**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****                QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

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

 

**For the transition period from        to        **

 

**Commission file number: 000-30885**

 

**RetractableTechnologies, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                                       | ** ** | **75-2599762**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **511 Lobo Lane**                        | ** ** | ** **     |
|------------------------------------------|------------|----------------|
| **Little Elm, Texas**                    | ** ** | **75068-0009** |
| (Address of principal executive offices) |       | (Zip Code)     |

 

**(972) 294-1010**

(Registrant’s telephone number, including area code)

 

 

(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 of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “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) |   |                             |

 

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:

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Sections 12, 13, or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.  Yes o  No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 23,878,164 shares of Common Stock, no par value,issued and outstanding on July 30, 2010.

 

 

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended June 30,2010**

 

**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** | **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 5.**                                 | **Other Information** | **16** |
|                                        |   |   |
| **Item 6.**                                 | **Exhibits** | **17** |
|                                        |   |   |
| **SIGNATURES**                              | **17** |

 

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.****                       FinancialStatements.**

 

**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED BALANCE SHEETS**

 

 
| ** **                                       | ** **    | **June 30,  2010** | ** ** | ** **    | ** **                  | ** ** |
|--------------------------------------------------|---------------|-------------------------|------------|---------------|-----------------------------|------------|
| ** **                                       | ** **    | **(unaudited)**         | ** ** | ** **    | **December 31,  2009** | ** ** |
|                                             |          |                    |       |          |                        |       |
| **ASSETS**                                       |          |                    |       |          |                        |       |
| Current assets:                                  |          |                    |       |          |                        |       |
| Cash and cash  equivalents                       | $   | 11,433,099              |       | $   | 18,126,084                  |       |
| Accounts  receivable, net                        |          | 5,801,408               |       |          | 9,948,210                   |       |
| Inventories, net                                 |          | 10,669,200              |       |          | 6,907,369                   |       |
| Income taxes  receivable                         |          | 3,990,120               |       |          | 3,655,637                   |       |
| Other current  assets                            |          | 796,617                 |       |          | 624,393                     |       |
| Total  current assets                            |          | 32,690,444              |       |          | 39,261,693                  |       |
|                                             |          |                    |       |          |                        |       |
| Property, plant,  and equipment, net             |          | 13,322,782              |       |          | 14,234,181                  |       |
| Intangible  assets and other assets, net         |          | 423,705                 |       |          | 445,425                     |       |
| Total  assets                                    | $   | 46,436,931              |       | $   | 53,941,299                  |       |
|                                             |          |                    |       |          |                        |       |
|                                             |          |                    |       |          |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |          |                    |       |          | ** **                  |       |
| Current  liabilities:                            |          |                    |       |          |                        |       |
| Accounts payable                                 | $   | 4,706,381               |       | $   | 6,997,310                   |       |
| Current  portion of long-term debt               |          | 501,733                 |       |          | 2,628,652                   |       |
| Accrued  compensation                            |          | 632,482                 |       |          | 561,484                     |       |
| Dividends  payable                               |          | 876,566                 |       |          | —                      |       |
| Marketing  fees payable                          |          | 1,419,760               |       |          | 1,419,760                   |       |
| Accrued  royalties to shareholders               |          | 550,040                 |       |          | 843,327                     |       |
| Other  accrued liabilities                       |          | 1,832,042               |       |          | 745,460                     |       |
| Total  current liabilities                       |          | 10,519,004              |       |          | 13,195,993                  |       |
|                                             |          |                    |       |          |                        |       |
| Long-term  debt, net of current maturities       |          | 4,570,293               |       |          | 4,824,833                   |       |
| Total  liabilities                               |          | 15,089,297              |       |          | 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                      |          | 57,552,888              |       |          | 57,089,153                  |       |
| Retained  deficit                                |          | (28,490,520             | )          |          | (23,453,946                 | )          |
| Total  stockholders’ equity                 |          | 31,347,634              |       |          | 35,920,473                  |       |
| Total  liabilities and stockholders’ equity | $   | 46,436,931              |       | $   | 53,941,299                  |       |

 

 

See accompanying notes to condensed financialstatements

 

1

----

 

**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED STATEMENTS OFOPERATIONS**

**(unaudited)**

 

