**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| x | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|--------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2010**

 

**or**

 
| **o** | **TRANSITION REPORT PURSUANT TO  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 ofregistrant 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’stelephone number, including area code)

 

 

 (Former name, former address, and formerfiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe 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 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                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                         |

 

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

 

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURINGTHE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documentsand reports required 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 TOCORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: 23,825,149 sharesof Common Stock, no par value, issued and outstanding on May 3, 2010.

 

 

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended March 31,2010**

 

 

**TABLE OF CONTENTS**

 

 
|           | **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** | **9**      |
| **Item 3.**    | **Quantitative  and Qualitative Disclosures About Market Risk**                                 | **14**     |
| **Item 4.**    | **Controls and  Procedures**                                                                    | **14**     |
| ** **     | ** **                                                                                      | ** ** |
|           | **PART II—OTHER  INFORMATION**                                                        |       |
|           | ** **                                                                                      |       |
| **Item 1.**    | **Legal Proceedings**                                                                           | **14**     |
| **Item 1A.**   | **Risk Factors**                                                                                | **15**     |
| **Item 2.**    | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | **15**     |
| **Item 3.**    | **Defaults  Upon Senior Securities**                                                            | **16**     |
| **Item 5.**    | **Other Information**                                                                           | **16**     |
| **Item  6.**   | **Exhibits**                                                                                    | **16**     |
| **SIGNATURES** | **17**                                                                                          |
|                |                                                                                                 |            |  |

 

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.        FinancialStatements.**

 

**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED BALANCE SHEETS**

 

 
| ** **                                       | ** ** | **March 31, 2010** | ** ** | ** **                      | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**              | ** ** | **December 31, 2009** | ** ** |
|                                             |       |                         |       |                            |       |
| **ASSETS**                                       | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets:                                  |       |                         |       |                            |       |
| Cash and cash equivalents                        | $          | 19,316,342                   | $          | 18,126,084                      |       |
| Accounts  receivable, net                        |       | 5,166,351                    |       | 9,948,210                       |       |
| Inventories, net                                 |       | 8,501,939                    |       | 6,907,369                       |       |
| Income taxes receivable                          |       | 3,655,637                    |       | 3,655,637                       |       |
| Other current assets                             |       | 742,083                      |       | 624,393                         |       |
| Total  current assets                            |       | 37,382,352                   |       | 39,261,693                      |       |
|                                             |       |                         |       |                            |       |
| Property,  plant, and equipment, net             |       | 13,689,483                   |       | 14,234,181                      |       |
| Intangible  assets and other assets, net         |       | 434,565                      |       | 445,425                         |       |
| Total  assets                                    | $          | 51,506,400                   | $          | 53,941,299                      |       |
|                                             |       |                         |       |                            |       |
|                                             |       |                         |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |                         | ** ** | ** **                      | ** ** |
| Current  liabilities:                            |       |                         |       |                            |       |
| Accounts  payable                                | $          | 6,086,735                    | $          | 6,997,310                       |       |
| Current portion of long-term debt                |       | 2,616,076                    |       | 2,628,652                       |       |
| Accrued  compensation                            |       | 702,240                      |       | 561,484                         |       |
| Marketing  fees payable                          |       | 1,419,760                    |       | 1,419,760                       |       |
| Accrued  royalties to shareholders               |       | 605,241                      |       | 843,327                         |       |
| Other  accrued liabilities                       |       | 1,059,357                    |       | 745,460                         |       |
| Total  current liabilities                       |       | 12,489,409                   |       | 13,195,993                      |       |
|                                             |       |                         |       |                            |       |
| Long-term  debt, net of current maturities       |       | 4,694,720                    |       | 4,824,833                       |       |
| Total  liabilities                               |       | 17,184,129                   |       | 18,020,826                      |       |
|                                             |       |                         |       |                            |       |
| 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                      |       | 552,500                         |       |
| Series V,  Class B                     |       | 1,238,821                    |       | 1,238,821                       |       |
| Common  stock, no par value                      |       | —                       |       | —                          |       |
| Additional  paid-in capital                      |       | 57,762,447                   |       | 57,089,153                      |       |
| Retained  deficit                                |       | (25,725,442                  |  )    | (23,453,946                     |  )    |
| Total  stockholders’ equity                 |       | 34,322,271                   |       | 35,920,473                      |       |
| Total  liabilities and stockholders’ equity | $          | 51,506,400                   | $          | 53,941,299                      |       |

 

 

See accompanying notes to condensed financial statements

 

1

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**RETRACTABLETECHNOLOGIES, INC.**

## **CONDENSED STATEMENTS OFOPERATIONS**

**(unaudited)**

 

