Tableof Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended June 30, 2008**

** **

**or**

** **

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

** **

**For thetransition period from                      to                      **

** **

**Commissionfile number 000-30885**

** **

**Retractable Technologies, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                                     | ** ** | **75-2599762**                      |
|---------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (I.R.S. EmployerIdentification 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)

 

 

(Former name, former address, and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x     Noo

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o    No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13, or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.   Yes o    No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number ofshares outstanding of each of the issuer’s classes of Common Stock, as of thelatest practicable date: 23,800,064 shares of Common Stock, no par value,issued and outstanding on August 1, 2008.

 

 

 

----

Tableof Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended June 30, 2008**

 

**TABLE OFCONTENTS**

 
| **PART I—FINANCIAL  INFORMATION**  |                                                                                             |
|----------------------------------------------|--------------------------------------------------------------------------------------------------|
| ** **                                   | ** **                                                                                       |   |
| **Item 1.**                                  | **Financial  Statements.**                                                                       | 1 |
|                                         |                                                                                             |   |
| **CONDENSED  BALANCE SHEETS**                | 1                                                                                                |
| **CONDENSED  STATEMENTS OF OPERATIONS**      | 2                                                                                                |
| **CONDENSED  STATEMENTS OF CASH FLOWS**      | 3                                                                                                |
| **NOTES TO  CONDENSED FINANCIAL STATEMENTS** | 4                                                                                                |
|                                         |                                                                                             |   |
| **Item 2.**                                  | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.** | 10 |
|                                         |                                                                                             |   |
| **Item 3.**                                  | **Quantitative  and Qualitative Disclosures About Market Risk.**                                 | 15 |
|                                         |                                                                                             |   |
| **Item 4.**                                  | **Controls and  Procedures.**                                                                    | 15 |
|                                         |                                                                                             |   |
| **PART II—OTHER  INFORMATION**     |                                                                                             |
|                                         |                                                                                             |   |
| **Item 1.**                                  | **Legal  Proceedings.**                                                                          | 15 |
|                                         |                                                                                             |   |
| **Item 1A.**                                 | **Risk  Factors.**                                                                               | 16 |
|                                         |                                                                                             |   |
| **Item 2.**                                  | **Unregistered  Sales of Equity Securities and Use of Proceeds.**                                | 16 |
|                                         |                                                                                             |   |
| **Item 3.**                                  | **Defaults  Upon Senior Securities.**                                                            | 16 |
|                                         |                                                                                             |   |
| **Item 4.**                                  | **Submission  of Matters to a Vote of Security Holders.**                                        | 17 |
|                                         |                                                                                             |   |
| **Item 5.**                                  | **Other  Information.**                                                                          | 17 |
|                                         |                                                                                             |   |
| **Item 6.**                                  | **Exhibits.**                                                                                    | 17 |
|                                         |                                                                                             |   |
| **SIGNATURES**                               | 18                                                                                               |

 

Table of Contents

 

**PART I—FINANCIALINFORMATION**

 

**Item 1.        Financial Statements.**

 

**RETRACTABLETECHNOLOGIES, INC.**

## **CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **June 30, 2008** | ** ** | ** **                 | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**        | ** ** | **December 31, 2007** | ** ** |
|                                            |       | ** **             |       |                       |       |
| **ASSETS**                                      | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current assets:                                 |       |                   |       |                       |       |
| Cash and cash equivalents                       |       | $                      | 35,296,288 |                       | $          | 40,507,431 |   |
| Accounts receivable, net                        |       | 2,770,796              |       | 1,667,636                  |       |
| Inventories, net                                |       | 7,426,029              |       | 7,037,129                  |       |
| Income taxes receivable                         |       | —                 |       | 2,345,041                  |       |
| Other current assets                            |       | 459,135                |       | 358,807                    |       |
| Total current assets                            |       | 45,952,248             |       | 51,916,044                 |       |
|                                            |       |                   |       |                       |       |
| Property, plant, and equipment, net             |       | 11,976,641             |       | 11,483,423                 |       |
| Intangible assets, net                          |       | 412,656                |       | 424,560                    |       |
| Other assets                                    |       | 6,211                  |       | 505,899                    |       |
| Total assets                                    |       | $                      | 58,347,756 |                       | $          | 64,329,926 |   |
|                                            |       |                   |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current liabilities:                            |       |                   |       |                       |       |
| Accounts payable                                |       | $                      | 3,434,865  |                       | $          | 5,535,365 |   |
| Current portion of long-term debt               |       | 477,696                |       | 387,906                    |       |
| Accrued compensation                            |       | 580,643                |       | 539,330                    |       |
| Marketing fees payable                          |       | 1,419,760              |       | 1,419,760                  |       |
| Accrued royalties to shareholders               |       | 463,269                |       | 619,304                    |       |
| Other accrued liabilities                       |       | 405,114                |       | 263,339                    |       |
| Current deferred tax liability                  |       | 18,538                 |       | 20,626                     |       |
| Total current liabilities                       |       | 6,799,885              |       | 8,785,630                  |       |
|                                            |       |                   |       |                       |       |
| Long-term debt, net of current maturities       |       | 3,445,399              |       | 3,747,259                  |       |
| Long-term deferred tax liability                |       | 23,304                 |       | 36,200                     |       |
| Total liabilities                               |       | 10,268,588             |       | 12,569,089                 |       |
|                                            |       |                   |       |                       |       |
| Stockholders’ equity:                      |       |                   |       |                       |       |
| Preferred stock $1 par value:                   |       |                   |       |                       |       |
| Series I, Class B                     |       | 144,000                |       | 144,000                    |       |
| Series II, Class B                    |       | 219,700                |       | 219,700                    |       |
| Series III, Class B                   |       | 130,245                |       | 130,245                    |       |
| Series IV, Class B                    |       | 552,500                |       | 553,500                    |       |
| Series V, Class B                     |       | 1,238,821              |       | 1,282,471                  |       |
| Common stock, no par value                      |       | —                 |       | —                     |       |
| Additional paid-in capital                      |       | 53,878,618             |       | 53,818,987                 |       |
| Accumulated deficit                             |       | (8,084,716             | )          | (4,388,066                 | )          |
| Total stockholders’ equity                 |       | 48,079,168             |       | 51,760,837                 |       |
| Total liabilities and stockholders’ equity |       | $                      | 58,347,756 |                       | $          | 64,329,926 |   |

 

See accompanying notes to condensed financialstatements

 