 

 
| ** **                                  | ** ** | **Three  Months  Ended  June 30, 2010** | ** ** | ** ** | **Three  Months  Ended  June 30, 2009** | ** ** | ** ** | **Six  Months  Ended  June 30, 2010** | ** ** | ** ** | **Six  Months  Ended  June 30, 2009** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|------------|----------------------------------------------|------------|------------|--------------------------------------------|------------|------------|--------------------------------------------|------------|
|                                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Sales,  net                                 | $          | 7,448,733                                    |       | $          | 5,752,613                                    |       | $          | 15,914,350                                 |       | $          | 11,011,078                                 |       |
| Cost  of sales                              |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Cost  of manufactured product               |       | 4,074,388                                    |       |       | 2,983,784                                    |       |       | 8,483,959                                  |       |       | 6,579,241                                  |       |
| Royalty  expense to shareholders            |       | 549,271                                      |       |       | 429,063                                      |       |       | 1,154,513                                  |       |       | 862,895                                    |       |
| Total  cost of sales                        |       | 4,623,659                                    |       |       | 3,412,847                                    |       |       | 9,638,472                                  |       |       | 7,442,136                                  |       |
| Gross  profit                               |       | 2,825,074                                    |       |       | 2,339,766                                    |       |       | 6,275,878                                  |       |       | 3,568,942                                  |       |
|                                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Operating  expenses:                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Sales  and marketing                        |       | 955,961                                      |       |       | 1,399,932                                    |       |       | 1,805,977                                  |       |       | 2,535,599                                  |       |
| Research  and development                   |       | 204,004                                      |       |       | 352,365                                      |       |       | 549,251                                    |       |       | 630,726                                    |       |
| General  and administrative                 |       | 4,694,151                                    |       |       | 3,368,279                                    |       |       | 9,133,391                                  |       |       | 7,225,151                                  |       |
| Total  operating expenses                   |       | 5,854,116                                    |       |       | 5,120,576                                    |       |       | 11,488,619                                 |       |       | 10,391,476                                 |       |
| Loss  from operations                       |       | (3,029,042                                   | )          |       | (2,780,810                                   | )          |       | (5,212,741                                 | )          |       | (6,822,534                                 | )          |
|                                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Interest  and other income                  |       | 2,517                                        |       |       | 11,446                                       |       |       | 8,197                                      |       |       | 40,183                                     |       |
| Interest  expense, net                      |       | (75,685                                      | )          |       | —                                       |       |       | (166,537                                   | )          |       | —                                     |       |
| Net  loss before income taxes               |       | (3,102,210                                   | )          |       | (2,769,364                                   | )          |       | (5,371,081                                 | )          |       | (6,782,351                                 | )          |
| Benefit  for income taxes                   |       | (337,132                                     | )          |       | —                                       |       |       | (334,507                                   | )          |       | (105,346                                   | )          |
| Net  loss                                   |       | (2,765,078                                   | )          |       | (2,769,364                                   | )          |       | (5,036,574                                 | )          |       | (6,677,005                                 | )          |
| Preferred  stock dividend requirements      |       | (342,717                                     | )          |       | (342,717                                     | )          |       | (685,434                                   | )          |       | (685,434                                   | )          |
| Loss  applicable to common shareholders     | $          | (3,107,795                                   | )          | $          | (3,112,081                                   | )          | $          | (5,722,008                                 | )          | $          | (7,362,439                                 | )          |
|                                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Loss  per share – (basic and diluted)  | $          | (0.13                                        | )          | $          | (0.13                                        | )          | $          | (0.24                                      | )          | $          | (0.31                                      | )          |
|                                        |       |                                         |       |       |                                         |       |       |                                       |       |       |                                       |       |
| Weighted  average common shares outstanding |       | 23,825,149                                   |       |       | 23,800,064                                   |       |       | 23,825,149                                 |       |       | 23,800,064                                 |       |

 

 

See accompanyingnotes to condensed financial statements

 

2

----

 

