maturity.  The loan is secured by the Company’s land  and buildings.  The interest rate is 5.968%. |   | 4,209,608  |       | 2,847,006 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 7,453,485  |       | 6,547,400 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |       |       |      |   |
| Less:  current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (2,628,652 | )          | (451,865  | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $          | 4,824,833  |      | $      | 6,095,535 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        |            |            |           |        |  |  |

 

The aggregate maturities of long-term debt as of December 31,2009, are as follows:

 

|       |   |      |      |
|------------|--------|-----------|-----------|
| 2010       | $      | 2,628,652 |      |
| 2011       |   | 519,611   |      |
| 2012       |   | 447,755   |      |
| 2013       |   | 132,504   |      |
| 2014       |   | 140,862   |      |
| Thereafter |   | 3,584,101 |      |
|       | $      |      | 7,453,485 |   |
|            |        |           |           |  |

 

**8.**  **COMMITMENTS ANDCONTINGENCIES**

 

On August 12, 2005,the Company filed a lawsuit against Abbott in the U.S. District Court in theEastern District of Texas, Texarkana Division. The Company is alleging fraud and breach of contract in connection withthe National Marketing and Distribution Agreement dated as of May 4, 2000,which was terminated on October 15, 2003. It is seeking damages which it estimates to be in millions of dollars oflost profits, out of pocket expenses, and other damages.  In addition, it is seeking punitive damages,pre- and post-judgment interest, and attorneys’ fees.  Following Abbott’s unsuccessful attempt toget the case dismissed and ordered to arbitration, Abbott filed an answer andcounterclaim on July 15, 2008, alleging several breaches of contract,breach of implied warranty of merchantability, and breach of express warranty,seeking in excess of $6,000,000 in compensatory damages as well as seekingattorneys’ fees.  The Company denies thevalidity of Abbott’s counterclaims. Discovery has already taken place and is substantially completed.  The District Court has issued a revisedscheduling order calling for trial in May 2010.

 

In April 2008, theCompany sued Occupational and Medical Innovations Limited (“OMI”) in the U.S.District Court for the Eastern District of Texas, Tyler Division, alleging thatOMI had infringed two U.S. patents (6,572,584 and 7,351,224).  The Company also alleged theft ofconfidential information, intentional interference with contracts, and engagingin false advertising that wrongfully disparaged and mischaracterized thesyringe products.  The Company furtheralleged that OMI made false allegations regarding the source of origin of itssafety syringe products being offered in the U.S. On December 18, 2009,the jury delivered a verdict in the Company’s favor on the patent infringementand misappropriation of trade secrets claims against OMI. On March 4, 2010,the Court entered a final judgment and ordered that the Company recover damagesand prejudgment interest from OMI based on OMI’s misappropriation of tradesecrets in the amount of $3,153,575.  Inaddition, the Court entered a permanent injunction enjoining OMI, itsmanufacturers, distributors and service providers from infringing patent no.6,572,584, by making, importing, selling or using any of OMI’s syringes in theU.S. and its territories.  OMI hasentered into an administrative proceeding in Australia which is the equivalentof bankruptcy and has filed a similar proceeding in the Eastern District ofTexas, which make the actual recovery of the damages unlikely.

 

In June 2007, theCompany sued Becton Dickinson and Company (“BD”) in the U.S. District Court forthe Eastern District of Texas, Marshall Division, alleging infringement ofthree patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of thefederal and state antitrust laws, and of the Lanham Act.  The Company subsequently dropped the5,578,011 patent allegations from the lawsuit. In January 2008, the Court 

 

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severed the patent claimsfrom the other claims pending resolution of the patent dispute.  In April 2008, the Company and theofficer sued BD in the U.S. District Court for the Eastern District of Texas,Marshall Division, alleging infringement of another recently issued patent (7,351,224).  BD counterclaimed for non-infringement andinvalidity of the asserted patent.  TheCourt consolidated this case with the above-stated case filed in June 2007.  On November 9, 2009, the jury returned averdict finding that the patents asserted by the Company were valid andinfringed by BD and awarded $5,000,000 in damages.  No final judgment has been entered in thiscase.  The Company is seeking injunctiverelief.