1

Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                 | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Sales, net                                 |       |   $                               | 6,474,227  |                                        | $          | 5,274,982                                 |       | $                                         | 11,789,382 |   |   $ | 11,048,805 |   |
| Cost of sales                              |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Cost of manufactured product               |       | 3,035,014                                   |       | 2,728,087                                   |       | 6,631,927                                 |       | 6,803,001                                 |       |
| Royalty expense to shareholders            |       | 463,269                                     |       | 403,925                                     |       | 895,780                                   |       | 843,325                                   |       |
| Total cost of sales                        |       | 3,498,283                                   |       | 3,132,012                                   |       | 7,527,707                                 |       | 7,646,326                                 |       |
| Gross profit                               |       | 2,975,944                                   |       | 2,142,970                                   |       | 4,261,675                                 |       | 3,402,479                                 |       |
|                                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Operating expenses:                        |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Sales and marketing                        |       | 1,301,002                                   |       | 1,349,080                                   |       | 2,468,910                                 |       | 2,691,002                                 |       |
| Research and development                   |       | 267,324                                     |       | 239,680                                     |       | 532,832                                   |       | 421,715                                   |       |
| General and administrative                 |       | 2,459,853                                   |       | 2,512,316                                   |       | 5,388,433                                 |       | 4,988,354                                 |       |
| Total operating expenses                   |       | 4,028,179                                   |       | 4,101,076                                   |       | 8,390,175                                 |       | 8,101,071                                 |       |
| Loss from operations                       |       | (1,052,235                                  | )          | (1,958,106                                  | )          | (4,128,500                                | )          | (4,698,592                                | )          |
|                                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Interest and other income                  |       | 241,449                                     |       | 448,698                                     |       | 495,118                                   |       | 989,895                                   |       |
| Interest expense, net                      |       | (22,269                                     | )          | (94,398                                     | )          | (63,268                                   | )          | (171,192                                  | )          |
| Net loss                                   |       | (833,055                                    | )          | (1,603,806                                  | )          | (3,696,650                                | )          | (3,879,889                                | )          |
| Preferred stock dividend requirements      |       | (342,717                                    | )          | (349,200                                    | )          | (687,585                                  | )          | (704,251                                  | )          |
| Loss applicable to common shareholders     |       |   $                               | (1,175,772 | )                                           | $          | (1,953,006                                | )          | $                                         | (4,384,235 | ) |   $ | (4,584,140 | ) |
|                                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Loss per share – basic and diluted    |       |   $                               | (0.05      | )                                           | $          | (0.08                                     | )          | $                                         | (0.18      | ) |   $ | (0.19 | ) |
|                                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Weighted average common shares outstanding |       | 23,800,064                                  |       | 23,731,664                                  |       | 23,789,068                                |       | 23,704,164                                |       |

 

See accompanying notes to condensed financial statements

 

2

Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                 | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| **Cash flows from operating activities**                                                   |       |                                      |       |                                      |       |
| Net  loss                                                                                  |       | $                                         | (3,696,650 | )                                         | $          | (3,879,889 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used by) operating activities: |       |                                      |       |                                      |       |
| Depreciation  and amortization                                                             |       | 700,539                                   |       | 721,889                                   |       |
| Capitalized  interest                                                                      |       | (96,094                                   | )          | (91,394                                   | )          |
| Stock  option compensation                                                                 |       | —                                    |       | 6,478                                     |       |
| Provisions  for doubtful accounts                                                          |       | 112,976                                   |       | 2,242                                     |       |
| Accreted  interest                                                                         |       | 28,539                                    |       | 62,547                                    |       |
| (Increase)  decrease in assets                                                             |       |                                      |       |                                      |       |
| Inventories                                                                                |       | (388,900                                  | )          | (1,733,239                                | )          |
| Accounts  receivable                                                                       |       | (1,216,136                                | )          | (284,261                                  | )          |
| Income  taxes receivable                                                                   |       | 2,345,041                                 |       | (2,079                                    | )          |
| Other  current assets                                                                      |       | (100,328                                  | )          | (495,065                                  | )          |
| Increase  (decrease) in liabilities                                                        |       |                                      |       |                                      |       |
| Accounts  payable                                                                          |       | (2,100,500                                | )          | (169,983                                  | )          |
| Other  accrued liabilities                                                                 |       | 27,053                                    |       | 555,652                                   |       |
| Net  cash used by operating activities                                                     |       | (4,384,460                                | )          | (5,307,102                                | )          |
| ** **                                                                                 |       |                                      |       |                                      |       |
| **Cash flows from investing activities**                                                   |       |                                      |       |                                      |       |
| Purchase  of property, plant, and equipment                                                |       | (1,073,938                                | )          | (236,090                                  | )          |
| Acquisitions  of patents, trademarks, licenses and intangibles                             |       | (9,825                                    | )          | (131,400                                  | )          |
| Liquidation of investment in LLC                                                           |       | 497,690                                   |       | —                                    |       |
| Net  cash used by investing activities                                                     |       | (586,073                                  | )          | (367,490                                  | )          |
| ** **                                                                                 |       |                                      |       |                                      |       |
| **Cash flows from financing activities**                                                   |       |                                      |       |                                      |       |
| Repayments  of long-term debt and notes payable                                            |       | (240,610                                  | )          | (184,590                                  | )          |
| Net  cash used by financing activities                                                     |       | (240,610                                  | )          | (184,590                                  | )          |
|                                                                                       |       |                                      |       |                                      |       |
| Net  decrease in cash                                                                      |       | (5,211,143                                | )          | (5,859,182                                | )          |
|                                                                                       |       |                                      |       |                                      |       |
| Cash  and cash equivalents at:                                                             |       |                                      |       |                                      |       |
| Beginning  of period                                                                       |       | 40,507,431                                |       | 46,814,689                                |       |
| End  of period                                                                             |       | $                                         | 35,296,288 |                                      | $          | 40,955,507 |   |
|                                                                                       |       |                                      |       |                                      |       |
| Supplemental  disclosures of cash flow information:                                        |       |                                      |       |                                      |       |
| Interest  paid                                                                             |       | $                                         | 130,823    |                                      | $          | 200,038 |   |
|                                                                                       |       |                                      |       |                                      |       |
| Supplemental  schedule of noncash financing activities                                     |       |                                      |       |                                      |       |
| Preferred  dividends declared                                                              |       | $                                         | —     |                                      | $          | 1,053,544 |   |

 

See accompanying notes to condensed financial statements

 

3

Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 
| **1.** | ** ** | **BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION** |
|--------|------------|-------------------------------------------------------|

 

**Business of the Company**

 

Retractable Technologies, Inc. (the “Company”)was incorporated in Texas on May 9, 1994, and designs, develops,manufactures, and markets safety syringes and other safety medical products forthe healthcare profession.  The Companybegan to develop its manufacturing operations in 1995.  The Company’s manufacturing andadministrative facilities are located in Little Elm, Texas.  The Company’s primary products with Notice ofSubstantial Equivalence to the FDA are the VanishPoint® 0.5 cc insulin syringe; 1cc tuberculin, insulin, and allergyantigen syringes; the 3cc, 5cc, and 10cc syringes; the autodisable syringe; thesmall diameter tube adapter; the blood collection tube holder; the allergytray; the IV safety catheter; and the Patient SafeTM syringe.