 

 
| ** **                                  | ** ** | **Three  Months  Ended  March 31, 2010** | ** ** | ** ** | ** ** | **Three  Months  Ended  March 31, 2009** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|
|                                        | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** **                                    | ** ** |
| Sales,  net                                 | $          | 8,465,617                                     |       |       | $          | 5,258,465                                     |       |
| Cost  of sales                              |       |                                          |       |       |       |                                          |       |
| Cost  of manufactured product               |       | 4,409,571                                     |       |       |       | 3,595,457                                     |       |
| Royalty  expense to shareholders            |       | 605,242                                       |       |       |       | 433,832                                       |       |
| Total  cost of sales                        |       | 5,014,813                                     |       |       |       | 4,029,289                                     |       |
| Gross  profit                               |       | 3,450,804                                     |       |       |       | 1,229,176                                     |       |
|                                        |       |                                          |       |       |       | ** **                                    |       |
| Operating  expenses:                        |       |                                          |       |       |       | ** **                                    |       |
| Sales  and marketing                        |       | 850,016                                       |       |       |       | 1,135,667                                     |       |
| Research  and development                   |       | 345,247                                       |       |       |       | 278,361                                       |       |
| General  and administrative                 |       | 4,439,240                                     |       |       |       | 3,856,872                                     |       |
| Total  operating expenses                   |       | 5,634,503                                     |       |       |       | 5,270,900                                     |       |
| Loss  from operations                       |       | (2,183,699                                    |  )    |       |       | (4,041,724                                    |  )    |
|                                        |       |                                          |       |       |       |                                          |       |
| Interest  and other income                  |       | 5,680                                         |       |       |       | 28,737                                        |       |
| Interest  expense, net                      |       | (90,852                                       |  )    |       |       | —                                        |       |
| Net  loss before income taxes               |       | (2,268,871                                    |  )    |       |       | (4,012,987                                    |  )    |
| Provision  (benefit) for income taxes       |       | 2,625                                         |       |       |       | (105,346                                      |  )    |
| Net  loss                                   |       | (2,271,496                                    |  )    |       |       | (3,907,641                                    |  )    |
| Preferred  stock dividend requirements      |       | (342,717                                      |  )    |       |       | (342,717                                      |  )    |
| Loss  applicable to common shareholders     | $          | (2,614,213                                    |  )    |       | $          | (4,250,358                                    | )          |
|                                        |       |                                          |       |       |       |                                          |       |
| Loss  per share (basic and diluted)         | $          | (0.11                                         |  )    |       | $          | (0.18                                         |  )    |
|                                        |       |                                          |       |       |       |                                          |       |
| Weighted  average common shares outstanding |       | 23,825,149                                    |       |       |       | 23,800,064                                    |       |

 

See accompanyingnotes to condensed financial statements

 

2

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**RETRACTABLETECHNOLOGIES, INC.**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 

 

 
| ** **                                                                                 | ** ** | **Three  Months  Ended  March 31, 2010** | ** ** | **Three  Months  Ended  March 31, 2009** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| **Cash flows from operating activities**                                                   |       |                                          |       |                                          |       |
| Net loss                                                                                   | $          | (2,271,496                                    |  )    | $                                             | (3,907,641 |  ) |
| Adjustments to  reconcile net loss to net cash provided by (used by) operating activities: |       |                                          |       |                                          |       |
| Depreciation  and amortization                                                             |       | 429,365                                       |       | 342,640                                       |       |
| Share-based  compensation                                                                  |       | 673,293                                       |       | 173,014                                       |       |
| Accreted  interest                                                                         |       | 8,917                                         |       | 11,878                                        |       |
| Impairment  of assets                                                                      |       | 163,039                                       |       | —                                        |       |
| (Increase)  decrease in assets:                                                            |       |                                          |       |                                          |       |
| Inventories                                                                                |       | (1,594,570                                    |  )    | (1,124,312                                    |  )    |
| Accounts  receivable                                                                       |       | 4,781,859                                     |       | 1,551,704                                     |       |
| Income  taxes receivable                                                                   |       | —                                        |       | (104,784                                      |  )    |
| Other  current assets                                                                      |       | (117,690                                      |  )    | (416,356                                      |  )    |
| Increase  (decrease) in liabilities:                                                       |       |                                          |       |                                          |       |
| Accounts  payable                                                                          |       | (910,575                                      |  )    | 502,896                                       |       |
| Other  accrued liabilities                                                                 |       | 216,567                                       |       | (50,669                                       |  )    |
| Income  taxes payable                                                                      |       | —                                        |       | (408                                          |  )    |
| Net  cash provided by (used by) operating activities                                       |       | 1,378,709                                     |       | (3,022,038                                    |  )    |
| ** **                                                                                 |       |                                          |       |                                          |       |
| **Cash flows from investing activities**                                                   |       |                                          |       |                                          |       |
| Purchase  of property, plant, and equipment                                                |       | (36,842                                       |  )    | (1,485,584                                    |  )    |
| Net  cash used by investing activities                                                     |       | (36,842                                       |  )    | (1,485,584                                    |  )    |
| ** **                                                                                 |       |                                          |       |                                          |       |
| **Cash flows from financing activities**                                                   |       |                                          |       |                                          |       |
| Repayments  of long-term debt and notes payable                                            |       | (151,609                                      |  )    | (123,670                                      |  )    |
| Net  cash used by financing activities                                                     |       | (151,609                                      |  )    | (123,670                                      |  )    |
|                                                                                       |       |                                          |       |                                          |       |
| Net  increase (decrease) in cash                                                           |       | 1,190,258                                     |       | (4,631,292                                    |  )    |
|                                                                                       |       |                                          |       |                                          |       |
| Cash  and cash equivalents at:                                                             |       |                                          |       |                                          |       |
| Beginning  of period                                                                       |       | 18,126,084                                    |       | 33,283,740                                    |       |
| End  of period                                                                             | $          | 19,316,342                                    | $          | 28,652,448                                    |       |
|                                                                                       |       |                                          |       |                                          |       |
| Supplemental  disclosures of cash flow information:                                        |       |                                          |       |                                          |       |
| Interest  paid                                                                             | $          | 100,429                                       | $          | 40,932                                        |       |
| Income  taxes paid                                                                         | $          | 12,278                                        | $          | 15,883                                        |       |
|                                                                                       |       |                                          |       |                                          |       |
| Supplemental  schedule of noncash investing and financing activities:                      |       |                                          |       |                                          |       |
| Debt  assumed to construct warehouse                                                       | $          | —                                        | $          | 1,264,906                                     |       |
|                                                                                            |            |                                               |            |                                               |            |  |