 

In September 2007,BD and MDC Investment Holdings, Inc. (“MDC”) sued the Company in theUnited States District Court for the Eastern District of Texas, TexarkanaDivision, initially alleging that the Company is infringing two U.S. patents ofMDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seekinjunctive relief and unspecified damages. The Company counterclaimed for declarations of non-infringement,invalidity, and unenforceability of the asserted patents.  The plaintiffs subsequently dropped allegationswith regard to patent no. 7,090,656 and the Company subsequently dropped itscounterclaims for unenforceability of the asserted patents.  The Court conducted a claims constructionhearing on September 25, 2008 and issued its claims construction order on November 14,2008.  No trial date has been set.

 

In September 2008, theCompany and an officer sued Safety Medical International (“SMI”) in the UnitedStates District Court for the Eastern District of Texas, Tyler Division,alleging infringement of U.S. patent nos. 6,572,584 and 7,351,224, and seekinginjunctive relief, unspecified monetary damages, and reimbursement ofattorneys’ fees.  SMI has counterclaimed,seeking declaratory judgments of non-infringement and invalidity of theasserted patents.  SMI is not seekingmonetary damages.  SMI has filed forbankruptcy, and this lawsuit, including all claims and counterclaims, wasdismissed as a result of those proceedings, which have concluded.

 
| **9.** | **INCOME TAXES** |
|--------|------------------|

 

The provision for incometaxes consists of the following:
| ** **                              | ** ** | **For  the Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current  tax provision (benefit)        |       |                                       |       |   |   |   |   |
| Federal                                 |       | $                                          | (3,655,637 | ) | $ | — |   | $ | (143,459 | ) |
| State                                   |       |                                       | (181,953   | ) | — |   | (1,310,158 | ) |
| Total  current provision (benefit)      |       | (3,837,590                                 | )          | — |   | (1,453,617 | ) |
|                                    |       |                                       |       |   |   |   |   |
| Deferred  tax provision (benefit)       |       |                                       |       |   |   |   |   |
| Federal                                 |       | —                                     |       | — |   | — |   |
| State                                   |       | —                                     |       | — |   | — |   |
| Total  deferred tax provision (benefit) |       | —                                     |       | — |   | — |   |
| Total  income tax provision (benefit)   |       | $                                          | (3,837,590 | ) | $ | — |   | $ | (1,453,617 | ) |

 

The Company recognized atax benefit in 2007 primarily due to the net effect of a state tax refund forprior years that had not been previously recognized.

 

The Company recognized atax benefit in 2009 primarily due to a federal tax carryback related to 2009.

 

Deferred taxes areprovided for those items reported in different periods for income tax andfinancial reporting purposes.  The taxeffects of temporary differences that give rise to significant portions of thedeferred tax assets and liabilities are presented below:

 

The Company has $14,277,070in tax benefits attributable to carryback losses for federal tax purposes.  The loss carryforwards will begin to expirein 2027 for federal tax purposes and will begin to expire for state taxpurposes in 2012.

 

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|                                  |   | **December 31,** |       |
|---------------------------------------|--------|-----------------------|------------|
|                                  |   | **2009**              | ** ** | **2008** |   |
| Deferred tax assets                   |   |                  |       |   |   |   |
| Net operating loss  carryforwards     | $      | 5,414,579             | $          |   | 5,285,164 |   |   |
| Accrued expenses and reserves         |   | 1,045,120             |       | 1,240,050 |   |   |
| Employee stock option expense         |   | 422,476               |       | 31,669 |   |   |
| Inventory                             |   | 242,807               |       | 435,578 |   |   |
| Non-employee stock option expense     |   | 183,570               |       | 198,425 |   |   |
| Charitable contribution carryforwards |   | 26,164                |       | 21,118 |   |   |
| Deferred tax assets                   |   | 7,334,716             |       | 7,212,004 |   |   |
| Deferred tax liabilities              |   |                  |       |   |   |   |
| Property and equipment                |   | (687,512              | )          | (1,178,618 | ) |   |
| Deferred tax liabilities              |   | (687,512              | )          | (1,178,618 | ) |   |
| Net deferred assets                   |   | 6,647,204             |       | 6,033,386 |   |   |
| Valuation allowance                   |   | (6,647,204            | )          | (6,033,386 | ) |   |
| Net deferred tax liabilities          | $      | —                | $          |   | — |   |   |

 