 

**Basis of presentation**

 

The accompanying condensed financial statements are unaudited and, inthe opinion of Management, reflect all adjustments that are necessary for afair presentation of the financial position and results of operations for theperiods presented.  All such adjustmentsare of a normal and recurring nature. The results of operations for the periods presented are not necessarilyindicative of the results to be expected for the entire year.  The condensed financial statements should beread in conjunction with the financial statement disclosures contained in theCompany’s audited financial statements incorporated into its Form 10-K filedon March 31, 2008 for the year ended December 31, 2007.

 
| **2.** | ** ** | **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** |
|--------|------------|------------------------------------------------|

 

**Accounting estimates**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires Management to make estimatesand assumptions 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**

 

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

 

**Accounts receivable**

 

The Company 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**

 

Inventories are valued at the lower of cost or market, with cost beingdetermined using a standard cost method, which approximates average cost.  A reserve is established for any excess orobsolete inventories.

 

4

Table of Contents

 

**Property, plant, and equipment**

 

Property, plant, and equipment are stated atcost.  Expenditures for maintenance andrepairs are charged to operations as incurred. Cost includes major expenditures for improvements and replacements whichextend useful lives or increase capacity and interest cost associated withsignificant capital additions.  Gains orlosses from property disposals are included in income.

 

Depreciation and amortization are calculated usingthe straight-line method over the following useful lives:

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

 

**Long-lived assets**

 

The Company assesses the recoverability oflong-lived assets using an assessment of the estimated undiscounted future cashflows related to such assets.  In theevent that assets are found to be carried at amounts which are in excess ofestimated gross future cash flows, the assets will be adjusted for impairmentto a level commensurate with a discounted cash flow analysis of the underlyingassets.

 

**Intangible assets**

 

Intangible assets are stated at cost and consistprimarily of patents, a license agreement granting exclusive rights to usepatented technology, and trademarks which are amortized using the straight-linemethod over 17 years.

 

**Financial instruments**

 

Effective January 1, 2008, the Company adoptedStatement of Financial Accounting Standard (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosure requirements about fairvalue measurements.  In accordance withFinancial Accounting Standards Board (“FASB”) Staff Position FAS 157-2, *Effective Date of FASB Statement No. 157*,the Company will defer the adoption of SFAS 157 for its nonfinancial assets andnonfinancial liabilities, except those items recognized or disclosed at fairvalue on an annual or more frequent recurring basis, until January 1,2009.  The adoption of SFAS 157 did nothave a material impact on the Company’s fair value measurements.

 

The Company estimates the fair market value offinancial instruments through the use of public market prices, quotes fromfinancial institutions and other available information.  Judgment is required in interpreting data todevelop estimates of market value and, accordingly, estimates are notnecessarily indicative of the amounts that could be realized in a currentmarket exchange.  Short-term financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable and other liabilities, consist primarily of instruments withoutextended maturities, the fair value of which, based on Management’s estimates,equals their recorded values.

 

**Concentration risks**

 

The Company’s financial instruments exposed toconcentrations of credit risk consist primarily of cash, cash equivalents, andaccounts receivable.  Cash balances, someof which exceed the federally insured limits, are maintained in financialinstitutions; however, Management believes the institutions are of high creditquality.  The majority of accountsreceivable are due from companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.

 

5

Table of Contents

 

The Company manufactures syringes in Little Elm,Texas as well as utilizing manufacturers in China.  The Company purchases most of its productcomponents from single suppliers, including needle adhesives and packagingmaterials.  There are multiple sources ofthese materials.  The Company obtainedroughly 69.7% of its finished products in the first six months of 2008 throughDouble Dove, a Chinese manufacturer.  Inthe event that the Company was unable to purchase such product from DoubleDove, the Company would need to find an alternate supplier for its 0.5cc insulinsyringe, its 5cc and 10cc syringes and its autodisable syringe and increasedomestic production for 1cc and 3cc syringes to avoid a disruption in supply.

 

**Revenue recognition**

 

Revenue is recognized for sales to distributors whentitle and risk of ownership passes to the distributor, generally uponshipment.  Revenue is recorded on thebasis of sales price to distributors, less contractual pricing allowances.  Contractual pricing allowances consist of: (i) rebatesgranted to distributors who provide tracking reports which show, among otherthings, the facility that purchased the products, and (ii) a provision forestimated contractual pricing allowances for products that the Company has notreceived tracking reports.  Rebates arerecorded when issued and are applied against the customer’s receivablebalance.  The provision for contractualpricing allowances is reviewed at the end of each quarter and adjusted forchanges in levels 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.

 

The Company’s domestic return policy is set forth inits standard Distribution Agreement. This policy provides that a customer may return incorrect shipmentswithin 10 days following arrival at the distributor’s facility.  In all such cases the distributor must obtainan authorization code from the Company and affix the code to the returnedproduct.  The Company will not acceptreturned goods without a returned goods authorization number.  The Company may refund the customer’s moneyor replace the product.

 

The Company’s return policy also provides that acustomer may return product that is overstocked.  Overstocking returns are limited to two timesin each 12-month period up to one percent of distributor’s total purchase ofproducts for the prior 12-month period. All product overstocks and returns are subject to inspection andacceptance by manufacturer.

 

The Company’s international distribution agreementsdo not provide for any returns.

 

The Company records an allowance for estimatedreturns as a reduction to Accounts receivable and Gross sales.  Historically, returns have been less than0.48% of Total sales.

 

**Marketing fees**

 

Under a sales and marketing agreement with AbbottLaboratories (“Abbott”), the Company paid marketing fees until the Companyterminated 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 the Company’s products to end-users.  Marketing fees were accrued at the time ofthe sale of product to Abbott.  Thesefees were paid after Abbott provided the Company a tracking report of productsales to end-users.  These costs wereincluded in Sales and marketing expense in the Condensed Statements ofOperations.  No marketing fees have beenaccrued since October 15, 2003, the date the National Marketing and DistributionAgreement with Abbott was terminated. The Company filed suit against Abbott in August 2005 for breach ofcontract.  Abbott filed an answer andcounterclaim July 15, 2008.  SeeNote 5 **COMMITMENTS AND CONTINGENCIES**for further discussion.

 

6

Table of Contents

 

**Income taxes**

 

The Company provides for deferred income taxes inaccordance with SFAS No. 109, *Accountingfor Income Taxes* (“SFAS 109”). SFAS 109 requires an asset and liability approach for financialaccounting and reporting for income taxes based on the tax effects ofdifferences between the financial statement and tax bases of assets and liabilities,based on enacted rates expected to be in effect when such differences reversein future periods.  Deferred tax assetsare periodically reviewed for realizability. The Company had sufficient taxable income from prior carryback years torealize all of its taxable losses through December 31, 2006.  Taxable losses for 2007 and thereafter aresubject to loss carryforwards.  TheCompany has established a valuation allowance for its net deferred tax asset asfuture taxable income cannot be reasonably assured.  Penalties and interest on uncertain taxpositions are classified as income taxes in the Condensed Statements ofOperations.

 

**Earnings per share**

 

The Company has adopted SFAS No. 128, *Earnings Per Share*, which establishesstandards for computing and presenting earnings per share.  Basic earnings per share is computed bydividing net earnings for the period (adjusted for any cumulative dividends forthe period) by the weighted average number of common shares outstanding duringthe period.  The Company’s potentiallydilutive Common Stock equivalents, consisting of options, convertible debt andconvertible Preferred Stock, are all antidilutive for the three and six monthsended June 30, 2008 and 2007. Accordingly basic loss per share is equal to diluted earnings per share.