 

See accompanyingnotes to condensed financial statements

 

3

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**RETRACTABLE TECHNOLOGIES, INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**(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 medicalproducts for the healthcare profession. The Company began 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® 0.5mL insulinsyringe; 1mL tuberculin, insulin, and allergy antigen syringes; 3mL, 5mL, and10mL syringes; the small diameter tube adapter; the blood collection tubeholder; the allergy tray; the IV safety catheter; and the Patient Safe® syringe.

 

**Basis of presentation**

 

The accompanyingcondensed financial statements are unaudited and, in the opinion of Management,reflect all adjustments that are necessary for a fair presentation of thefinancial position and results of operations for the periods presented.  All such adjustments are of a normal andrecurring nature.  The results ofoperations for the periods presented are not necessarily indicative of theresults to be expected for the entire year. The condensed financial statements should be read in conjunction withthe financial statement disclosures contained in the Company’s auditedfinancial statements incorporated into its Form 10-K filed on March 31,2010 for the year ended December 31, 2009 and Form 10-K/A filed on April 7,2010 for the same period.  Certain prioryear amounts have been reclassified to conform with the current period’spresentation.

 

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

 

**Accounting estimates**

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples (“GAAP”) requires Management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ significantlyfrom those estimates.

 

**Cash and cash equivalents**

 

For purposes of reportingcash flows, cash and cash equivalents include unrestricted cash, money marketaccounts, and investments with original maturities of three months or less.

 

**Accounts receivable**

 

The Company records tradereceivables when revenue is recognized. No product has been consigned to customers.  The Company’s allowance for doubtful accountsis 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.

 

4

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**Inventories**

 

Inventories are valued atthe lower of cost or market, with cost being determined using actual averagecost.  A reserve is established for anyexcess or obsolete inventories.

 

**Property,plant, and equipment**

 

Property, plant, andequipment 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 capital additions.  Gains or losses from property disposals areincluded in income.

 

Depreciationand amortization are calculated using the straight-line method over thefollowing 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 the event that assets are found to be carriedat amounts which are in excess of estimated gross future cash flows, the assetswill be adjusted for impairment to a level commensurate with a discounted cashflow analysis of the underlying assets.

 

During the first quarter of 2010, the Companyrecognized an impairment charge of $163,039 on equipment designed in connectionwith research and development activities. The Company will outsource themajority of this production through overseas manufacturers. Minimal cash flows,if any, are expected to be generated by this equipment. Accordingly, theCompany has reduced the carrying value of this equipment to an estimated fairvalue of zero. The Company’s management estimated the fair value of theequipment based on guidance established by the *Fair ValueMeasurements and Disclosures* Topic of the FASB Accounting StandardsCodification. In this instance, the Company’s management determined theimpairment charge by utilizing observable market data, a Level 2 input underthe FASB Accounting Standards Codification. A Level 1 input would requirequoted prices, which were not available in this matter.

 

**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**

 

TheCompany estimates the fair market value of financial instruments through theuse of public market prices, quotes from financial institutions, and otheravailable information.  Judgment isrequired in interpreting data to develop estimates of market value and,accordingly, amounts are not necessarily indicative of the amounts that couldbe realized in a current market exchange. Short-term financial instruments, including cash and cash equivalents,accounts receivable, accounts payable and other liabilities, consist primarilyof instruments without extended maturities, the fair value of which, based onManagement’s estimates, 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.  The Company had a high concentration of saleswith two significant customers accounting for approximately $2.8 million, or32.6% of net sales in the first quarter of 2010.

 

The Company manufacturessyringes 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 65.3% of 

 

5

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its finished products inthe first three months of 2010 from 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 supplier for its 0.5mL insulin syringe, its 5mL and 10mL syringes andits autodisable syringe and increase domestic production for 1mL and 3mLsyringes to avoid a disruption in supply.

 

**Revenuerecognition**

 

Revenue is recognized forsales to distributors when title and risk of ownership passes to thedistributor, 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 in levelsof 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 domesticreturn policy is set forth in its standard Distribution Agreement.  This policy provides that a customer mayreturn incorrect shipments within 10 days following arrival at the distributor’sfacility.  In all such cases thedistributor must obtain an authorization code from the Company and affix thecode to the returned product.  TheCompany will not accept returned goods without a returned goods authorizationnumber.  The Company may refund thecustomer’s money or replace the product.

 

The Company’s returnpolicy 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 the Company.

 

The Company’sinternational distribution agreements do not provide for any returns.

 

The Company records anallowance for estimated returns as a reduction to Accounts receivable and Grosssales.  Historically, returns have beenless than 0.5% of net sales.