A reconciliationof income taxes based on the federal statutory rate and the provision (benefit)for income taxes is summarized as follows:

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Income tax (benefit) at the federal statutory rate |       | (35.0                 | )%         | (35.0 |  )% | (35.0 |  )% |
| State tax (benefit), net of federal (benefit)      |       | (2.9                  |  )    | (2.9 |  ) | (2.9 |  ) |
| Increase (decrease) in valuation allowance         |       | 4.6                   |       | 32.1 |   | 27.2 |   |
| Permanent differences                              |       | 3.0                   |       | 0.4 |   | 1.0 |   |
| Cancellation of options under Exchange Offer       |       | —                |       | 5.4 |   | — |   |
| State tax refund and accruals                      |       | (0.8                  | )          | — |   | (12.0 |  ) |
| Return to accrual adjustments                      |       | 0.5                   |       | — |   | 3.2 |   |
| Other                                              |       | 1.6                   |       | — |   | 1.2 |   |
| Effective tax (benefit) rate                       |       | (29.0                 | )%         | — | % | (17.3 |  )% |

 

TheCompany files income tax returns in the U.S. federal jurisdiction and invarious state and local jurisdictions. The Company’s federal income tax returns for all tax years ended on orafter December 31, 2006, remain subject to examination by the InternalRevenue Service.  The Company’s state andlocal income tax returns are subject to examination by the respective state andlocal authorities over various statutes of limitations, most ranging from threeto five years from the date of filing.

 
| **10.** | **STOCKHOLDERS’ EQUITY** |
|---------|-------------------------------|

 

**PreferredStock**

 

TheCompany has one class of Preferred Stock outstanding:  Class B Convertible Preferred Stock (“Class BStock”).  The Class B Stock has fiveseries:  Series I, Series II, Series III,Series IV, and Series V.

 

Class B

 

TheCompany has authorized 5,000,000 shares of $1 par value Class B Stockwhich have been allocated among Series I, II, III, IV, and V inthe amounts of 144,000; 219,700; 130,245; 552,500; and 1,238,821 shares,respectively.  The remaining 2,714,734authorized shares have not been assigned a series.

 

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Series IClass B

 

Therewere 1,000,000 shares of $1 par value Series I Class B ConvertiblePreferred Stock (“Series I Class B Stock”) issued and 144,000outstanding at December 31, 2009 and 2008. Holders of Series I Class B Stock are entitled to receive acumulative annual dividend of $.50 per share, payable quarterly if declared bythe Board of Directors.  In 2004, the Companypaid $2,550,000 in dividends.  In 2007,the Company paid $262,819 in dividends. At December 31, 2009 and 2008 approximately $180,000 and $108,000,respectively, of dividends which had not been declared were in arrears.

 

Series IClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $7.50 per share, plus all accrued andunpaid dividends.  Each share of Series IClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in theevent the Company files an initial registration statement under the SecuritiesAct of 1933.  Pursuant to these terms, noshares of Series I Class B Stock were converted into Common Stock in2009.  In the event of voluntary orinvoluntary dissolution, liquidation, or winding up of the Company, holders of Series IClass B Stock then outstanding are entitled to $6.25 per share, plus allaccrued and unpaid dividends prior to any distributions to holders of Series IIClass B Convertible Preferred Stock (“Series II Class B Stock”),Series III Class B Convertible Preferred Stock (“Series III Class BStock”), Series IV Class B Convertible Preferred Stock (“Series IVClass B Stock”), Series V Class B Convertible Preferred Stock (“Series VClass B Stock”), or Common Stock.

 

Series IIClass B

 

Therewere 1,000,000 shares of $1 par value Series II Class B Stock issuedand there were 219,700****sharesoutstanding at December 31, 2009 and 2008. Holders of Series II Class B Stock are entitled to receive acumulative annual dividend of $1.00 per share, payable quarterly if declared bythe Board of Directors.  Holders of Series IIClass B Stock generally have no voting rights until dividends are inarrears and unpaid for twelve consecutive quarters.  In such case, the holders of Series II Class BStock have the right to elect one-third of the Board of Directors of theCompany.  In 2004, the Company paid $4.6million in dividends.  In 2007, theCompany paid $790,725 in dividends.** **At December 31, 2009 and2008, approximately $551,000 and $331,000 respectively, of dividends which hadnot been declared were in arrears.