**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 

 
| ** **                                                                                 | ** ** | ** ** | **Six  Months  Ended  June 30, 2010** | ** ** | ** ** | **Six  Months  Ended  June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|--------------------------------------------|------------|------------|--------------------------------------------|------------|
| **Cash flows from operating activities**                                                   |       |       |                                       |       |       |                                       |       |
| Net  loss                                                                                  |       | $          | (5,036,574                                 | )          | $          | (6,677,005                                 | )          |
| Adjustments to  reconcile net loss to net cash provided by (used by) operating activities: |       |       |                                       |       |       |                                       |       |
| Depreciation  and amortization                                                             |       |       | 788,680                                    |       |       | 678,986                                    |       |
| Share-based  compensation                                                                  |       |       | 1,340,300                                  |       |       | 346,335                                    |       |
| Provision  for rebates                                                                     |       |       | 850,000                                    |       |       | —                                     |       |
| Accreted  interest                                                                         |       |       | 17,054                                     |       |       | 23,030                                     |       |
| Impairment  of assets                                                                      |       |       | 163,039                                    |       |       | —                                     |       |
| (Increase)  decrease in assets:                                                            |       |       |                                       |       |       |                                       |       |
| Inventories                                                                                |       |       | (3,761,831                                 | )          |       | (3,651,148                                 | )          |
| Accounts  receivable                                                                       |       |       | 3,296,802                                  |       |       | 675,033                                    |       |
| Income taxes receivable                                                                    |       |       | (334,483                                   | )          |       | (104,784                                   | )          |
| Other  current assets                                                                      |       |       | (172,224                                   | )          |       | (296,006                                   | )          |
| Increase (decrease) in liabilities:                                                        |       |       |                                       |       |       |                                       |       |
| Accounts  payable                                                                          |       |       | (2,290,929                                 | )          |       | (1,205,506                                 | )          |
| Other accrued liabilities                                                                  |       |       | 864,293                                    |       |       | 156,140                                    |       |
| Income taxes payable                                                                       |       |       | —                                     |       |       | (425                                       | )          |
| Net  cash used by operating activities                                                     |       |       | (4,275,873                                 | )          |       | (10,055,350                                | )          |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| **Cash flows from investing  activities**                                                  |       |       |                                       |       |       |                                       |       |
| Purchase  of property, plant, and equipment                                                |       |       | (18,597                                    | )          |       | (2,002,502                                 | )          |
| Net  cash used by investing activities                                                     |       |       | (18,597                                    | )          |       | (2,002,502                                 | )          |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| **Cash flows from financing  activities**                                                  |       |       |                                       |       |       |                                       |       |
| Repayments  of long-term debt and notes payable                                            |       |       | (2,398,515                                 | )          |       | (250,403                                   | )          |
| Net  cash used by financing activities                                                     |       |       | (2,398,515                                 | )          |       | (250,403                                   | )          |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| Net  decrease in cash                                                                      |       |       | (6,692,985                                 | )          |       | (12,308,255                                | )          |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| Cash and cash equivalents at:                                                              |       |       |                                       |       |       |                                       |       |
| Beginning of period                                                                        |       |       | 18,126,084                                 |       |       | 33,283,740                                 |       |
| End of period                                                                              |       | $          | 11,433,099                                 |       | $          | 20,975,485                                 |       |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| Supplemental disclosures of cash flow  information:                                        |       |       |                                       |       |       |                                       |       |
| Interest paid                                                                              |       | $          | 179,024                                    |       | $          | 77,854                                     |       |
| Income taxes paid                                                                          |       | $          | 15,755                                     |       | $          | 15,883                                     |       |
|                                                                                       |       |       |                                       |       |       |                                       |       |
| Supplemental schedule of noncash financing  activities:                                    |       |       |                                       |       |       |                                       |       |
| Preferred dividends declared                                                               |       | $          | 876,566                                    |       | $          | —                                     |       |
| Debt assumed to construct warehouse                                                        |       | $          | —                                     |       | $          | 1,362,602                                  |       |

 

 

See accompanyingnotes to condensed financial statements

 

3

----

 

 

**RETRACTABLETECHNOLOGIES, INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**(unaudited)**

 

 

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

 

**Businessof 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 ofpresentation**

 

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 SIGNIFICANTACCOUNTING POLICIES**

 

**Accountingestimates**

 

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 andcash 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.

 

**Accountsreceivable**

 

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

----

 

**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**

 

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

 

Duringthe first quarter of 2010, the Company recognized an impairment charge of$163,039 on equipment designed in connection with research and developmentactivities.  The Company will outsourcethe majority of this production through overseas manufacturers. Minimal cashflows, if any, are expected to be generated by this equipment.  Accordingly, the Company has reduced thecarrying value of this equipment to an estimated fair value of zero.  The Company’s management estimated the fairvalue of the equipment based on guidance established by the *Fair Value Measurements and Disclosures*Topic of the FASBAccounting Standards Codification.  Inthis instance, the Company’s management determined the impairment charge byutilizing observable market data, a Level 2 input under the FASB AccountingStandards Codification.  A Level 1 inputwould require quoted prices, which were not available in this matter.

 

**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.

 

5

----

 

**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 $4.7 million, or 29.7%of net sales in the six months ended June 30, 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 packaging materials.  There are multiple sources of thesematerials.  The Company obtained roughly 66.0%of its finished products in the first six months of 2010 from Double Dove, aChinese manufacturer.  In the event thatthe Company becomes unable to purchase such product from Double Dove, theCompany would need to find an alternate supplier for its 0.5mL insulin syringe,its 5mL and 10mL syringes and its autodisable syringe and increase domesticproduction for 1mL and 3mL syringes 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.  Contractualpricing allowances consist of: (i) rebates granted to distributors whoprovide tracking reports which show, among other things, the facility thatpurchased the products, and (ii) a provision for estimated contractualpricing allowances for products that the Company has not received trackingreports.  Rebates are recorded whenissued and are applied against the customer’s receivable balance.  The provision for contractual pricingallowances is reviewed at the end of each quarter and adjusted for changes inlevels of products for which there is no tracking report.  Additionally, if it becomes clear thattracking reports will not be provided by individual distributors, the provisionis further adjusted.  The estimatedcontractual allowance is netted against individual 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 are subjectto 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.