 

**Marketingfees**

 

Under a sales andmarketing agreement with Abbott Laboratories (“Abbott”), the Company paidmarketing fees until the Company terminated the contract for breach.  The contracted services were to includeparticipation 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 Condensed Statements of Operations.  No marketing fees have been accrued since October 15,2003, the date the National Marketing and Distribution Agreement with Abbottwas terminated.  The Company filed suitagainst Abbott in August 2005 for breach of contract.  See **Note 5. COMMITMENTS ANDCONTINGENCIES** for further discussion.

 

6

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**Incometaxes**

 

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 the technical merits of theposition.  Measurement of the taxposition is based upon the largest amount of benefit that is greater than 50%likely of being realized upon ultimate settlement.

 

The Company provides fordeferred income taxes through utilizing an asset and liability approach forfinancial accounting and reporting based on the tax effects of differencesbetween the financial statement and tax bases of assets and liabilities, basedon enacted rates expected to be in effect when such differences reverse infuture periods.  Deferred tax assets areperiodically reviewed for realizability. Under recent tax law changes, companies are allowed to carry backtaxable losses from either 2008 or 2009. The Company will file for a tax refund utilizing its 2009 taxable losseswhich will result in a minimum of a $3.7 million refund.  The Company has established a valuationallowance for its net deferred tax asset as future taxable income cannot bereasonably assured.  Penalties andinterest on uncertain tax positions are classified as income taxes in theCondensed Statements of Operations.

 

**Earningsper share**

 

The Company computesbasic earnings per share by dividing net earnings for the period (adjusted forany cumulative dividends for the period) by the weighted average number ofcommon shares outstanding during the period. The Company’s potentially dilutive Common Stock equivalents, consistingof options, convertible debt and convertible Preferred Stock, are allantidilutive for the three months ended March 31, 2010 and 2009.  Accordingly basic loss per share is equal todiluted earnings per share.

 

**Shippingand handling costs**

 

The Company classifiesshipping and handling costs as part of Cost of sales in the CondensedStatements of Operations.

 

**Research and development costs**

 

Research and developmentcosts are expensed as incurred.

 

**Share-based compensation**

 

The Company’s share-basedpayments are accounted for using the fair value method.  The Company records share-based compensationexpense on a straight-line basis over the requisite service period.  The Company incurred the followingshare-based compensation costs:

 
| ** **                  | ** ** | **Three  Months  Ended  March 31, 2010** | ** ** | **Three  Months  Ended  March 31, 2009** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
|                        |       |                                          |       |                                          |       |
| Cost  of sales              | $          | 91,446                              | $          | 39,082                                        |       |
| Sales  and marketing        |       | 42,315                              |       | 48,389                                        |       |
| Research  and development   |       | 14,129                              |       | 6,317                                         |       |
| General  and administrative |       | 525,403                             |       | 79,226                                        |       |
|                        | $          | 673,293                             | $          | 173,014                                       |       |

 

7

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**3.**      **INVENTORIES**

 

Inventories consist ofthe following:

 
| ** **         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw  materials     | $          | 2,226,026                | $          | 2,424,818                   |       |
| Finished  goods    |       | 6,481,513                |       | 4,688,151                   |       |
|               |       | 8,707,539                |       | 7,112,969                   |       |
| Inventory  reserve |       | (205,600                 | )          | (205,600                    | )          |
|               | $          | 8,501,939                | $          | 6,907,369                   |       |

 

**4.**      **INCOME TAXES**

 

TheCompany’s effective tax rate on the net loss before income taxes was 0.1% and2.6% (benefit) for the three months ended March 31, 2010 and March 31,2009, respectively.

** **

**5.**      **COMMITMENTS AND CONTINGENCIES**

 

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.  Trial is currently set for July 2010.

 

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 the 5,578,011patent allegations from the lawsuit.  In January 2008,the Court severed the patent claims from the other claims pending resolution ofthe patent dispute.  In April 2008,the Company and the officer sued BD in the U.S. District Court for the EasternDistrict of Texas, Marshall Division, alleging infringement of another recentlyissued patent (7,351,224).  BDcounterclaimed for non-infringement and invalidity of the asserted patent.  The Court consolidated this case with theabove-stated case filed in June 2007. On November 9, 2009, the jury returned a verdict finding that thepatents asserted by the Company were valid and infringed by BD and awarded$5,000,000 in damages.  No final judgmenthas been entered in this case.  TheCompany is seeking injunctive relief.

 

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 droppedallegations with regard to patent no. 7,090,656 and the Company subsequentlydropped its counterclaims 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.

 

**6.**      **SUBSEQUENT EVENTS**

 

On April 23,2010, the Company paid $2,122,445 to Lewisville State Bank, adivision of 1st International Bank (“1st International”), to pay off a loan inthe original principal amount of $2,500,000 which matured in late March 2010.  The Company may seek other financing toreplace this loan.

 

8

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On May 11,2010, the Company declared a dividend to holders of Series I Class Band Series II Class B Convertible Preferred Stock in the amount of$216,000 and $660,555, respectively. Dividends cover amounts in arrears from June 30, 2007 through dateof conversion or June 30, 2010, whichever is applicable.  The dividends will be paid on July 15,2010.