 

Series IIClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $15.00 per share plus all accrued andunpaid dividends.  Each share of Series IIClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in the eventthe Company files an initial registration statement under the Securities Act of1933.  Pursuant to these terms, no sharesof Series II Class B Stock were converted into Common Stock in2009.  In the event of voluntary orinvoluntary dissolution, liquidation, or winding up of the Company, holders of Series IIClass B Stock then outstanding are entitled to $12.50 per share, plus allaccrued and unpaid dividends, after distribution obligations to holders of Series IClass B Stock have been satisfied and prior to any distributions toholders of Series III Class B Stock, Series IV Class BStock, Series V Class B Stock, or Common Stock.

 

Series IIIClass B

 

Therewere 1,160,445 shares of $1 par value Series III Class B Stock issuedand 130,245 shares outstanding at December 31, 2009 and 2008.  Holders of Series III Class B Stockare entitled to receive a cumulative annual dividend of $1.00 per share,payable quarterly if declared by the Board of Directors.  At December 31, 2009 and 2008,approximately $3,246,000 and $3,117,000, respectively, of dividends which havenot been declared were in arrears.

 

Series IIIClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $15.00 per share, plus all accrued andunpaid dividends.  Each share of Series IIIClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in theevent the Company files an initial registration statement under the SecuritiesAct of 1933.  Pursuant to these terms, no****shares of Series III Class B Stock were convertedinto Common Stock in

 

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2009.  In the event of voluntary or involuntary dissolution,liquidation, or winding up of the Company, holders of Series III Class BStock then outstanding are entitled to $12.50 per share, plus all accrued andunpaid dividends, after distribution obligations to Series I Class BStock and Series II Class B Stock have been satisfied and prior toany distributions to holders of Series IV Class B Stock, Series VClass B Stock, or Common Stock.

 

Series IVClass B

 

Therewere 1,133,800 shares issued and 552,500 shares outstanding at December 31,2009 and 2008. Holders of Series IV Class B Stock are entitled toreceive a cumulative annual dividend of $1.00 per share, payable quarterly, ifdeclared by the Board of Directors. Holders of Series IV Class B Stock generally have no votingrights.  At December 31, 2009 and2008, approximately $7,583,000 and $7,030,000, respectively, of dividends whichhave not been declared were in arrears.

 

Series IVClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $11.00 per share plus all accrued andunpaid dividends.  Each share of Series IVClass B Stock may, at the option of the stockholder any time subsequent tothree years from date of issuance, be converted into one share of Common Stock,or in the event the Company files an initial registration statement under theSecurities Act of 1933.  Pursuant tothese terms, no****shares of Series IV Class BStock were converted into Common Stock in 2009. In the event of voluntary or involuntary liquidation, dissolution, orwinding up of the Company, holders of Series IV Class B Stock thenoutstanding are entitled to receive liquidating distributions of $11.00 pershare, plus accrued and unpaid dividends after distribution obligations to Series IClass B Stock, Series II Class B Stock, and Series III Class BStock have been satisfied and prior to any distribution to holders of Series VClass B Stock, or Common Stock.

 

Series VClass B

 

Therewere 2,416,221 shares issued and 1,238,821 outstanding at December 31,2009 and 2008.  Holders of Series V Class BStock are entitled to receive a cumulative annual dividend of $0.32 per share,payable quarterly, if declared by the Board of Directors.  Holders of Series V Class B Stockgenerally have no voting rights.  At December 31,2009 and 2008, approximately $3,693,000 and $3,297,000, respectively, ofdividends which have not been declared were in arrears.

 

Series VClass B Stock is redeemable after two years from the date of issuance atthe option of the Company at a price of $4.40 per share plus all accrued andunpaid dividends.  Each share of Series VClass B Stock may, at the option of the stockholder any time subsequent tothe date of issuance, be converted into Common Stock.  Pursuant to the terms of the certificate ofdesignation, no shares of Series V Class B Stock were converted intoCommon Stock in 2009.  In the event ofvoluntary or involuntary liquidation, dissolution, or winding up of theCompany, holders of Series V Class B Stock then outstanding areentitled to receive liquidating distributions of $4.40 per share, plus accruedand unpaid dividends after distribution obligations to Series I Class BStock, Series II Class B Stock, Series III Class B Stock,and Series IV Class B Stock have been satisfied and prior to anydistribution to the holders of the Common Stock.