 

6

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**LitigationProceeds**

 

Proceeds from litigationsettlements will be recognized when realizable. Generally, realization is not reasonably assured and expected untilproceeds are collected.  Such amountswill be net of attorneys’ fees, court costs, and legal expenses.

 

**Marketingfees**

 

At June 30, 2010,accrued marketing fees to Abbott Laboratories (“Abbott”) were included in currentliabilities in the Condensed Balance Sheets. The Company settled its breach of contract suit against Abbott withregard to the sales and marketing agreement as of July 12, 2010.  As a result of the settlement, the accruedmarketing fees will not have to be paid. See **Note 5. COMMITMENTS AND CONTINGENCIES**for further discussion.

 

**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 filed for a tax refund utilizing its 2009 taxable losseswhich resulted in a $4.0 million refund received in the quarter ending September 30,2010.  The Company has established avaluation allowance for its net deferred tax asset as future taxable incomecannot be reasonably assured.  Penaltiesand interest 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 and six months ended June 30, 2010 and2009.  Accordingly basic loss per shareis equal to diluted earnings per share.

 

**Shippingand handling costs**

 

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

 

**Researchand development costs**

 

Research and developmentcosts are expensed as incurred.

 

**Share-basedcompensation**

 

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:

 

7

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| ** **                  | ** ** | **Three  Months  Ended  June 30, 2010** | ** ** | **Three  Months  Ended  June 30, 2009** | ** ** | **Six  Months  Ended  June 30, 2010** | ** ** | **Six  Months  Ended  June 30, 2009** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                        |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Cost  of sales              | $          | 91,446                                       | $          | 39,389                                       | $          | 182,891                                    | $          | 78,471                                     |       |
| Sales  and marketing        |       | 36,028                                       |       | 48,389                                       |       | 78,343                                     |       | 96,778                                     |       |
| Research  and development   |       | 14,129                                       |       | 6,317                                        |       | 28,259                                     |       | 12,634                                     |       |
| General  and administrative |       | 525,403                                      |       | 79,226                                       |       | 1,050,807                                  |       | 158,452                                    |       |
|                        | $          | 667,006                                      | $          | 173,321                                      | $          | 1,340,300                                  | $          | 346,335                                    |       |

 

**3.**                   **INVENTORIES**

 

Inventories consist ofthe following:

 
| ** **         | ** ** | **June 30,  2010** | ** ** | ** ** | **December 31,  2009** | ** ** |
|--------------------|------------|-------------------------|------------|------------|-----------------------------|------------|
| Raw  materials     | $          | 1,856,973               |       | $          | 2,424,818                   |       |
| Finished  goods    |       | 9,017,827               |       |       | 4,688,151                   |       |
|               |       | 10,874,800              |       |       | 7,112,969                   |       |
| Inventory  reserve |       | (205,600                | )          |       | (205,600                    | )          |
|               | $          | 10,669,200              |       | $          | 6,907,369                   |       |

 

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

 

TheCompany’s effective tax rate on the net loss before income taxes was 6.2% (benefit)and 1.6% (benefit) for the six months ended June 30, 2010 and June 30,2009, respectively.  This benefit is dueto a carryback of net operating loss for 2009 pursuant to a revision in the taxlaw.

 

**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 alleged fraud and breach of contract in connection with theNational Marketing and Distribution Agreement dated as of May 4, 2000,which was terminated on October 15, 2003. It sought damages which it estimated to be in millions of dollars oflost profits, out of pocket expenses, and other damages.  In addition, it sought 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.  On July 28, 2010,the Company entered into a settlement agreement with Abbott and Hospira, Inc.(“Hospira”), effective as of July 12, 2010 (the “Effective Date”), whichresolved all the above-mentioned claims and counterclaims between the Companyand Abbott or claims that accrued prior to the Effective Date.  The settlement agreement provides thatHospira shall deliver $6 million to the Company within 15 business days of theEffective Date, and Abbott waives its rights to any Series IV Class Bpreferred stock accrued dividends.  Inaddition, Hospira is granted an exclusive one-year option to negotiate alicensing agreement for certain uses of the Company’s Patient Safe® syringe.  In exchange for the option, Hospira shall paythe Company $2 million per quarter for four quarters, beginning three monthsfrom the Effective Date and every three months thereafter, for a total of $8million.  In the event a licensingagreement is entered into, any remaining portion of the option fee shall, whenpaid, be credited against royalties payable by Hospira to the Company then orin the future under the exclusive license.