 

**Item 2.       Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**FORWARD-LOOKING STATEMENT WARNING**

 

Certain statements included by reference in this filing containing thewords “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” andsimilar such words constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act. Any forward-looking statements involve known and unknown risks,uncertainties, and other factors that may cause our actual results,performance, or achievements to be materially different from any futureresults, performance, or achievements expressed or implied by suchforward-looking statements.  Such factorsinclude, among others, our ability to maintain liquidity, our maintenance ofpatent protection, the impact of current litigation (as it affects our costs aswell as market access), our ability to maintain favorable supplier arrangementsand relationships, our ability to receive royalties from Baiyin Tonsun MedicalDevice Co., Ltd. (“BTMD”), our ability to quickly increase capacity in responseto an increase in demand, our ability to access the market, our ability tomaintain or lower production costs, our ability to continue to finance researchand development as well as operations and expansion of production, theincreased interest of larger market players, specifically Becton Dickinson andCompany (“BD”), in providing devices to the safety market, and other factorsreferenced in **Item 1A. Risk Factors** in **Part II**.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

**MATERIALCHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Overview*

 

We have been manufacturing and marketing our products into themarketplace since 1997.  We currentlyprovide 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 hub contamination.  Patient Safe®’sunique luer guard reduces the risk of luer tip contact contamination and therisk of contamination of intravenous fluid. Safety syringes comprised 99.0% of our sales in the first three monthsof 2010.

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  The H1N1 virus (“Swine Flu”) may have a longer worldwideimmunization duration than the seasonal flu.  In the third quarter of 2009, we were awarded a contract bythe Department of Health and Human Services (“DHHS”) to supply a portion of thesafety engineered syringes to be used in the U.S. efforts to vaccinate the U.S.population against the Swine Flu.  The impact on us was material.  Sales to the DHHS comprised 24.4% of ourrevenues for the twelve months ended December 31, 2009.  Thisprogram, which was estimated to run from August 2009 through March 2010,ended in December 2009.  We do notknow if there will be a similar program in 2010.  We recorded sales to DHHS in 2010 (7.1% of Sales,net for the first quarter) that were attributable to orders placed in 2009.

 

Our products have been and continue to be distributed nationallythrough numerous distributors.  However,we have been blocked from access to the market by exclusive marketing practicesengaged in by BD, which dominates the market. We believe that its monopolistic business practices continue despite itspaying $100 million in 2004 to settle a prior lawsuit with us foranticompetitive practices, business disparagement, and tortiousinterference.  Additionally, a juryreturned a verdict in November 2009 finding that all three patentsasserted by us against BD are valid and infringed by BD (with regard to itsIntegraTM product).  Although we have madelimited 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 products and the federal and state legislation requiring the useof safe needle devices.

 

9

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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 Occupational and Medical Innovations Limited (“OMI”) in April 2008and separately sued BD in June 2007 for claims of patent infringement (seeItem 3. Legal Proceedings of the Form 10-K), and in December 2009 andNovember 2009, respectively, such companies were found to infringe ourpatents.  These verdicts could increasedemand for our product.  However, thereis no assurance when or if such increase will occur.

 

In the event we continue to have only limited market access, the cashprovided by the litigation settlements and generated from operations becomesinsufficient, and royalties from BTMD are not forthcoming, we would takeadditional 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 royalty payments.  We took such actions at the end of the secondquarter of 2009.

 

At the end of the second quarter of 2009, we announced that in theinterest of the long-term survival of the Company we would reorganize some ofthe Company’s functions and implement staff reductions, all in order to minimizeour 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 of2009.  The effect of Mr. Shaw’s waiver of$1,000,000 in royalties was fully realized in 2009.  Salaries for all personnel above a certainsalary level were cut by 10% in 2009 (subject to contract rights).  As a result of the cost cutting measures,compensation costs included in Operating expenses were reduced by $270,000 and401(k) matching expense declined $26,000. Other costs related to the reduction in force declined $71,000 forconsulting, $57,000 for travel and entertainment, and $48,000 for marketingexpense.  We have begun additionalmolding in Little Elm.  These measureswill remain in place as long as Management deems them necessary.

 

We are focusing on methods of upgrading our manufacturing capabilityand efficiency in order to reduce costs. We believe our current capitalization provides the resources necessaryto implement some of these changes and improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

 

Product purchases from Double Dove, a Chinese manufacturer, haveenabled us to increase manufacturing capacity with little capital outlay andhave provided a competitive manufacturing cost. In the first quarter of 2010, Double Dove manufactured approximately65.3% of the units we produced.  The costof production per unit has generally declined as volumes increased.  We believe we could make up any long-termdisruption in these supplies by utilizing more of the capacity at the LittleElm facility, except for the 0.5mL insulin syringe, the 5mL and 10mL syringes,and the autodisable syringe which altogether comprised about 9.9% of ourrevenues in the first quarter of 2010.

 

We entered into a new agreement (effective as of July 1, 2009)with BTMD along similar terms as our prior agreement.  This agreement expires on July 1, 2010which may automatically extend under certain conditions.  Such terms include granting to BTMD a limitedexclusive license to manufacture and a limited exclusive right to sell syringesin China having retractable 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 China 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 BTMD facility has been completed and BTMD has met Chinese Governmentrequirements.  BTMD received aRegistration Certificate for Medical Device on August 24, 2009.  The obligation to pay the royalties continueseven if any and all of our patent rights in China are found to be invalid orunenforceable for any reason.  BTMDreported they owe us $22,952 for royalties attributable to the first quarter of2010.  This amount is included in Sales,net for the quarter ended March 31, 2010.