 

**Common stock**

 

TheCompany is authorized to issue 100,000,000 shares of no par value Common Stock,of which 23,825,149 and 23,800,064 shares were issued and outstanding at December 31,2009 and 2008, respectively.

 
| **11.** | **RELATED PARTY TRANSACTIONS** |
|---------|--------------------------------|

 

TheCompany had a lease with Mill Street Enterprises (“Mill Street”), a soleproprietorship owned by a person, who ceased to be a 10% shareholder in 2008,for offices and storage in Lewisville, Texas. During the year ended December 31, 2007, the Company paid $14,500under this lease.  This lease termexpired in June 2007.

 

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TheCompany paid MediTrade International Corporation, a company controlled by aperson, who ceased to be a 10% shareholder in 2008 on a month-to-monthconsulting agreement whereby MediTrade is paid $7,500 per month plus expenses.** **Total amounts paidto MediTrade for the years ending December 31, 2009, 2008, and 2007totaled $111,883.57; $98,401; and $129,618, respectively.

 

TheCompany has a license agreement with the Chief Executive Officer of theCompany. See Note 5.

 

Duringthe years ended December 31, 2009, 2008, and 2007, the Company paid$50,793; $40,191; and $30,397, respectively, to family members of its ChiefExecutive Officer for various consulting services.

 
| **12.** | **STOCK OPTIONS** |
|---------|-------------------|

 

**Stock options**

 

Prior to 2008, the Company had three stock optionplans that provided for the granting of stock options to officers, employees,and other individuals.  Two of thoseplans have terminated.  A 2008 StockOption Plan was approved for the granting of stock options to employees,Directors, and consultants.  During 1999,the Company approved the 1999 Stock Option Plan.  Options for the purchase of 131,880 shares ofCommon Stock granted under the 1999 Stock Option Plan are outstanding.  The 1999 Stock Option Plan terminatedpursuant to its terms in 2009.  The 2008Plan is the only plan with stock options currently being awarded.  The Company has reserved an aggregate 3,000,000shares of Common Stock for issuance upon the exercise of options under the 2008Stock Option Plan.

 

On September 26, 2008, the Company’s shareholdersapproved an Exchange Offer whereby employees, including executive officers, andDirectors could exchange certain outstanding underwater options for optionsissued under the 2008 Stock Option Plan.** **Pursuant to the****Exchange Offer, eligible participants (totaling 103)tendered, and the Company accepted for cancellation, eligible options topurchase an aggregate of 1,925,365 shares of the Company’s Common Stockrepresenting 99.4% of the total shares of Common Stock underlying optionseligible to exchange in the Exchange Offer. The Company issued new options under the 2008 Stock Option Plan topurchase an aggregate of 962,683 shares of Common Stock in exchange for thecancellation of the tendered options. Options issued to employees vest in mid 2010.  Options issued to non-employee Directorsvested in 2009.

 

In July 2009, the Company issued options for thepurchase of a total of 1,886,425 shares to Directors, Executive Officers,employees, and consultants under the 2008 Stock Option Plan.  Of this amount, incentive stock options forthe purchase of 269,956 shares of Common Stock and Non Qualified Stock Optionsfor the purchase of 229,494 shares of Common Stock were issued to Executive Officersand Directors.  Additionally, in 2009, anoption to purchase Three Million (3,000,000) shares issued to Thomas J. Shawoutside these plans was approved by shareholders.

 

The Company also had**** options for common shares outstanding underthe 1996 Incentive Stock Option Plan and the 1996 Stock Option Plan forDirectors and Other Individuals through November 2008.  The two 1996 plans and all options issuedthereunder have terminated or have been exchanged for options granted under the2008 Plan.

 

The Compensationand Benefits Committee administers all plans and determines and/or recommendsto the Board exercise prices at which options are granted.  All executive compensation, including thegranting of stock options, is determined by the Compensation and BenefitsCommittee.  Shares issued upon exerciseof options come from the Company’s authorized but unissued Common Stock.  The options vest over periods up to threeyears from the date of grant and generally expire ten years after the date ofgrant.  Unvested options issued under the2008 Stock Option Plan expire immediately after termination of employment.