 

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

 

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Division, alleginginfringement of another recently issued patent (7,351,224).  BD counterclaimed for non-infringement andinvalidity of the asserted patent.  TheCourt consolidated this case with the above-stated case filed in June 2007.  On November 9, 2009, the jury returned averdict finding that the patents asserted by the Company were valid andinfringed by BD and awarded $5,000,000 in damages.  Final judgment was entered on May 19,2010 for the Company and against BD’s counterclaims, ordering that the Companyrecover $5,000,000 plus prejudgment interest, and ordering a permanentinjunction for BD’s 1mL and 3mL Integra syringes until the expiration ofcertain patents.  However, the permanentinjunction is stayed for the longer of the exhaustion of an appeal of this caseor twelve months from May 19, 2010. BD has filed an appeal.  No trialdate has been set.

 

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 construction hearingon September 25, 2008 and issued its claims construction order on November 14,2008.  No trial date has been set.

 

**Item 2.****                             ****Management’s Discussion andAnalysis 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 future results,performance, or achievements expressed or implied by such forward-lookingstatements.  Such factors include, amongothers, our ability to maintain liquidity, our maintenance of patentprotection, the impact of current litigation (as it affects our costs as wellas market access), our ability to maintain favorable supplier arrangements andrelationships, our ability to quickly increase capacity in response to anincrease in demand, our ability to access the market, our ability to maintainor lower 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 and Company (“BD”), inproviding 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.

 

**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 hubcontamination.  Patient Safe®’s unique luer guard reduces the risk of luer tipcontact contamination and the risk of contamination of intravenous fluid.  We also manufacture and market safety IVcatheters and safety blood collection tube holders.  Both products have a retractable needle.  Safety syringes comprised 99.0% of our salesin the first six months of 2010.

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  In the third quarter of2009, we were awarded a contract by the Department of Health and HumanServices (“DHHS”) to supply a portion of the safety engineered syringes to beused in the U.S. efforts to vaccinate the U.S. population against the SwineFlu.  The impact on us was material. Sales to the DHHS comprised 24.4% of our revenues for the twelve monthsended December 31, 2009.  This program, which was estimated to runfrom August 2009 through March 2010, ended in December 2009.  We do not know if there will be a similarprogram in 2010.

 

9

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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 U.S.District Court found that BD’s 1mL and 3mL Integra syringes infringed on ourproducts and ordered a permanent injunction, but stayed such permanentinjunction until the later of one year or the exhaustion of an appeal of thecase.  Although we have made limitedprogress in some areas, such as the alternate care market, our volumes are notas high as they should be given the nature and quality of our products and thefederal and state legislation requiring the use of safe needle devices.

 

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

 

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, the products of such companies were found toinfringe our patents.  These verdicts mayhave increased the demand for our product. OMI was immediately enjoined from further sales of its products, but inthe case of BD syringes, the Court’s injunction was stayed pending appeal, sothat product remains in the market at this time.

 

In the event we continue to have only limited market access, and thecash provided by the litigation settlements and generated from operationsbecomes insufficient, 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.  We tooksuch actions at the end of the second quarter 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’swaiver 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 for the six months ended June 30, 2010 included inOperating expenses were reduced by $809,000 and 401(k) matching expensedeclined $53,000.  Other costs related tosteps taken last year to reduce costs include reductions of $85,000 forconsulting, $205,000 for travel and entertainment, and $70,000 for marketingexpense.  Additional molding continues inLittle Elm as a cost saving measure.  Thesemeasures will remain in place as long as Management deems them necessary.

 

Pursuant to a settlement agreement among us,Abbott Laboratories (“Abbott”), and Hospira, Inc. (“Hospira”) effectiveJuly 12, 2010 (the “Effective Date”), Hospira delivered $6 million to usin the third quarter of 2010. Also pursuant to this settlement agreement,Abbott waived its rights to any Series IV Class B preferred stockaccrued dividends. Additionally, Hospira was granted an exclusive one-yearoption to negotiate a licensing agreement forcertain uses of our Patient Safe® syringe. Inexchange for the option, Hospira shall pay us $2 million per quarter for fourquarters, beginning three months from the Effective Date and every three monthsthereafter, for a total of $8 million. In the event a licensing agreement isentered into, any remaining portion of the option fee shall, when paid, becredited against royalties payable by Hospira to us then or in the future underthe exclusive license agreement.