 

With increased volumes, our manufacturing unit costs have generallytended to decline.  Factors that couldaffect our unit costs include increases in costs by third party manufacturers,changing production volumes, costs of petroleum products, and transportationcosts.  Increases in such costs may notbe recoverable through price increases of our products.

 

10

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The following discussion may contain trend information and otherforward-looking statements that involve a number of risks anduncertainties.  Our actual future resultscould differ materially from our historical results of operations and thosediscussed in any forward-looking statements. Variances have been rounded for ease of reading.  All period references are to the periodsended March 31, 2010 or 2009.

 

*Comparison of Three Months Ended March 31,2010 and March 31, 2009*

 

Domestic sales accounted for 88.2% and 78.8% of the revenues for thethree months ended March 31, 2010 and 2009, respectively.  International sales accounted for theremaining revenues.  Domestic revenuesincreased 80.1% principally due to higher average prices and highervolumes.  Most of the increase indomestic revenues is attributable to sales of the 1mL and 3mL syringes.  International revenues decreased 10.1% dueprimarily to lower volumes mitigated by higher prices.  Overall, unit sales increased 27.6%.  Domestic unit sales increased 47.9% due toincreased sales to our major domestic distributors and filling orders from DHHSfrom 2009.  International unit salesdecreased 14.3%.  Domestic unit saleswere 78.1% of total unit sales for the three months ended March 31, 2010.

 

Gross profit increased 181% primarily due to higher revenues and lowerunit costs.  The average cost ofmanufactured product sold per unit decreased by 3.9% 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 39.5% dueto higher gross sales.

 

Operating expenses increased 6.9%. The increase was mitigated by the effect of cost cutting measures takenin 2009. Compensation costs declined $270,000 and 401(k) matching expensedeclined $26,000. Other related costs such as travel and entertainment,marketing expense, and consulting declined $176,000. General and administrativecosts increased due primarily to stock options and litigation expense.  The decrease in expense for Sales andmarketing was attributable primarily to lower compensation costs.  Research and development costs increased$163,000 due to impairment charges mitigated by lower compensation costs.

 

Loss from operations decreased 46% due principally to higher grossprofit.

 

Interest expense increased due to less capitalized interest.  Interest expense for the first quarter of2010 was $91,000.

 

The Company’s effective tax rate on the net loss before income taxeswas 0.1% and 2.6% (benefit) for the three months ended March 31, 2010 and March 31,2009, respectively.

 

There are two charges to our Statement of Operations in the firstquarter of 2010 that are nonrecurring or are not typical of a manufacturingcompany.  These charges includelitigation costs and stock option expense (a noncash charge which will be fullyamortized at the end of the second quarter of 2010).  Were it not for these two charges, our Netearnings applicable to common shareholders for the quarter would have beenapproximately $350,000 and our Net income would have been approximately$700,000.  There would be no federalincome tax impact since we have net operating loss carryforwards which wouldhave eliminated the tax obligation.

 

*Discussion of Balance Sheet and Statement of CashFlow Items*

 

The Company’s balance sheet remains strong with cash making up 37.5% oftotal assets.  Working capital was $24.9million at March 31, 2010, a decrease of $1.2 million from December 31,2009.  The current ratio was 3.0 at December 31,2009 and March 31, 2010.  The quickratio was 2.5 at December 31, 2009 and 2.3 at March 31, 2010.  We expect the cost cutting measures describedearlier to continue to mitigate the reduction in future cash balances.

 

We increased our raw materials inventory in the fourth quarter of 2009due to the demand for flu shots, particularly under the DHHS program.  Since the cancellation of the DHHS program,we have decreased raw materials for production. We expect to continue moving the manufacturing of piece parts to LittleElm as a cost saving measure.  Finishedgoods inventory increased 38.3% since December 31, 2009 because of a buildup related to the DHHS program.

 

Approximately $1.4 million in cash flow in the first quarter of 2010was provided by operating activities.  Usesof cash were primarily for repayment of debt.

 

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**LIQUIDITY**

 

Historical Sources ofLiquidity

 

We have historically funded operations primarily from the proceeds fromrevenues, private placements, loans, and litigation settlements.

 

Internal Sources ofLiquidity

 

*Marginsand Market Access*

 

To achieve break even quarters, we need minimal access to hospitalmarkets which has been difficult to obtain due to the monopolistic marketplacewhich was the subject of our initial lawsuit and now also included in oursecond 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 our manufacturing capabilityand efficiency in order to reduce costs.  We believe our currentcapitalization provides the resources necessary to implement some of thesechanges and improve our manufacturing capacity and efficiency, thereby reducingour unit cost.

 

In the 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 24.4% of our revenues for the twelve months ended December 31,2009.  This program, which was estimated to run from August 2009through March 2010, ended in December 2009.  We do not know if there will be a similarprogram in 2010.  We recorded sales toDHHS in 2010 (7.1% of Sales, net for the first quarter) that were attributableto orders placed in 2009.

 

Fluctuations in the cost and availability of raw materials andinventory and our ability to maintain favorable supplier arrangements andrelationships could result in the need to manufacture all (as opposed to 32.9%)of our products in the U.S.  This couldtemporarily increase unit costs as we ramp up domestic production.

