** **

**UNITED STATES**

**SECURITIES AND 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 September 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: 001-16465**

 

**Retractable Technologies, Inc.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

**(972) 294-1010**

(Registrant’s telephone number, including area code)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was 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:

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13, or 15(d) of the  SecuritiesExchangeActof1934subsequenttothedistributionofsecuritiesunderaplanconfirmedbyacourt.  Yes  o  Noo

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 23,960,864 shares of Common Stock, nopar value, issued and outstanding on November 1, 2010.

 

 

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended September 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.** | **10** |
|                                            |   |   |
| **Item 3.**                                     | **Quantitative  and Qualitative Disclosures About Market Risk.** | **15** |
|                                            |   |   |
| **Item 4.**                                     | **Controls and  Procedures.** | **15** |
|                                            |   |   |
| **PART II—OTHER  INFORMATION**        |
|                                            |   |   |
| **Item 1.**                                     | **Legal Proceedings.** | **16** |
|                                            |   |   |
| **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 6.**                                     | **Exhibits.** | **17** |
|                                            |   |   |
| **SIGNATURES**                                  | **17** |

 

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements.**

 

**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **September 30, 2010** | ** ** | ** ** | ** **                      | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**                  | ** ** | ** ** | **December 31, 2009** | ** ** |
|                                            |       |                             |       |       |                            |       |
| **ASSETS**                                      | ** ** | ** **                       | ** ** | ** ** | ** **                      | ** ** |
| Current assets:                                 |       |                             |       |       |                            |       |
| Cash and cash equivalents                       | $          | 19,721,370                       |       | $          | 18,126,084                      |       |
| Accounts receivable, net                        |       | 6,855,090                        |       |       | 9,948,210                       |       |
| Inventories, net                                |       | 10,055,569                       |       |       | 6,907,369                       |       |
| Income taxes receivable                         |       | 16,024                           |       |       | 3,655,637                       |       |
| Other current assets                            |       | 326,320                          |       |       | 624,393                         |       |
| Total current assets                            |       | 36,974,373                       |       |       | 39,261,693                      |       |
|                                            |       |                             |       |       |                            |       |
| Property, plant, and equipment, net             |       | 13,034,099                       |       |       | 14,234,181                      |       |
| Intangible assets and other assets, net         |       | 412,845                          |       |       | 445,425                         |       |
| Total assets                                    | $          | 50,421,317                       |       | $          | 53,941,299                      |       |
|                                            |       |                             |       |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |                             |       |       | ** **                      |       |
| Current liabilities:                            |       |                             |       |       |                            |       |
| Accounts payable                                | $          | 2,225,824                        |       | $          | 6,997,310                       |       |
| Current portion of long-term debt               |       | 508,835                          |       |       | 2,628,652                       |       |
| Accrued compensation                            |       | 437,877                          |       |       | 561,484                         |       |
| Marketing fees payable                          |       | —                           |       |       | 1,419,760                       |       |
| Accrued royalties to shareholders               |       | 953,421                          |       |       | 843,327                         |       |
| Other accrued liabilities                       |       | 2,205,367                        |       |       | 745,460                         |       |
| Total current liabilities                       |       | 6,331,324                        |       |       | 13,195,993                      |       |
|                                            |       |                             |       |       |                            |       |
| Long-term debt, net of current maturities       |       | 4,439,738                        |       |       | 4,824,833                       |       |
| Total liabilities                               |       | 10,771,062                       |       |       | 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                      |       | 57,624,504                       |       |       | 57,089,153                      |       |
| Retained deficit                                |       | (20,259,515                      | )          |       | (23,453,946                     | )          |
| Total stockholders’ equity                 |       | 39,650,255                       |       |       | 35,920,473                      |       |
| Total liabilities and stockholders’ equity | $          | 50,421,317                       |       | $          | 53,941,299                      |       |

 

See accompanying notes to condensed financialstatements

 

1

----

 