 

In the second quarter of 2010, we reached anagreement with our counsel, Locke Lord Bissell & Liddell, regardingfuture litigation expenditures that caps our litigation costs in exchange for acontingent fee interest. We believe this agreement serves both the short-termand long-term interests of the Company and will reduce the legal fee componentof our General and administrative costs and will impact our cash flow in apositive manner.

 

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 six months ended June 30, 2010, Double Dove manufacturedapproximately 66.0% of the units we produced. We believe we could make up any long-term disruption in these suppliesby utilizing more of the capacity at the Little Elm facility, except for the0.5mL insulin syringe, the 5mL and 10mL syringes, and the autodisable syringewhich altogether comprised about 6.2% of our revenues for the six months ended June 30,2010.

 

10

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BTMDpaid us $38,000 for royalties attributable to the six months ended June 30,2010.  This amount is included in Sales,net for the periods ended June 30, 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.

 

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 June 30, 2010 or 2009.

 

*Comparison of Three Months Ended June 30,2010 and June 30, 2009*

 

Domestic sales accounted for 97.3% and 85.6% of the net sales for thethree months ended June 30, 2010 and 2009, respectively.  International sales accounted for theremaining revenues.  Domestic revenuesincreased 47.3% principally due to higher volumes and higher average salesprices.  International revenues decreased75.9% due primarily to lower volumes. Overall, unit sales increased 22.9%. Domestic unit sales increased 59.2%, which may be attributable toseveral factors, including, but not limited to, recent favorable verdicts inour patent litigation trials and BD removing its 1mL Integra syringe from themarket.  International unit salesdecreased 81.6%, which may be due to our imposition of stricter guidelines inapproving international distributors. Domestic unit sales were 96.2% of total unit sales for the three monthsended June 30, 2010.

 

Gross profit increased primarily due to higher revenues.  The average cost of manufactured product soldper unit increased by 11.1% due to lower manufacturing costs being capitalizedin inventory, resulting from using the higher valued inventory in the Cost ofmanufactured product. Profit margins can fluctuate depending upon, among otherthings, the cost of product manufactured and the capitalized cost of productrecorded in inventory, as well as product sales mix.  Royalty expense increased 28% due to highergross sales.

 

Operating expenses increased 14.3%. The increase was due to an additional provision for rebates and stockoption expense, which was fully amortized in the second quarter of 2010.Compensation costs declined $528,000 and 401(k) matching expense declined$34,000.  Other related costs such astravel and entertainment, marketing expense, and consulting declined$182,000.  General and administrativecosts increased due primarily to the provision for rebates and stock option expense.The decrease in expense for Sales and marketing and Research and developmentwas due to lower compensation and other related reductions in costs.

 

Loss from operations increased 8.9% due principally to provision forrebates and stock option expense, mitigated by increased revenues and lowercosts.

 

Interest expense increased due to the decrease in capitalizedinterest.  Interest expense for the secondquarter of 2010 was $76,000.

 

The Company’s effective tax rate on the net loss before income taxeswas 10.9% (benefit) and 0% (benefit) for the three months ended June 30,2010 and June 30, 2009, respectively. The benefit is due to a carryback of our net operating loss for 2009pursuant to a revision in the tax law.

 

There are two charges to our Statement of Operations in the secondquarter of 2010 that are nonrecurring or are not typical of a manufacturingcompany.  These charges includelitigation costs and stock option expense (a noncash charge which has beenfully amortized).  Were it not for thesetwo charges, our Net loss applicable to common shareholders for the quarterwould have been approximately $833,000 and our Net loss would have

 

11

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beenapproximately $491,000.  There would beno federal income tax impact since we have net operating loss carryforwardswhich would have eliminated the tax obligation.

 

*Comparison of Six Months Ended June 30, 2010and June 30, 2009*

 

Domestic sales accounted for 92.3% and 82.4% of the net sales for thesix months ended June 30, 2010 and 2009, respectively.  International sales accounted for theremaining revenues.  Domestic revenuesincreased 62.0% principally due to higher volumes and higher average salesprices.  International revenues decreased37.0% due primarily to lower volumes. Overall, unit sales increased 25.3%. Domestic unit sales increased 53.5%, which may be attributable toseveral factors, including, but not limited to, recent favorable verdicts inour patent litigation trials and BD removing its 1mL Integra syringe from themarket.  International unit salesdecreased 42.8%, which may be due to our imposition of stricter guidelines inapproving international distributors. Domestic unit sales were 86.6% of total unit sales for the six monthsended June 30, 2010.

 

Gross profit increased primarily due to higher revenues.  The average cost of manufactured product soldper unit increased by 2.9% due to lower manufacturing costs being capitalizedin inventory, resulting from using the higher valued inventory in the Cost ofmanufactured product.  Profit margins canfluctuate depending upon, among other things, the cost of product manufacturedand the capitalized cost of product recorded in inventory, as well as productsales mix.  Royalty expense increased33.8% due to increased gross sales.