 

**Employee options**

 

A summary of Director, officer, and employee optionsgranted and outstanding under the Plans is presented below:

 

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|                                                          | ** ** | **Years Ended December 31,** |       |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                          | ** ** | ** **                        |       |
|                                                          | ** ** | **2009**                          |       | **2008** |   | **2007** |   |
|                                                          | ** ** | **Shares**                        | ** ** | **Weighted****Average****Exercise****Price** |   | **Shares** |   | **Weighted****Average****Exercise****Price** |   | **Shares** | ** ** | **Weighted****Average****Exercise****Price** |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 1,057,263                         |       | $ | 1.99 |   | 2,187,455 |   | $ | 8.80 |   | 2,417,295 |   | $ | 8.58 |   |
| Granted                                                       |       | 4,796,425                         |       | 0.81 |   | 962,683 |   | 1.30 |   | — |   | — |   |
| Exercised                                                     |       | (5,085                            | )          | (1.30 | ) | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | (127,075                          | )          | (4.99 | ) | (2,092,875 | ) | (8.79 | ) | (229,840 | ) | (6.50) |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 5,721,528                         |       | $ | 0.94 |   | 1,057,263 |   | $ | 1.99 |   | 2,187,455 |   | $ | 8.80 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 1,137,403                         |       | $ | 1.44 |   | 147,580 |   | $ | 6.25 |   | 2,187,455 |   | $ | 8.80 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted  during period |       | —                            |       | $ | 0.59 |   | — |   | $ | 0.76 |   | — |   | $ | — |   |

 

Thefair value of each 2008 option grant is estimated on the date of grant usingthe binomial option pricing model with the following weighted average assumptionsused for grants in 2008:  no dividendyield; expected volatility of 67.53%; risk free interest rate of 2.83%; and anexpected life of 8.61 to 8.69 years.  Theoptions were issued under the 2008 Stock Option Plan.  No options were issued in 2007. 

 

Thefair value of each 2009 grant is estimated on the date of the grant using theBlack-Scholes pricing model with the following weighted average assumptionsused for grants in 2009: expected volatility of 67.53%, risk free interest rateof 3.35%, and an expected life of 8.61 to 8.69 years. Other than the optionsissued to the Chief Executive Officer, the options were issued under the 2008Stock Option Plan. 

 

Thefollowing table summarizes information about Director, officer, and employeeoptions outstanding under the aforementioned plans at December 31, 2009:

** **

|         | ** **  | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|-------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** **  | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** **  | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** **  | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** **  | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
|  $      |  10.00 |            | 17,100     |            | 0.84       |            | 17,100     |   |
|  $      |  6.90  |            | 15,080     |            | 2.75       |            | 15,080     |   |
|  $      |  8.65  |            | 2,400      |            | 3.48       |            | 2,400      |   |
|  $      |  8.87  |            | 700        |            | 4.36       |            | 700        |   |
|  $      |  1.30  |            | 902,123    |            | 8.89       |            | 902,123    |   |
|  $      |  0.81  |            | 4,784,125  |            | 9.54       |            | 200,000    |   |

 

F-22

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**Non-employeeoptions**

 

Asummary of options outstanding during the years ended December 31 and heldby non-employees is as follows:

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                        | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 454,700                           |       | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   |
| Granted                                                       |       | 90,000                            |       | 0.84 |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | (20,000                           |  )    | (0.95 |  ) | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | (133,100                          |  )    | (10.00 |  ) | (95,000 |  ) | (10.00 |  ) | (30,000 |  ) | (5.00 |  ) |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 391,600                           |       | $ | 6.52 |   | 454,700 |   | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 391,600                           |       | $ | 6.52 |   | 454,700 |   | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted  during period |       | —                            |       | $ | 0.61 |   | — |   | $ | — |   | — |   | $ | — |   |

 

The fair value of each 2009 grant is estimated on thedate of the grant using the Black Scholes pricing model with the followingassumptions: expected volatility of 67.53%, risk free interest rate of 3.35%,and an expected life of 8.61 years. These options were issued under the 2008Stock Option Plan. No options were issued in 2008 or  2007.