 

The mix of domestic and international sales affects the average salesprice of our products.  Generally, thehigher the ratio of domestic sales to international sales, the higher theaverage sales price will be.  Typicallyinternational sales are shipped directly from China to the customer.  Purchases of product manufactured in China,if available, usually decrease the average cost of manufacture for all units. Domesticcosts, such as 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 economicbenefits as well as to maintain our domestic manufacturing capability.  Currently, approximately 32.9%****of our products are produced domestically.

 

Fluctuations in the cost of oil (since our products are petroleumbased), transportation, and the volume of units purchased from Double Dove mayhave 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 latter part of the yeardue, in part, to the demand for syringes during the flu season.  The SwineFlu may have a longer worldwide immunization duration than the seasonal flu.

 

*LicensingAgreement*

 

Weentered into a new agreement (effective as of July 1, 2009) with BTMDalong similar terms as our prior agreement. This agreement expires on July 1, 2010 which may automaticallyextend under certain conditions. Such 

 

12

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terms include granting toBTMD a limited exclusive license to manufacture and a limited exclusive rightto sell syringes in China having retractable needles that incorporate ourtechnology.  This License Agreement issubject to the Technology 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 China 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 facility has been completed and BTMD has met Chinese governmentrequirements.  BTMD received aRegistration Certificate for Medical Device on August 24, 2009.  The obligation to pay the royalties continueseven if any and all of our patent rights in China are found to be invalid or unenforceablefor any reason.  BTMD reported they oweus $22,952 for royalties attributable to the first quarter of 2010.  This amount is included in Sales, net for thequarter ended March 31, 2010.

 

*CashRequirements*

 

Due to funds received from prior litigation settlements, we havesufficient cash reserves and intend to rely on operations, cash reserves, anddebt 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.

 

External Sources ofLiquidity

 

We have obtained several loans from our inception, which have, togetherwith the proceeds from the sales of equities and litigation efforts, enabled usto pursue development and production of our products.  Given the current economic conditions, ourability to obtain additional funds through loans is uncertain.  Furthermore, the shareholders previouslyauthorized an additional 5,000,000 shares of a Class C Preferred Stockthat could, if necessary, be designated and used to raise funds through thesale of equity.  Due to the currentmarket price of our Common Stock, it is unlikely we would choose to raise fundsby the sale of equity.

 

Weobtained a loan from Lewisville State Bank, a division of 1st InternationalBank (“1st International”), for $2,500,000, secured by the land and existingbuildings, which provided funding for the construction of the 47,250 squarefoot warehouse placed in service in 2005. This loan matured in late March 2010 and we paid $2,122,445 to payoff the loan on April 23, 2010.  We may seek otherfinancing to replace this loan.

 

On August 29,2008, we obtained a $4,210,000 interim construction loan from 1st International. The purpose of the loan was to expand the warehouse, includingadditional office space, and construct a new Controlled Environment.  The construction project was completed andthe loan was renewed on December 10, 2009 with a 20 year amortization and10 year maturity.  The interest rate is5.968%.

 

**CAPITALRESOURCES**

 

Material Commitments forCapital Expenditures

 

None.

 

Trends in CapitalResources

 

Interest expense will increase due to the reduction of capitalizedinterest at the present time.  It mayalso be affected by additional loans or rising interest rates.  However, interest expense may be lower if wedo not obtain a loan to replace the money expended to pay off the 1stInternational note, which was paid in the second quarter of 2010.  Interest income may continue to be negativelyaffected by lower interest rates and our prior movement of cash to U.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.

 

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** **

**CONTRACTUAL OBLIGATIONS**

 

We obtained a loan from 1st International for $2,500,000, secured bythe land and existing buildings, which provided funding for the construction ofthe 47,250 square foot warehouse placed in service in 2005.  This loan matured in late March 2010 andwe paid $2,122,445 to pay off the loan on April 23, 2010.  We may seek other financing toreplace this loan.

 

**Item 3.       Quantitativeand Qualitative Disclosures About Market Risk.**

 

No update.

 

**Item 4.       Controls and Procedures.**

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of1934, Management, with the participation of our President, Chairman, and ChiefExecutive Officer, Thomas J. Shaw (the “CEO”), and our Vice President and ChiefFinancial Officer, Douglas W. Cowan (the “CFO”), acting in their capacities asour principal executive and principal financial officer, evaluated theeffectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934.  Theterm disclosure controls andprocedures**means controlsand other procedures that are designed to ensure that information required to bedisclosed by us in our periodic reports is: i) recorded, processed, summarizedand reported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms; and ii) accumulated and communicated to ourManagement, including our principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure. Basedupon this evaluation, the CEO and CFO concluded that, as of March 31,2010, our disclosure controls and procedures were effective.

 

Changes in InternalControl Over Financial Reporting

 

There have been no changes during the first quarter of 2010 orsubsequent to March 31, 2010 in our internal control over financialreporting that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

**Item 1.       LegalProceedings.**

 

On August 12, 2005, we filed a lawsuit against Abbott Laboratories(“Abbott”) in the U.S. District Court in the Eastern District of Texas,Texarkana Division.  We are alleging fraud and breach of contract inconnection with the National Marketing and Distribution Agreement dated as of May 4,2000, which was terminated on October 15, 2003.  We are seekingdamages which we estimate to be in millions of dollars of lost profits, out ofpocket expenses, and other damages.  In addition, we are seeking punitivedamages, pre- and post-judgment interest, and attorneys’ fees.  FollowingAbbott’s unsuccessful attempt to get the case dismissed and ordered toarbitration, Abbott filed an answer and counterclaim on July 15, 2008,alleging 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.  Wedeny the validity of Abbott’s counterclaims.  Discovery has already takenplace and is substantially completed.  Trial is currently set for July 2010.