 

Operating expenses increased 10.6%. The increase was due to an increase in the provision for rebates, stockoption expense, and litigation costs, offset by the effect of cost cuttingmeasures taken in 2009.  Compensationcosts declined $809,000 and 401(k) matching expense declined $52,000.  Other related costs such as travel andentertainment, marketing expense, and consulting declined $360,000.  General and administrative costs increaseddue primarily to an increase in the provision for rebates, stock option expenseand litigation costs.  The decrease inexpense for Sales and marketing and Research and development were attributableto lower compensation and related costs.

 

Loss from operations decreased 23.6% due principally to higherrevenues.

 

Interest expense increased due to lower capitalized interest.  Interest expense for the six months ended June 30,2010 was $167,000.

 

The Company’s effective tax rate on the net loss before income taxeswas 6.2% (benefit) and 1.6% (benefit) for the six months ended June 30,2010 and June 30, 2009, respectively. This benefit is due to a carryback of our net operating loss for 2009 pursuantto a revision in the tax law.

 

There are two charges to our Statement ofOperations in the six months ended June 30, 2010 that are nonrecurring orare not typical of a manufacturing company. These charges include litigationcosts and stock option expense (a noncash charge which has been fullyamortized). Were it not for these two charges, our Net loss applicable tocommon shareholders for the quarter would have been approximately $800,000 andour Net loss would have been approximately $115,000. 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*

 

Our balance sheet remains strong with cash making up 24.6% of totalassets.  Working capital was $22.2million at June 30, 2010, a decrease of $3.9 million from December 31,2009.  The current ratio was 3.0 at December 31,2009 and 3.1 at June 30, 2010.  Thequick ratio was 2.5 at December 31, 2009 and 2.1 at June 30,2010.  We expect the cost cuttingmeasures described earlier to continue to mitigate the reduction in future cashbalances.

 

We expect to continue moving the manufacturing of piece parts to LittleElm as a cost saving measure.  Finishedgoods inventory increased 92.4% since December 31, 2009 because of a buildup related to flu season.

 

Approximately $4.3 million in cash flow in the first six months of 2010was used by operating activities.  Usesof cash were primarily for our net loss, increased inventory, and loweraccounts payable.  Our payment in thesecond quarter of $2,122,445 to Lewisville State Bank, a division of 1stInternational Bank (“1st International”), to pay off a loan that matured in March 2010had a material effect on the net decrease in cash.

 

**LIQUIDITY**

 

HistoricalSources of Liquidity

 

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

 

12

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InternalSources of Liquidity

 

*Margins and 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 estimatedto run from August 2009 through March 2010, ended in December 2009.  We do not know if there will be a similarprogram in 2010.

 

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 32.1%)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 allunits.  Domestic costs, such as indirectlabor and overhead, remain relatively constant. The number of units produced by the Company versus manufactured in Chinacan have a significant effect on the carrying costs of inventory as well asCost of sales.  We will continue toevaluate the appropriate mix of products manufactured domestically and thosemanufactured in China to achieve economic benefits as well as to maintain ourdomestic manufacturing capability. Currently, approximately 32.1%****ofour 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.

 

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*LicensingAgreements*

 

BTMDpaid us $38,000 for royalties attributable to the six months ended June 30,2010.  This amount is included in Sales,net for the periods ended June 30, 2010.

 

Pursuantto a settlement agreement among us, Abbott, and Hospira effective July 12,2010 (the “Effective Date”), Hospira was granted an exclusive one-year optionto negotiate a licensing agreement to produce and market our Patient Safe® syringe forcertain uses. In exchange for the option, Hospira shall pay us $2 million perquarter for four quarters, beginning three months from the Effective Date andevery three months thereafter, for a total of $8 million.  In the event a licensing agreement is enteredinto, any remaining portion of the option fee shall, when paid, be creditedagainst royalties payable by Hospira to us then or in the future under theexclusive license agreement.

 

*Cash Requirements*

 

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 the deferralof royalty payments.

 

ExternalSources of Liquidity

 

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 1st International, for $2,500,000, secured by the land andexisting buildings, which provided funding for the construction of the 47,250square foot warehouse placed in service in 2005.  This loan matured in late March 2010 andwe paid $2,122,445 to pay off the loan on April 23, 2010.  We may seek other financing to replace thisloan.

 

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  and the loan was renewed on December 10,2009 with a 20 year amortization and 10 year maturity.  The interest rate is 5.968%.