**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSED STATEMENTS OFOPERATIONS**

**(unaudited)**

** **

** **
| ** **                                       | ** ** | **Three Months  Ended  September 30, 2010** | ** ** | ** ** | **Three Months  Ended  September 30, 2009** | ** ** | ** ** | **Nine Months  Ended  September 30, 2010** | ** ** | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Sales, net                                       | $          | 12,235,018                                                 |       | $          | 10,752,445                                                 |       | $          | 28,149,368                                                |       | $          | 21,763,523                                                |       |
| Cost of sales                                    |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Cost of manufactured product                     |       | 6,081,201                                                  |       |       | 7,034,384                                                  |       |       | 14,565,160                                                |       |       | 13,613,625                                                |       |
| Royalty expense to shareholders                  |       | 953,454                                                    |       |       | 782,335                                                    |       |       | 2,107,967                                                 |       |       | 1,645,230                                                 |       |
| Total cost of sales                              |       | 7,034,655                                                  |       |       | 7,816,719                                                  |       |       | 16,673,127                                                |       |       | 15,258,855                                                |       |
| Gross profit                                     |       | 5,200,363                                                  |       |       | 2,935,726                                                  |       |       | 11,476,241                                                |       |       | 6,504,668                                                 |       |
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Operating expenses:                              |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Sales and marketing                              |       | 1,140,151                                                  |       |       | 1,024,191                                                  |       |       | 2,946,128                                                 |       |       | 3,559,790                                                 |       |
| Research and development                         |       | 316,044                                                    |       |       | 195,753                                                    |       |       | 865,295                                                   |       |       | 826,479                                                   |       |
| General and administrative                       |       | 2,729,116                                                  |       |       | 5,264,302                                                  |       |       | 11,862,507                                                |       |       | 12,489,453                                                |       |
| Total operating expenses                         |       | 4,185,311                                                  |       |       | 6,484,246                                                  |       |       | 15,673,930                                                |       |       | 16,875,722                                                |       |
| Income (loss) from operations                    |       | 1,015,052                                                  |       |       | (3,548,520                                                 | )          |       | (4,197,689                                                | )          |       | (10,371,054                                               | )          |
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Interest and other income                        |       | 10,046                                                     |       |       | 14,176                                                     |       |       | 18,243                                                    |       |       | 54,359                                                    |       |
| Interest expense, net                            |       | (69,853                                                    | )          |       | —                                                     |       |       | (236,390                                                  | )          |       | —                                                    |       |
| Litigation settlements, net                      |       | 7,275,760                                                  |       |       | —                                                     |       |       | 7,275,760                                                 |       |       | —                                                    |       |
| Net income (loss) before income taxes            |       | 8,231,005                                                  |       |       | (3,534,344                                                 | )          |       | 2,859,924                                                 |       |       | (10,316,695                                               | )          |
| Benefit for income taxes                         |       | —                                                     |       |       | (100,027                                                   | )          |       | (334,507                                                  | )          |       | (205,373                                                  | )          |
| Net income (loss)                                |       | 8,231,005                                                  |       |       | (3,434,317                                                 | )          |       | 3,194,431                                                 |       |       | (10,111,322                                               | )          |
| Preferred stock dividend requirements            |       | (342,717                                                   | )          |       | (342,717                                                   | )          |       | (1,028,151                                                | )          |       | (1,028,151                                                | )          |
| Income (loss) applicable  to common stockholders | $          | 7,888,288                                                  |       | $          | (3,777,034                                                 | )          | $          | 2,166,280                                                 |       | $          | (11,139,473                                               | )          |
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Basic earnings (loss) per share                  | $          | 0.33                                                       |       | $          | (0.16                                                      | )          | $          | 0.09                                                      |       | $          | (0.47                                                     | )          |
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Diluted earnings (loss) per share                | $          | 0.29                                                       |       | $          | (0.16                                                      | )          | $          | 0.08                                                      |       | $          | (0.47                                                     | )          |
|                                             |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Weighted average common  shares outstanding:     |       |                                                       |       |       |                                                       |       |       |                                                      |       |       |                                                      |       |
| Basic                                            |       | 23,887,028                                                 |       |       | 23,803,397                                                 |       |       | 23,845,775                                                |       |       | 23,801,175                                                |       |
| Diluted                                          |       | 28,767,768                                                 |       |       | 23,803,397                                                 |       |       | 26,499,790                                                |       |       | 23,801,175                                                |       |

 

See accompanying notes to condensed financial statements

 