 

**Shipping and handling costs**

 

The Company classifies shipping and handling costsas part of Cost of sales in the Condensed Statements of Operations.

 

**Research and development costs**

 

Research and development costs are expensed asincurred.

 

**Share-based compensation**

 

The Company has issued options under threestock-based Director, independent contractor and employee compensation plans aswell as several individual option agreements. Two of the plans have terminated; however, the options continue untiltheir expected maturity dates.

 

The Company’s share-based payments are accounted forin accordance with the provisions of SFAS No. 123 (Revised 2004) (“SFAS123 R”), *Share-Based Payment*,using the fair value method.  The Companyrecords share-based compensation expense on a straight-line basis over therequisite service period, generally over periods up to three years.  In accordance with the disclosurerequirements of SFAS No. 123 R, the Company incurred the followingshare-based compensation costs:

 
| ** **                 | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                       |       |                                        |       |                                        |       |                                      |       |                                      |       |
| Cost of sales              |       | $                                           | —     |                                        | $          | —                                    |       | $                                         | —     |   | $ | 6,648 |   |
| Sales and marketing        |       | —                                      |       | —                                      |       | —                                    |       | 3,086                                     |       |
| Research and development   |       | —                                      |       | —                                      |       | —                                    |       | (7,863                                    | )          |
| General and administrative |       | —                                      |       | —                                      |       | —                                    |       | 4,607                                     |       |
|                       |       | $                                           | —     |                                        | $          | —                                    |       | $                                         | —     |   | $ | 6,478 |   |

 

7

Table of Contents

 
| **3.** | ** ** | **INVENTORIES** |
|--------|------------|-----------------|

 

Inventories consist of the following:

 
| ** **        | ** ** | **June 30,  2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------|------------|-------------------------|------------|----------------------------|------------|
|              |       |                    |       |                       |       |
| Raw materials     |       |                    | $          | 1,573,424                  |       |   | $ | 1,743,990 |   |
| Finished goods    |       |                    | 6,058,205  |                       |       | 5,498,739 |   |
|              |       |                    | 7,631,629  |                       |       | 7,242,729 |   |
| Inventory reserve |       |                    | (205,600   | )                          |       | (205,600 | ) |
|              |       |                    | $          | 7,426,029                  |       |   | $ | 7,037,129 |   |

 
| **4.** | ** ** | **OTHER ASSETS** |
|--------|------------|------------------|

 

In 2006, the Company invested $500,000 in a limitedliability company.  The Company exercisedits option to have that investment returned. The investment was returned in April 2008.

 
| **5.** | ** ** | **COMMITMENTS AND CONTINGENCIES** |
|--------|------------|-----------------------------------|

 

Litigation

 

On August 12, 2005, the Company filed a lawsuitagainst Abbott in the United States District Court in the Eastern District ofTexas, Texarkana Division.  The Companyis alleging fraud and breach of contract in connection with the NationalMarketing and Distribution Agreement dated as of May 4, 2000, which wasterminated on October 15, 2003.  TheCompany 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 attorney’s fees.  On October 31, 2005, Abbott moved todismiss the suit and to compel arbitration of the dispute.  The Court ruled in the Company’s favor anddenied the motion to compel arbitration. Abbott appealed the decision to the Fifth Circuit on February 27,2007.  The Fifth Circuit affirmed thedenial of the motion to compel arbitration. Abbott requested an en banc hearing before the Fifth Circuit, which wasdenied on June 30, 2008.  With thecase back before the District Court, Abbott filed an answer and counterclaim onJuly 15, 2008 alleging several breaches of contract, breach of impliedwarranty of merchantability, and breach of express warranty, seeking in excessof $6,000,000 in compensatory damages as well as seeking attorneys’ fees.  The Company denies the validity of Abbott’scounterclaims.  The District Court hasissued a scheduling order setting trial for January 2010.

 

In August 2006, the Company was sued byOccupational and Medical Innovations Limited (“OMI”) in Federal Court ofAustralia, alleging that two letters written to OMI by outside counselcontained unjustified threats of patent infringement, but seeking nodamages.  OMI later amended its complaintto seek a declaratory judgment that OMI does not infringe the Company’sAustralian Patent No. 701878, again seeking no damages.  Following a one-day trial in June 2007, theCourt held that one of the two letters written by outside counsel contained athreat of patent infringement, and awarded costs to OMI in an amount that hasnot yet been determined.  Following aone-day trial in June 2008, the Court held that OMI is entitled to adeclaratory judgment of non-infringement of the Company’s Australian Patent No.701878.  The Court has not yet issued anorder implementing the declaratory judgment and has not yet awarded costs inthe declaratory judgment matter.  BothOMI and the Company are seeking costs, and the amount of costs to be awardedwill be determined at a later date.

 

In June 2007, the Company sued BectonDickinson & Company (“BD”) in the United States District Court for theEastern District of Texas, Marshall Division, alleging infringement of three ofthe Company’s patents (5,578,011; 5,632,733; and 6,090,077) and violations byBD of the federal and state antitrust laws, and of the Lanham Act.  The Company and Thomas J. Shaw, aco-plaintiff, are seeking injunctive relief and unspecified monetary damages inthe suit.  BD counterclaimed fornon-infringement and invalidity of the asserted patents.  In January 2008, the Court severed the patentclaims from the other claims pending resolution of the patent dispute, which isset for trial in March 2009.

 

In September 2007, BD and MDC InvestmentHoldings, Inc. (“MDC”) sued the Company in the United States District Court forthe Eastern District of Texas, Texarkana Division, alleging that the Company isinfringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensedto BD.  BD and MDC seek injunctive reliefand unspecified damages.  The Companycounterclaimed for declarations of non-infringement, invalidity andunenforceability of the asserted patents. No trial date has been set.

 

8

Table of Contents

 

In March 2008, MedSafe Technologies LLC  (“MedSafe”) sued the Company and BD in theUnited States District Court for the District of South Carolina, GreenvilleDivision, alleging infringement of a MedSafe patent (6,074,370) and seekinginjunctive relief and unspecified monetary damages.  The Company counterclaimed for declarationsof non-infringement, invalidity and unenforceability of the asserted patents.  The case is set for trial in October 2009.

 

In April 2008, the Company and Thomas J. Shawsued BD in the United States District Court for the Eastern District of Texas,Marshall Division, alleging infringement of another recently issued patent ofthe Company (7,351,224), and seeking injunctive relief and unspecified monetarydamages (including treble damages).  BDcounterclaimed for non-infringement and invalidity of the assertedpatents.  The Company has moved toconsolidate this case with the other patent case against BD that is pending inMarshall, and is awaiting decision on the motion.