 

Pursuantto a settlement agreement among us, Abbott, and Hospira, Hospira delivered $6million to us in the third quarter of 2010. Also pursuant to this settlement agreement, Abbott waived its rights toany Series IV Class B preferred stock accrued dividends.

 

**CAPITALRESOURCES**

 

MaterialCommitments for Capital Expenditures

 

None.

 

Trendsin Capital Resources

 

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

 

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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.

 

**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 to replace thisloan.

 

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

 

No update.

 

**Item 4.       Controls and Procedures.**

 

DisclosureControls 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 officers, 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 tobe disclosed by us in our periodic reports is: i) recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms; and ii) accumulated andcommunicated to our Management, including our principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure. Based upon this evaluation, the CEO and CFO concluded that, as of June 30,2010, our disclosure controls and procedures were effective.

 

Changesin Internal Control Over Financial Reporting

 

There have been no changes during the second quarter of 2010 orsubsequent to June 30, 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.       Legal Proceedings.**

 

Please refer to Note 5 to the financial statements fora complete description of all legal proceedings.  The following material developments haveoccurred in our legal proceedings since the beginning of the period covered bythis report.

 

On July 28, 2010, we entered into a settlementagreement with Abbott and Hospira, effective as of July 12, 2010 (the “EffectiveDate”), which resolved all the claims and counterclaims between us and Abbottor claims that accrued prior to the Effective Date.  The settlement agreement provides thatHospira shall deliver $6 million to us within 15 business days of the EffectiveDate, and Abbott waives its rights to any Series IV Class B preferredstock accrued dividends.  In addition,Hospira is granted an exclusive one-year option to negotiate a licensingagreement for certain uses of our Patient Safe® syringe. In exchange for the option, Hospira shall pay us $2 million per quarterfor four quarters, beginning three months from the Effective Date and everythree months thereafter, for a total of $8 million.  In the event a licensing agreement is enteredinto, any remaining portion of the option fee shall, when paid, be creditedagainst royalties payable by Hospira to us then or in the future under the exclusive license agreement.

 

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In the patent litigation with BD, final judgment was entered on May 19,2010 in our favor and against BD’s counterclaims, ordering our recovery of$5,000,000 plus prejudgment interest, and ordering a permanent injunction forBD’s 1mL and 3mL Integra syringes until the expiration of certain patents.  However, the permanent injunction is stayedfor the longer of the exhaustion of an appeal of this case or twelve monthsfrom May 19, 2010.  BD has filed anappeal.  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 EquitySecurities and Use of Proceeds.**

 

Unregistered Sales ofEquity Securities and Use of Proceeds

 

None.

 

Purchases of EquitySecurities by Issuer and Affiliated Persons

 

None.

 

Working CapitalRestrictions and Limitations on the Payment of Dividends

 

A dividend in the aggregateamount of $876,565.75 was paid to the Series I Class B and Series IIClass B Convertible Preferred Shareholders on July 15, 2010.

 

The certificates of designation for each of the outstanding series of Class BConvertible Preferred Stock each currently provide that, if a dividend upon anyshares of Preferred Stock is in arrears, no dividends may be paid or declaredupon any stock ranking junior to such stock and generally no junior preferredstock may be redeemed.

 

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

 

Series III Class BConvertible Preferred Stock

 

As of the six monthsended June 30, 2010, the amount of dividends in arrears was $66,000 andthe total arrearage was $3,311,000.

 

Series IV Class BConvertible Preferred Stock

 

As of the six monthsended June 30, 2010, the amount of dividends in arrears was $276,000 andthe total arrearage was $7,859,000.

 

Series V Class BConvertible Preferred Stock

 

As of the six monthsended June 30, 2010, the amount of dividends in arrears was $198,000 andthe total arrearage was $3,892,000.

 

**Item 5.          Other Information.**

 

Our annual meeting of shareholders will be held on September 24,2010 at 10:00 a.m. Central time and we are soliciting the vote ofshareholders of Common Stock with regard to the election of Directors andamendments to the Articles of Incorporation. The Proxy Statement has been delivered via the notice and access method,meaning most Common Stockholders will only receive a one page noticenotifying them of where they can download copies of the proxy materials.  Shareholders desiring paper copies of theproxy materials may request them.

 

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# **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 |

 

 

**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:  August 16, 2010 |  RETRACTABLE  TECHNOLOGIES, INC. |
|-----------------------------|--------------------------------------------|
|                        | (Registrant)                               |   |
|                        |                                       |   |
|                        |                                       |   |
|                        |  BY:                                  | s/ Douglas W.  Cowan |
|                        |                                       | DOUGLAS W. COWAN  VICE PRESIDENT AND  CHIEF FINANCIAL OFFICER |
|                             |                                            |  |  |

 

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