2

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**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 
| ** **                                                                                          | ** ** | ** ** | **Nine Months  Ended  September 30, 2010** | ** ** | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| **Cash flows from operating  activities**                                                           |       |       |                                                      |       |       |                                                      |       |
| Net income (loss)                                                                                   |       | $          | 3,194,431                                                 |       | $          | (10,111,322                                               | )          |
| Adjustments to reconcile net income (loss) to net  cash provided by (used by) operating activities: |       |       |                                                      |       |       |                                                      |       |
| Depreciation and amortization                                                                       |       |       | 1,169,293                                                 |       |       | 1,079,954                                                 |       |
| Stock option compensation                                                                           |       |       | 1,340,300                                                 |       |       | 1,329,566                                                 |       |
| Reserve for non-contractual deductions                                                              |       |       | 850,000                                                   |       |       | —                                                    |       |
| Provisions for doubtful accounts                                                                    |       |       | 65,280                                                    |       |       | 182,000                                                   |       |
| Accreted interest                                                                                   |       |       | 24,394                                                    |       |       | 33,459                                                    |       |
| Impairment of assets                                                                                |       |       | 163,039                                                   |       |       | —                                                    |       |
| (Increase) decrease in assets                                                                       |       |       |                                                      |       |       |                                                      |       |
| Inventories                                                                                         |       |       | (3,148,200                                                | )          |       | (1,800,648                                                | )          |
| Accounts receivable                                                                                 |       |       | 2,177,840                                                 |       |       | (3,004,610                                                | )          |
| Income taxes receivable                                                                             |       |       | 3,639,613                                                 |       |       | (16,846                                                   | )          |
| Other current assets                                                                                |       |       | 298,073                                                   |       |       | 264,041                                                   |       |
| Increase (decrease) in liabilities                                                                  |       |       |                                                      |       |       |                                                      |       |
| Accounts payable                                                                                    |       |       | (4,771,486                                                | )          |       | (1,414,650                                                | )          |
| Other accrued liabilities                                                                           |       |       | 1,446,394                                                 |       |       | 438,340                                                   |       |
| Marketing fees payable                                                                              |       |       | (1,419,760                                                | )          |       | —                                                    |       |
| Income taxes payable                                                                                |       |       | —                                                    |       |       | (103,744                                                  | )          |
| Net cash provided (used) by operating activities                                                    |       |       | 5,029,211                                                 |       |       | (13,124,460                                               | )          |
| ** **                                                                                          |       |       |                                                      |       |       |                                                      |       |
| **Cash flows from investing  activities**                                                           |       |       |                                                      |       |       |                                                      |       |
| Purchase of property, plant, and equipment                                                          |       |       | (99,667                                                   | )          |       | (2,301,359                                                | )          |
| Net cash used by investing activities                                                               |       |       | (99,667                                                   | )          |       | (2,301,359                                                | )          |
| ** **                                                                                          |       |       |                                                      |       |       |                                                      |       |
| **Cash flows from financing  activities**                                                           |       |       |                                                      |       |       |                                                      |       |
| Repayments of long-term debt and notes payable                                                      |       |       | (2,529,308                                                | )          |       | (373,987                                                  | )          |
| Proceeds from the exercise of stock options                                                         |       |       | 71,616                                                    |       |       | 19,000                                                    |       |
| Payment of dividends on Series I and II  Class B Convertible Preferred Stock              |       |       | (876,566                                                  | )          |       | —                                                    |       |
| Net cash used by financing activities                                                               |       |       | (3,334,258                                                | )          |       | (354,987                                                  | )          |
|                                                                                                |       |       |                                                      |       |       |                                                      |       |
| Net increase (decrease) in cash                                                                     |       |       | 1,595,286                                                 |       |       | (15,780,806                                               | )          |
|                                                                                                |       |       |                                                      |       |       |                                                      |       |
| Cash and cash equivalents at:                                                                       |       |       |                                                      |       |       |                                                      |       |
| Beginning of period                                                                                 |       |       | 18,126,084                                                |       |       | 33,283,740                                                |       |
| End of period                                                                                       |       | $          | 19,721,370                                                |       | $          | 17,502,934                                                |       |
|                                                                                                |       |       |                                                      |       |       |                                                      |       |
| Supplemental disclosures of cash flow information:                                                  |       |       |                                                      |       |       |                                                      |       |
| Interest paid                                                                                       |       | $          | 250,861                                                   |       | $          | 117,451                                                   |       |
| Income taxes paid                                                                                   |       | $          | 15,960                                                    |       | $          | 15,883                                                    |       |
|                                                                                                |       |       |                                                      |       |       |                                                      |       |
| Supplemental disclosure of non-cash investing and  financing activities:                            |       |       |                                                      |       |       |                                                      |       |
| Forgiveness of royalties by a shareholder                                                           |       | $          | —                                                    |       | $          | 682,335                                                   |       |
| Debt assumed to construct warehouse                                                                 |       | $          | —                                                    |       | $          | 1,362,602                                                 |       |

 

See accompanying notes to condensed financial statements

 

3

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**RETRACTABLE TECHNOLOGIES, INC.**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.**                    **BUSINESS OFTHE COMPANY AND BASIS OF PRESENTATION**

 

**Business of the Company**

 

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

 

**Basis of presentation**

 

The accompanying condensed financial statements areunaudited and, in the opinion of Management, reflect all adjustments that arenecessary for a fair presentation of the financial position and results ofoperations for the periods presented. All such adjustments are of a normal and recurring nature.  The results of operations for the periodspresented are not necessarily indicative of the results to be expected for theentire year.  The condensed financialstatements should be read in conjunction with the financial statementdisclosures contained in the Company’s audited financial statementsincorporated into its Form 10-K filed on March 31, 2010 for the yearended December 31, 2009 and Form 10-K/A filed on April 7, 2010for the same period.  Certain prior yearamounts have been reclassified to conform with the current period’spresentation.