 

In April 2008, the Company sued OMI in theUnited States District Court for the Eastern District of Texas, Tyler Division,alleging that OMI has infringed two U.S. patents that are not at issue in theAustralian litigation (6,572,584 and 7,351,224).  The Company also alleges theft ofconfidential information, intentional interference with contracts and engagingin false advertising that wrongfully disparages and mischaracterizes theCompany’s syringe products.  The Companyfurther alleges that OMI made false allegations regarding the source of originof its safety syringe products being offered in the U.S.  The Company seeks injunctive relief andunspecified damages (including treble damages) in the suit.  OMI has counterclaimed against the Company,seeking declaratory judgments of non-infringement, invalidity andunenforceability of the Company’s asserted patents.  OMI is not seeking monetary damages.  No trial date has been set.

 

The ultimate outcomes of these legal matterscannot be determined at this time.

 

Other Matters

 

The Company has begun expansion of its warehouse(including additional warehouse space, additional office space, and a new CleanRoom).  This expansion will be funded bya loan from a bank for approximately $4.2 million, secured by a second liendeed to the land and existing buildings.

 

The Company had a licensing agreement with BaiyinTonsun Medical Device Co., Ltd. (“BTMD”) which expired on May 13,2008.  As a result of the expiration ofthe contract, the Company recognized $100,000 of prepaid royalty income asother income.  The Company is in theprocess of negotiating a new agreement. Royalties that were expected in 2007 were not received due to the timeneeded to build the factory, assembly equipment, and the related infrastructureas well as the need of BTMD to meet the requisite Chinese governmentrequirements.  The facility has beencompleted and BTMD is in the process of meeting Chinese governmentalrequirements.  Although successful completionof this agreement cannot be assured, the Company still continues to expectroyalty payments although we are unable to predict the date it will begin toreceive such royalties.  The Companyshould begin earning royalties once Chinese government requirements are met andBTMD is able to produce and sell products.

 
| **6.** | ** ** | **SUBSEQUENT EVENTS** |
|--------|------------|-----------------------|

 

On July 25, 2008, theCompany adopted the 2008 Stock Option Plan (the “Plan”).  The Plan will be submitted to theshareholders for approval at the annual meeting so that eligible optionsgranted to employees may be incentive stock options.  If such approval is not obtained, then alloptions issued under the Plan will be nonqualified stock options.

 

The Company also approved anOption Exchange Plan for submission to the shareholders for approval at theannual meeting.  The range of proposedterms is set forth in the Company’s preliminary Proxy Statement filed with theU.S. Securities and Exchange Commission on August 1, 2008.

 

9

Table of Contents

 

**Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

FORWARD-LOOKINGSTATEMENT WARNING

 

Certainstatements included by reference in this filing containing the words “could,” “may,”“believes,” “anticipates,” “intends,” “expects,” and similar such wordsconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act.  Anyforward-looking statements involve known and unknown risks, uncertainties, andother factors that may cause our actual results, performance, or achievementsto be materially different from any future results, performance, orachievements expressed or implied by such forward-looking statements.  Such factors include, among others, ourability to maintain liquidity, our maintenance of patent protection, the impactof current litigation (as it affects our costs as well as market access and theviability of our patents), the ability to maintain favorable supplierarrangements and relationships, the ability to successfully complete a newlicense agreement with Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”) and thereceipt of payments thereunder, the impact of dramatic increases in demand, ourability to quickly increase capacity in the event of a dramatic increase indemand, our ability to access the market, our ability to maintain or lowerproduction costs, our ability to continue to finance research and development aswell as operations and expansion of production, the increased interest oflarger market players, specifically Becton Dickinson & Company (“BD”),in providing devices to the safety market, and other factors referenced in **Item 1A. Risk Factors**in **Part II**.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

OVERVIEW

 

Wehave been manufacturing and marketing our products into the marketplace since1997.  We currently provide other safetymedical products in addition to safety syringe products.  One such product, the Patient SafeTM syringe,which reduces the risk of infection resulting from IV contamination, enteredthe market in 2008. Safety syringes comprised 98.2% of our sales in the firstsix months of 2008.

 

Our products have been and continue to bedistributed nationally through numerous distributors.  However, we have been blocked from access tothe market by exclusive marketing practices engaged in by BD, who dominates themarket.  We believe that its monopolisticbusiness practices continue despite its paying $100 million in 2004 to settle aprior lawsuit with us for anticompetitive practices, business disparagement,and tortious interference.  Although wehave made limited progress in some areas, such as the alternate care and internationalmarkets, our volumes are not as high as they should be given the nature andquality of our product, the federal and state legislation requiring the use ofsafe needle devices, and various Senate Subcommittee hearings on GroupPurchasing Organizations.

 

We continue to pursue various strategies to havebetter access to the hospital market, as well as other markets, includingattempting to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products, and, when necessary,litigation.  We are also marketing moreproduct internationally.  Beginning in2004, we were given an award (from PATH) to supply syringes to various Africancountries.  Awards increasedsignificantly from 2004 to 2007. However, currently funding is uncertain for this program.  We continue to supply products under thisprogram, but not as high as previous levels. Additionally, an Australian distributor was awarded a one-year contractin March 2007 to supply our VanishPoint® automatedretraction syringes to all of Queensland Health’s 202 acute carefacilities.  Queensland Health is adepartment within the government of Queensland, Australia.  The contract was renewed for an additionaltwo years.  VanishPoint® products are distributed in Australia by Brisbane-basedScientific Educational Supplies Pty Ltd. International distributors continue to increase.

 

In the event we continue to have only limited marketaccess and the cash provided by the litigation settlements and generated fromoperations becomes insufficient, we would take 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.

 

10

Table of Contents

 

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 manufactured cost.  Double Dove manufactured, in the first six monthsof 2008, approximately 69.7% of the units produced by the Company.  These purchases have improved profit marginsin spite of limited revenues.  The costof production per unit has generally declined as volumes increased.  Double Dove has increased the prices to us by$0.005 per unit due to increased labor and raw material costs and the decliningvalue of the U.S. dollar.  Costreductions could be adversely affected by increased material and transportationcosts.  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 0.5 cc insulin syringe, the 5cc and10cc syringes, and the autodisable syringe which comprised about 3.7% of oursecond quarter 2008 revenues.

 

We had a Licensing Agreement with BTMD which expiredon May 13, 2008.  As a result of theexpiration of the contract, we recognized $100,000 of prepaid royalty income asother income.  We are in the process ofnegotiating a new agreement.  Royaltiesthat were expected in 2007 were not received due to the time needed to buildthe factory, assembly equipment, and the related infrastructure as well as theneed of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD isin the process of meeting Chinese government requirements.  Although successful completion of thisagreement cannot be assured, we still continue to expect royalty paymentsalthough we are unable to predict the date we will begin to receive such royalties.  We should begin earning royalties onceChinese government requirements are met and BTMD is able to produce and sellproducts.

 

Historically, unit sales have increased in thelatter part of the year due, in part, to the demand for syringes during the fluseason.

 

With increased volumes, our manufacturing unit costshave tended to decline.  Factors thatcould cause unit costs to increase include lower production volumes, increasingcosts of petroleum products, increased transportation costs and increased unitcosts of $0.005 from Double Dove.