 

Thefollowing table summarizes information about non-employee options outstandingunder the aforementioned plans at December 31, 2009:

 

|         | ** **       |                 | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** **       | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** **       | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** **       | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** **       | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
|  $      |  10.00      |            | 89,100     |            | 0.58       |            | 89,100     |   |
|  $      | 6.90             |            | 232,500    |            | 2.75       |            | 232,500    |   |
|  $      |   0.81 |            | 70,000     |            | 9.55       |            | 70,000     |   |

 

TheCompany recorded $2,111,360;  $98,473(offset by a credit of $65,844 for surrendered stock options); and $6,478 asstock-based compensation expense in 2009, 2008, and 2007, respectively.  The total intrinsic value of optionsexercised was $16,388; $0; and $0 in 2009, 2008, and 2007, respectively.  The aggregate intrinsic value of optionsoutstanding and of options exercisable at December 31, 2009 wasapproximately $4.3 million and $531,000, respectively.  The total compensation cost related tonon-vested stock options to be recognized in the future was $1,346,587 at December 31,2009.

 
| **13.** | **401(k) PLAN** |
|---------|----------------------|

 

TheCompany implemented an employee savings and retirement plan (the “401(k) Plan”)in 2005 that is intended to be a tax-qualified plan covering substantially allemployees.  Under the terms of the 401(k) Plan,employees may elect to contribute up to 88% of their compensation, or thestatutory prescribed limit, if less.  TheCompany may, at its discretion, match employee contributions.  The Company made matching

 

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contributionsof approximately $76,643, $122,000, and $111,000 in 2009, 2008 and 2007,respectively.   In the third quarter of2009, the Company discontinued contributions until further notice.

 
| **14.** | **BUSINESS SEGMENTS** |
|---------|-----------------------|

** **
|                | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 34,466,797 |      | $          | 23,244,370 |       | $ | 21,461,717 |   |
| International sales |       | 4,515,040 |       | 4,654,948 |       | 4,828,003  |       |
| Total sales         |       | $         | 38,981,837 |      | $          | 27,899,318 |       | $ | 26,289,720 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 13,961,445 |      | $          | 14,435,667 |       | $ | 11,483,423 |   |
| Foreign             |       | $         | 272,736    |      | $          | —     |       | $ | — |   |

 

TheCompany does not operate in separate reportable segments.  The Company has no long-lived assets inforeign countries.  Shipments tointernational customers generally require a prepayment either by wire transferor an irrevocable confirmed letter of credit. The Company does extend credit to international customers on someoccasions depending upon certain criteria, including, but not limited to, thecredit worthiness of the customer, the stability of the country, bankingrestrictions, and the size of the order. All transactions are in U.S. currency.

 
|   | **SELECTED QUARTERLY FINANCIAL DATA -  UNAUDITED** |
|--------|----------------------------------------------------|

 

The selected quarterly financial data for the periodsended December 31, 2009 and 2008, have been derived from the Company’sunaudited financial statements and include all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of the resultsof the interim periods.

 
|                                                   |       | **(In thousands, except for per share  and outstanding stock amounts)** |       |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                   |       | **2009**                                                                |       |
|                                                   | ** ** | **Quarter  1**                                                          | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** |   |
| Sales, net                                             |       | $                                                                       | 5,258      |   | $ | 5,753 |   | $ | 10,752 |   | $ | 17,219 |   |
| Cost of sales                                          |       | 4,029                                                                   |       | 3,413 |   | 7,817 |   | 10,207 |   |
| Gross profit                                           |       | 1,229                                                                   |       | 2,340 |   | 2,935 |   | 7,012 |   |
| Total operating expenses                               |       | 5,271                                                                   |       | 5,121 |   | 6,484 |   | 9,936 |   |
| Loss from operations                                   |       | (4,042                                                                  |  )    | (2,781 |  ) | (3,549 |  ) | (2,924 |  ) |
| Interest and other income                              |       | 29                                                                      |       | 11 |   | 14 |   | 4 |   |
| Interest expense, net                                  |       | —                                                                  |       | — |   | — |   | (22 |  ) |
| Benefit for income taxes                               |       | 105                                                                     |       | — |   | 100 |   | 3,633 |   |
| Net income (loss)                                      |       | (3,908                                                                  |  )    | (2,770 |  ) | (3,435 |  ) | 691 |   |
| Preferred stock dividend requirements                  |       | (343                                                                    |  )    | (343 |  ) | (343 |  ) | (342 |  ) |
| Earnings (loss) applicable to common shareholders      |       | $                                                                       | (4,251     |  ) | $ | (3,113 |  ) | $ | (3,778 |  ) | $ | 349 |   |
| Net earnings (loss) per share – basic and diluted |       | $                                                                       | (0.18      |  ) | $ | (0.13 |  ) | $ | (0.16 |  ) | $ | 0.01 |   |
| Weighted average shares outstanding                    |       | 23,800,064                                                              |       | 23,800,064 |   | 23,803,397 |   | 23,822,607 |   |
| Profit margin                                          |       | 23.4%                                                                   |       | 40.7% |   | 27.3% |   | 40.7% |   |