 

In June 2007, we sued BD in the U.S. District Court for theEastern District of Texas, Marshall Division, alleging infringement of threepatents (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.  We subsequentlydropped the 5,578,011 patent allegations from the lawsuit.  In January 2008,the Court severed the patent claims from the other claims pending resolution ofthe patent dispute.  In April 2008, we and Thomas J. Shaw sued BD inthe 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.  The Court consolidated this case withthe above-stated case filed in June 2007. On November 9, 2009, thejury returned a verdict finding that the patents asserted by us were

 

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validand infringed by BD and awarded $5,000,000 in damages.  No final judgment has been entered in thiscase.  We are seeking injunctive relief.

 

In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”)sued us in the United States District Court for the Eastern District of Texas,Texarkana Division, initially alleging that we are infringing two U.S. patentsof MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seekinjunctive relief and unspecified damages.  We counterclaimed for declarationsof non-infringement, invalidity, and unenforceability of the assertedpatents.  The plaintiffs subsequently dropped allegations with regard topatent no. 7,090,656 and we subsequently dropped our counterclaims forunenforceability of the asserted patents.  The Court conducted a claimsconstruction hearing on September 25, 2008 and issued its claimsconstruction order on November 14, 2008.  No trial date has been set.

 

**Item 1A.     Risk Factors.**

 

There were no materialchanges in the Risk Factors applicable to the Company as set forth in our Form 10-Kannual report for 2009 which was filed on March 31, 2010, and which isavailable on EDGAR.

 

**Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.**

 

Unregistered Salesof Equity Securities and Use of Proceeds

 

None.

 

Purchases ofEquity Securities by the Issuer and Affiliated Purchasers

 

Issuer Purchasesof Equity Securities

 
| Period              |   | Total  Number  of Shares  (or Units)  Purchased |   | Average  Price Paid  Per Share  (or Unit) |   | Total Number of  Shares  (or Units) Purchased as  Part of Publicly  Announced Plans or  Programs |   | Maximum Number  (or  Approximate Dollar Value) of  Shares (or Units) that May Yet  Be Purchased Under the Plans  or Programs |   |
|---------------------|--------|-------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                |   |                                            |   |                                      |   |                                                                                                  |   |                                                                                                                              |   |
| March 23, 2010 |   | 10,000(1)                                       |   | $1.54                                     |   | 0                                                                                                     |   | N/A                                                                                                                               |   |

 

(1)           These shares were purchased by anaffiliated purchaser in a private transaction, not through a publicly announcedplan or program.

 

Working CapitalRestrictions and Limitations on the Payment of Dividends

 

The Board of Directorsdeclared a dividend to the Series I Class B and Series II Class BConvertible Preferred Shareholders in the aggregate amount of $876,555. This dividend shall be paid on July 15, 2010.

 

We maintain cash for use as collateral for letters of credit we providefrom time to time to enable, among other things, the purchase of product fromChina.  As of March 31, 2010, we hadno funds held as restricted cash for such purposes.  The Board of Directors has authorizedManagement to borrow and incur indebtedness in the form of letters of credit inan aggregate amount, at any one time, of $5,000,000.

 

The certificatesof designation for each of the outstanding series of Class B ConvertiblePreferred Stock each currently provide that, if a dividend upon any shares ofPreferred Stock is in arrears, no dividends may be paid or declared upon anystock ranking junior to such stock and generally no junior preferred stock maybe redeemed.

 

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**Item 3.        DefaultsUpon Senior Securities.**

 

Series I Class BConvertible Preferred Stock

 

As of the three monthsended March 31, 2010, the amount of dividends in arrears was $18,000 andthe total arrearage was $198,000.  Thisamount will be included in the dividend payment to be made on July 15,2010.

 

Series II Class BConvertible Preferred Stock

 

As of the three monthsended March 31, 2010, the amount of dividends in arrears was $55,000 andthe total arrearage was $606,000.  Thisamount will be included in the dividend payment to be made on July 15,2010.

 

Series III Class BConvertible Preferred Stock

 

As of the three monthsended March 31, 2010, the amount of dividends in arrears was $33,000 andthe total arrearage was $3,278,000.

 

Series IV Class BConvertible Preferred Stock

 

As of the three monthsended March 31, 2010, the amount of dividends in arrears was $138,000 andthe total arrearage was $7,721,000.

 

Series V Class BConvertible Preferred Stock

 

As of the three monthsended March 31, 2010, the amount of dividends in arrears was $99,000 andthe total arrearage was $3,792,000.

 

# **Item 5.    OtherInformation.**

 

The 2010 annual meetingshall be held on September 24, 2010, at 10:00 a.m. Central time atLittle Elm City Hall; 100 West Eldorado Parkway; Little Elm, Texas 75068.

 

# **Item 6.    Exhibits.**

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

DATE:         May 17,2010

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

 

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