 

Wehave begun the expansion of an existing warehouse.  This expansion will increase our warehousearea, provide for additional office space, and add a second Clean Room.

 

**LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS**

 

Atthe present time, Management does not intend to raise equity capital.  Due to the funds received from priorlitigation settlements, we have sufficient cash reserves and intend to rely onoperations, cash reserves, and debt financing as the primary ongoing sources ofcash.

 

Historical Sources of Liquidity

 

Wehave historically funded operations primarily from the proceeds from privateplacements, loans, and litigation settlements. We were capitalized with approximately $52,600,000 raised from sixseparate private placement offerings.  Weraised $47,375,600 in cash from the private sales of an aggregate of 11,710,221shares of Convertible Preferred Stock. In addition, we obtained a cancellation of $3,679,284 in debt and$1,550,000 in Accounts payable in exchange for Series V Class BConvertible Preferred Stock.

 

We obtained $3,910,000 in 2000 from bank loans ofwhich $3,435,000 has been repaid and $475,000 was refinanced with a new notewith Lewisville State Bank, a division of 1st InternationalBank.  Additionally, we received a SmallBusiness Administration loan of $1,000,000 in 1996 to pay for portions ofautomated assembly equipment, multi-cavity molds, and other equipment.  This loan has been repaid.  Furthermore, we borrowed $5,000,000 in 2000under our Credit Agreement with Abbott Laboratories (“Abbott”).  In October 2002 we repaid the Abbottnote with proceeds from a new note from Katie Petroleum, Inc. for$3,000,000 and a portion of the proceeds from a private placement.

 

11

Table of Contents

 

Internal Sources of Liquidity

 

*Margins and Market Access*

 

To achieve break even quarters, we needminimal access to hospital markets which has been difficult to obtain due to themonopolistic marketplace which was the subject of our initial lawsuit and nowalso included in our second lawsuit against BD. We will continue to attempt to gain access to the market through oursales efforts, innovative technology, the introduction of new products, and,when necessary, litigation.  During thesecond quarter of 2008, our Net loss would have been less than $225,000 withoutlitigation expenses.

 

We are focusing on methods ofupgrading our manufacturing capability and efficiency in order to reducecosts.  We believe our currentcapitalization provides the resources necessary to implement some of thesechanges and improve our manufacturing capacity and efficiency, thereby reducingour unit cost.

 

Beginning in early 2004, we began to receiveshipment of product from Double Dove which enabled us to lower our unitcosts.  Fluctuations in the cost andavailability of raw materials and inventory and the ability to maintainfavorable supplier arrangements and relationships could result in the need tomanufacture all (as opposed to 30.3%) of the products in the U.S.  This could temporarily increase unit costs aswe ramp up domestic production.

 

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.  Purchases ofproduct manufactured in China, if available, usually decrease the average costof manufacture for all units as domestic costs, such as indirect labor andoverhead, remain relatively constant. Double Dove has increased their prices to us by $0.005 per unit due toincreased labor and raw material costs and the declining value of the U.S.dollar. The number of units produced by the Company versus manufactured inChina can have a significant effect on the carrying costs of inventory as wellas Cost of sales.  The Company willcontinue to evaluate the appropriate mix of products manufactured domesticallyand those manufactured in China to achieve economic benefits as well as tomaintain our domestic manufacturing capability. Currently, approximately 30.3%****ofour products are produced domestically.

 

The higher costs of oil (since our products arepetroleum based), transportation, and units purchased from Double Dove may havea negative impact on the unit costs of our product.  Such increased costs may not be recoverablethrough price increases of our products.

 

*Seasonality*

 

Historically, unit sales have increased in thelatter part of the year due, in part, to the demand for syringes during the fluseason.

 

*Licensing Agreement*

 

We had a Licensing Agreement with BTMD which expiredon May 13, 2008.  As a result of theexpiration of the contract, we recognized $100,000 of prepaid royalty income asother income.  We are in the process ofnegotiating a new agreement.  Royaltiesthat were expected in 2007 were not received due to the time needed to buildthe factory, assembly equipment, and the related infrastructure as well as theneed of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD isin the process of meeting Chinese government requirements.  Although successful completion of this agreementcannot be assured, we still continue to expect royalty payments although we areunable to predict the date we will begin to receive such royalties.  We should begin earning royalties onceChinese government requirements are met and BTMD is able to produce and sellproducts.

 

*Cash Requirements*

 

Dueto funds received from prior litigation settlements, we have sufficient cashreserves and intend to rely on operations, cash reserves, and debt financing asthe primary ongoing sources of cash.  Inthe event we continue to have only limited market access and cash generatedfrom operations becomes insufficient to support operations, we 

 

12

Table of Contents

 

wouldtake cost 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.

 

External Sources of Liquidity

 

Wehave obtained several loans from our inception, which have, together with theproceeds from the sales of equities and litigation efforts, enabled us topursue development and production of our products.  Currently we believe we could obtainadditional funds through loans if needed. Furthermore, the shareholders previously authorized an additional5,000,000 shares of a Class C Preferred Stock that could, if necessary, bedesignated and used to raise funds through the sale of equity.  We are in the process of finalizing a loanfor approximately $4.2 million to fund an expansion of the warehouse.

 

**CAPITAL RESOURCES**

 

Trends in Capital Resources

 

Interest expense will increase due to the pending 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.  Although we believe that we have grantedcredit to credit-worthy firms, current economic conditions may affect thetiming and/or collectability of some accounts.

 

In2006, we invested $500,000 in a limited liability company.  We exercised our option to have thatinvestment returned.  The investment wasreturned in the second quarter of 2008.

 

Material Commitments for Expenditures

 

We have begun expansion of our warehouse (includingadditional warehouse space, additional office space, and a new CleanRoom).  We expect to fund this expansionwith a loan from Lewisville State Bank, a division of 1st International Bank, for approximately $4.2 million, secured by asecond lien deed on the land and existing buildings.  In the event financing is not obtained onsatisfactory terms, we believe we can fund such expansion out of cash reserves.

 

**MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

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.  Varianceshave been rounded for ease of reading. All period references are to the periods ended June 30, 2008, or2007.

 

*Comparison of Three Months Ended*

*June 30, 2008, and June 30, 2007*

 

Domestic sales accounted for 80.7% and 87.9% of therevenues for the three months ended June 30, 2008 and 2007,respectively.  International salesaccounted for the remaining revenues. Domestic revenues increased 12.7% principally due to increased volumesand higher average selling prices and international revenues increased 95.8%due primarily to higher volumes because of the addition of newdistributors.  Overall, unit salesincreased 29.9%.  Domestic unit salesincreased 10.1% and international unit sales increased 98.1%.  Domestic unit sales were 65.7% of total unitsales for the three months ended June 30, 2008.

 

Gross profit increased primarily due to higher unitsales and lower cost per unit sold. Costs of manufactured product increased due to higher volumes mitigatedby lower unit costs.  The average cost ofmanufactured product sold per unit decreased by 14.4% principally due to highervolumes.  Profit margins can fluctuatedepending upon, among other things, the cost of product manufactured and thecapitalized cost of product recorded in inventory, as well as product salesmix.  Royalty expense increased 14.7% dueto higher gross sales.