 

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|                                        |       | **(In thousands, except for per share  and outstanding stock amounts)** |       |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                        |       | **2008**                                                                |       |
|                                        | ** ** | **Quarter  1**                                                          | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** |   |
| Sales, net                                  |       | $                                                                       | 5,315      |   | $ | 6,474 |   | $ | 8,997 |   | $ | 7,113 |   |
| Cost of sales                               |       | 4,029                                                                   |       | 3,498 |   | 6,871 |   | 5,275 |   |
| Gross profit                                |       | 1,286                                                                   |       | 2,976 |   | 2,126 |   | 1,838 |   |
| Total operating expenses                    |       | 4,362                                                                   |       | 4,028 |   | 4,306 |   | 5,975 |   |
| Loss from operations                        |       | (3,076                                                                  |  )    | (1,052 |  ) | (2,180 |  ) | (4,137 |  ) |
| Interest and other income                   |       | 254                                                                     |       | 241 |   | 159 |   | 202 |   |
| Interest expense, net                       |       | (41                                                                     |  )    | (22 |  ) | (14 |  ) | 23 |   |
| Net loss                                    |       | (2,863                                                                  |  )    | (833 |  ) | (2,035 |  ) | (3,912 |  ) |
| Preferred stock dividend requirements       |       | (345                                                                    |  )    | (343 |  ) | (343 |  ) | (342 |  ) |
| Loss applicable to common shareholders      |       | $                                                                       | (3,208     |  ) | $ | (1,176 |  ) | $ | (2,378 |  ) | $ | (4,254 |  ) |
| Net loss per share – basic and diluted |       | $                                                                       | (0.13      |  ) | $ | (0.05 |  ) | $ | (0.10 |  ) | $ | (0.18 |  ) |
| Weighted average shares outstanding         |       | 23,778,072                                                              |       | 23,800,064 |   | 23,800,064 |   | 23,800,064 |   |
| Profit margin                               |       | 24.2%                                                                   |       | 46.0% |   | 23.6% |   | 25.8% |   |

 

Major variances in the third quarter results for2009 compared to 2008 are due to higher revenues due to the DHHS contract andhigher litigation costs in 2009.

 

Fourth quarter results for 2009, when compared to2008, were affected by a dramatic increase in revenues due to the DHHS contract.  Operating expenses increased primarily due tothe recognition of an impairment cost of $2.6 million and additional litigationcosts of $2.1 million.  Net income waspositively affected in 2009 for a tax benefit of $3.6 million related to thecarryback of the 2009 net operating loss for federal taxes.

 

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**PART IV**

 

**Item 15. Exhibits, Financial Statement Schedules.**

 
|   | The  following exhibits are filed as part of this report: |
|--------|-----------------------------------------------------------|
|   |                                                      |
| 23     | Consent  of Independent Registered Public Accounting Firm |
| 31.1   | Certification  of Principal Executive Officer             |
| 31.2   | Certification  of Principal Financial Officer             |
| 32     | Section 1350  Certifications                         |

 

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**SIGNATURE**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | RETRACTABLE TECHNOLOGIES, INC. |                      |
|--------|--------------------------------|---------------------------|
|   | (Registrant)                   |                      |
|   |                           |                      |
|   | By:                            | /s/ Thomas J. Shaw        |
|   |                           | THOMAS J. SHAW            |
|   |                           | CHAIRMAN, PRESIDENT,  AND |
|   |                           | CHIEF EXECUTIVE OFFICER   |
|   |                           |                      |
|   | Date:                          | April 7, 2010             |
|   |                           |                      |
|        |                                |                           |  |

 

----