 

13

Table of Contents

 

Operating expenses decreased 1.8%.  The decrease in expense for Sales andmarketing was attributable primarily to lower trade show and travel andentertainment expense.  The decrease wasmitigated by increases of consulting costs. The increase in Research and development costs was due principally tohigher compensation costs.  Increases incompensation costs were attributable to merit increases and bonuses in the secondquarter for non-executive employees. General and administrative costs decreased due to lower legal expense aswell as recognizing $100,000 as other income under the expired BTMD licenseagreement. Bad debt expense increased.

 

Loss from operations decreased due principally tohigher revenues, higher profit margins, and lower operating expenses.

 

Interest expense and interest income declined due tolower interest rates and lower debt and cash equivalents balances.  In addition to generally declining interestrates, we shifted the bulk of our funds into U.S. Treasury bills and other U.S.government backed securities.

 

Our effective tax rate on the net loss before incometaxes was 0.0% for the three months ended June 30, 2008 and June 30,2007.

 

Excluding litigation expense, our Net loss wouldhave been less than $225,000.

 

*Comparison of Six Months Ended*

*June 30, 2008, and June 30, 2007*

 

Domesticsales accounted for 83.3% and 78.7% of the revenues for the six months ended June 30,2008 and 2007, respectively. International sales accounted for the remaining revenues.  Domestic revenues increased 13.0% principallydue to higher average selling prices and international revenues decreased 16.3%due primarily to lower volumes from PATH, but the decrease was mitigated by theadding of new distributors.  Overall,unit sales were flat.  Domestic unitsales increased 8.8% and international unit sales decreased 15.6%.  Domestic unit sales were 69.7% of total unitsales for the six months ended June 30, 2008.

 

Gross profit increased primarily due to higheraverage prices and lower unit costs. Costs of manufactured product decreased due to lower manufacturing costper unit.  The average cost ofmanufactured product sold per unit decreased by 2.5% principally due to highervolumes.  Profit margins can fluctuatedepending upon, among other things, the cost of product manufactured and thecapitalized cost of product recorded in inventory, as well as product salesmix.  Royalty expense increased 6.2% dueto higher gross sales.

 

Operating expenses increased 3.6%.  The decrease in expense for Sales andmarketing was attributable primarily to lower marketing costs and reducedtravel and entertainment expenses.  Theincrease in Research and development costs was due principally to increasedcompensation costs.  General andadministrative costs increased due to additional legal expense as well ascompensation expense, bad debt expense, accounting fees, and property taxes.  Increases in compensation costs wereattributable to merit increases and bonuses in the second quarter fornon-executive employees.

 

Loss from operations decreased due principally tohigher profit margins mitigated by higher operating expenses.

 

Interest expense and interest income declined due tolower interest rates and lower debt and cash equivalents balances.  In addition to generally declining interestrates, we shifted the bulk of our funds into U.S. Treasury bills and other U.S.government backed securities.

 

The Company’s effective tax rate on the net lossbefore income taxes was 0.0% for the six months ended June 30, 2008 and June 30,2007.

 

Excluding litigation expense, our Net losswould have been less than $1.7 million.

 

Our balance sheet remains strong with cash making up60.5% of total assets.  Working capitalwas $39.2 million at June 30, 2008, a decrease of $4.0 million from December 31,2007.  The current ratio was 5.9 at 

 

14

Table of Contents

 

December 31,2007 and 6.8 at June 30, 2008.  Thequick ratio was 5.1 for December 31, 2007 and 5.7 at June 30,2008.  These indicators continue todemonstrate a strong financial position.

 

Approximately$4.4 million in cash flow was used by operating activities.  The remaining uses of cash were for capitalcosts incurred for the acquisition of plant, property and equipment andintangible assets, and the repayment of long-term debt.

 

**Item 3.        Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

No update.

 

**Item 4.        Controls and Procedures.**

 

Our Management, including the Chief ExecutiveOfficer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expectthat our disclosure controls and procedures or our internal control overfinancial reporting will prevent or detect all errors and all instances offraud.  A control system, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance that the control system’s objectives will be met.

 

Pursuant to paragraph (b) of Rule 13a-15or Rule 15d-15 of the Securities Exchange Act of 1934 and on August 7,2008, Management, with the participation of our President, Chairman, and CEO,Thomas J. Shaw, and our Vice President and CFO, Douglas W. Cowan, acting intheir capacities as our principal executive and financial officers, evaluatedthe effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) orRule15d-15(e).  The CEO and CFO concluded that, as of June 30,2008 (the end of the period covered by the report), based on the evaluation ofthese controls and procedures required by paragraph (b) of Rule 13a-15or Rule 15d-15, there were no significant deficiencies in these controlsand procedures. The CEO and CFO concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed inour periodic reports is recorded, processed, summarized, and reported withinthe time periods specified in the SEC’s rules and forms. 

 

There have been no changesduring the second quarter of 2008 or subsequent to June 30, 2008identified in connection with the evaluation required by paragraph (d) of Rule 13a-15or 15d-15 in our internal control over financial reporting or in any otherfactor that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting. 

 

**PART II—OTHER INFORMATION**

 

**Item 1.        Legal Proceedings.**

 

On August 12, 2005, we filed a lawsuit againstAbbott in the United States District Court in the Eastern District of Texas,Texarkana Division.  We are allegingfraud and breach of contract in connection with the National Marketing andDistribution Agreement dated as of May 4, 2000, which was terminated on October15, 2003.  We are seeking damages whichwe estimate to be in millions of dollars of lost profits, out of pocketexpenses, and other damages.  Inaddition, we are seeking punitive damages, pre- and post-judgment interest andattorney’s fees.  On October 31, 2005,Abbott moved to dismiss the suit and to compel arbitration of the dispute.  The Court ruled in our favor and denied themotion to compel arbitration.  Abbottappealed the decision to the Fifth Circuit on February 27, 2007. The FifthCircuit affirmed the denial of the motion to compel arbitration. Abbottrequested an en banc hearing before the Fifth Circuit, which was denied on June30, 2008.  With the case back before theDistrict Court, Abbott filed an answer and counterclaim on July 15, 2008alleging several breaches of contract, breach of implied warranty ofmerchantability, and breach of express warranty, seeking in excess of$6,000,000 in compensatory damages as well as seeking attorneys’ fees.  We deny the validity of Abbott’scounterclaims.  The District Court hasissued a scheduling order setting trial for January 2010.

 

In August 2006, we were sued by Occupational andMedical Innovations Limited (“OMI”) in Federal Court of Australia, allegingthat two letters written to OMI by outside counsel contained unjustifiedthreats of patent infringement, but seeking no damages.  OMI later amended its complaint to seek adeclaratory judgment that OMI does not infringe our Australian Patent No. 701878,again seeking no damages.  Following aone-day trial in June 2007, the Court held that one of the two letters writtenby outside counsel contained a threat of patent infringement, and awarded coststo OMI in an amount that has not yet been determined.  Following a one-day trial in June 2008, theCourt held that OMI is entitled to a declaratory judgment of non-infringementof our Australian Patent No. 701878.  TheCourt has not yet issued an order implementing the declaratory judgment and hasnot yet awarded costs in the declaratory judgment matter.  Both OMI and we are seeking costs, and theamount of costs to be awarded will be determined at a later date.

 

15

Table of Contents

 

In June 2007, we sued BD in the United StatesDistrict Court for the Eastern District of Texas, Marshall Division, alleginginfringement of three of the Company’s patents (5,578,011; 5,632,733; and6,090,077) and violations by BD of the federal and state antitrust laws, and ofthe Lanham Act.  We and Thomas J. Shaw, aco-plaintiff, are seeking injunctive relief and unspecified monetary damages inthe suit.  BD counterclaimed fornon-infringement and invalidity of the asserted patents.  In January 2008, the Court severed the patentclaims from the other claims pending resolution of the patent dispute, which isset for trial in March 2009.

 

In September 2007, BD and MDC Investment Holdings,Inc. (“MDC”) sued us in the United States District Court for the EasternDistrict of Texas, Texarkana Division, alleging that the Company is infringingtwo U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD. BDand MDC seek injunctive relief and unspecified damages.  We counterclaimed for declarations of non-infringement,invalidity and unenforceability of the asserted patents.  No trial date has been set.

 

In March 2008, MedSafe Technologies LLC (“MedSafe”)sued us and BD in the United States District Court for the District of SouthCarolina, Greenville Division, alleging infringement of a MedSafe patent (6,074,370)and seeking injunctive relief and unspecified monetary damages.  We counterclaimed for declarations ofnon-infringement, invalidity and unenforceability of the asserted patents.  The case is set for trial in October 2009.

 

In April 2008, we and Thomas J. Shaw sued BD in theUnited States District Court for the Eastern District of Texas, MarshallDivision, alleging infringement of another of our recently issued patents(7,351,224), and seeking injunctive relief and unspecified monetary damages(including treble damages).  BDcounterclaimed for non-infringement and invalidity of the assertedpatents.  We have moved to consolidatethis case with the other patent case against BD that is pending in Marshall,and are awaiting decision on the motion.

 

In April 2008, we sued OMI in the United StatesDistrict Court for the Eastern District of Texas, Tyler Division, alleging thatOMI has infringed two U.S. patents that are not at issue in the Australianlitigation (6,572,584 and 7,351,224).  Wealso allege theft of confidential information, intentional interference withcontracts and engaging in false advertising that wrongfully disparages andmischaracterizes our syringe products. We further allege that OMI made false allegations regarding the sourceof origin of its safety syringe products being offered in the U.S. We seekinjunctive relief and unspecified damages (including treble damages) in thesuit.  OMI has counterclaimed against us,seeking declaratory judgments of non-infringement, invalidity andunenforceability of our asserted patents. OMI is not seeking monetary damages. No trial date has been set. 

 

**Item 1A.     Risk Factors.**

 

Therewere no material changes in the Risk Factors applicable to the Company as setforth in our Form 10-K annual report for 2007 which was filed on March 31,2008, and which is available on EDGAR.

 

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds.**

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Working Capital Restrictions and Limitations on the Payment ofDividends

 

Wemaintain cash for use as collateral for letters of credit we provide from timeto time to enable, among other things, the purchase of goods and services.  As of June 30, 2008, we had $48,000 heldas restricted cash for such purposes. The Board of Directors has authorized Management to borrow and incurindebtedness in the form of letters of credit in an aggregate amount, at anyone time, of $5,000,000.

 

Thecertificates of designation for each of the outstanding series of Class BConvertible Preferred Stock each provide that, if a dividend upon any shares ofPreferred Stock is in arrears, no dividends may be paid or declared or anyother distribution made upon any stock ranking junior to such stock andgenerally no such junior stock may be redeemed.

 

**Item 3.        Defaults Upon Senior Securities.**

 

Series I Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2008, theamount of dividends in arrears is $36,000 and the total arrearage is $72,000.

 

Series II Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2008, theamount of dividends in arrears is $110,000 and the total arrearage is $221,000.

 

Series III Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2008, theamount of dividends in arrears is $65,000 and the total arrearage is$3,050,000.

 

Series IV Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2008, theamount of dividends in arrears is $276,000 and the total arrearage is $6,754,000.

 

16

Table of Contents

 

Series V Class B Convertible Preferred Stock

 

As of the six months ended June 30, 2008, theamount of dividends in arrears is $200,000 and the total arrearage is$3,099,000.

 

**Item 4.      Submission of Matters to a Vote ofSecurity Holders.**

 

Not applicable.

 

**Item 5.      Other Information.**

 

On July 25, 2008, our Board of Directorsadopted the 2008 Stock Option Plan (the “Plan”), a copy of which isincorporated by reference herein as Exhibit No. 10. The Plan will besubmitted to our shareholders for approval at our annual meeting on September 26,2008, which will be held at the Little Elm City Hall located at 100 West EldoradoParkway, Little Elm 75068.

 

Also on July 25, 2008, the Board of Directorsnamed Ms. Amy Mack to fill the vacancy on the Compensation and BenefitsCommittee.

 

Beginning next year, the Company will provide proxydisclosures to its shareholders utilizing the new notice and accessmethod.  Accordingly, beginning in 2009,shareholders will no longer receive a Proxy Statement and proxy card in themail.  Instead they will receive a shortone page notice with the information allowed by the SEC which will givethe shareholders the web address where a copy of the Proxy Statement andrelated materials may be found.  Uponreaching such address, the shareholder may read or print the documents and may(after submitting their account number) vote their shares.

 

# **Item 6.        Exhibits.**

 
| Exhibit No. | ** ** | Description of Document                                  |
|------------------|------------|----------------------------------------------------------|
|             |       |                                                     |
| 10               |       | 2008  Stock Option Plan*                                 |
|             |       |                                                     |
| 31.1             |       | Certification  of Principal Executive Officer**          |
|             |       |                                                     |
| 31.2             |       | Certification  of Principal Financial Officer**          |
|             |       |                                                     |
| 32               |       | Certification  Pursuant to 18 U.S.C. Section 1350** |

 

----

*                 Incorporatedby reference to Appendix B of our preliminary Proxy Statement on Schedule 14Afiled on August 1, 2008

 

**          Attached hereto

 

17

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 

| DATE:  | August 8,  2008 | RETRACTABLE  TECHNOLOGIES, INC. |                                                     |
|--------|----------------------|---------------------------------|----------------------------------------------------------|
|   |                 | (Registrant)                    |                                                     |
|   |                 |                            |                                                     |
|   |                 |                            |
|   |                 | BY:                             |       /s/ Douglas W. Cowan |   |
|   |                 |                            | DOUGLAS  W. COWAN                                        |
|   |                 |                            | VICE  PRESIDENT AND                                      |
|   |                 |                            | CHIEF  FINANCIAL OFFICER                                 |
|        |                      |                                 |                                                          |  |

 

18