 

**2.**                    **SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Accounting estimates**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles (“GAAP”) requiresManagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ significantly from those estimates.

 

**Cash and cash equivalents**

 

For purposes of reporting cash flows, cash and cashequivalents include unrestricted cash, money market accounts, and investmentswith original maturities of three months or less.

 

**Accounts receivable**

 

The Company records trade receivables when revenueis recognized.  No product has beenconsigned to customers.  The Company’sallowance for doubtful accounts is primarily determined by review of specifictrade receivables.  Those accounts thatare doubtful of collection are included in the allowance.  An additional allowance has been establishedbased on a percentage of receivables outstanding.  These provisions are reviewed to determinethe adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when thereis certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not beenmade within contract terms.

 

4

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**Inventories**

 

Inventories are valued at the lower of cost ormarket, with cost being determined using actual average cost.  The Company compares the average cost to themarket price and records the lower value. Management considers such factors as the amount of inventory on hand andin the distribution channel, estimated time to sell such inventory, the shelflife of inventory, and current market conditions when determining excess orobsolete inventories.  A reserve isestablished for any excess or obsolete inventories or they may be written off.

 

**Property, plant, and equipment**

 

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

 

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

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

 

**Long-lived assets**

 

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

 

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 the majority of this production throughoverseas manufacturers. Minimal cash flows, if any, are expected to begenerated by this equipment. Accordingly, the Company has reduced the carrying value of this equipmentto an estimated fair value of zero.  TheCompany’s management estimated the fair value of the equipment based onguidance established by the *Fair Value Measurementsand Disclosures*Topic of the Financial Accounting Standards Board (“FASB”)Accounting 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.

 

The Company’s remaining property, plant, andequipment primarily consists of buildings, land, assembly equipment forsyringes, molding machines, molds, office equipment, furniture, andfixtures.  There has been no impairmentcharge against the assembly equipment since the Company continues tomanufacture a significant portion of 1cc and 3cc syringes at the Company’sLittle Elm facility which results in sufficient future cash flows to recoup thenet book value of all property, plant, and equipment.

 

**Intangible assets**

 

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

 

5

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**Financial instruments**

 

The Company estimates the fair market value offinancial instruments through the use of public market prices, quotes fromfinancial institutions, and other available information.  Judgment is required in interpreting data todevelop estimates of market value and, accordingly, amounts are not necessarilyindicative of the amounts that could be realized in a current marketexchange.  Short-term financial instruments,including cash and cash equivalents, accounts receivable, accounts payable, andother liabilities, consist primarily of instruments without extendedmaturities, the fair value of which, based on Management’s estimates, equalstheir recorded values.

 

**Concentration risks**

 

The Company’s financial instruments exposed toconcentrations of credit risk consist primarily of cash, cash equivalents, andaccounts receivable.  Cash balances, someof which exceed federally insured limits, are maintained in financialinstitutions; however, Management believes the institutions are of high creditquality.  The majority of accountsreceivable are due from companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.  The Company had a high concentration of saleswith three significant customers accounting for approximately $11.5 million, or40.8% of net sales in the nine months ended September 30, 2010.

 

The Company manufactures syringes in Little Elm,Texas as well as utilizing manufacturers in China.  The Company purchases most of its productcomponents from single suppliers, including needle adhesives and packagingmaterials.  There are multiple sources ofthese materials.  The Company obtainedroughly 64.9% of its finished products in the first nine months of 2010 fromDouble Dove, a Chinese manufacturer.  Inthe event that the Company becomes unable to purchase such product from DoubleDove, the Company would need to find an alternate supplier for its 0.5mLinsulin syringe, its 5mL and 10mL syringes and its autodisable syringe andincrease domestic production for 1mL and 3mL syringes to avoid a disruption insupply.

 

**Revenue recognition**

 

Revenue is recognized for sales when title and riskof ownership passes to the customer, generally upon shipment.  Under certain contracts, revenue is recordedon the basis of sales price to distributors, less contractual pricingallowances.  Contractual pricingallowances consist of: (i) rebates granted to distributors who providetracking reports which show, among other things, the facility that purchasedthe products, and (ii) a provision for estimated contractual pricingallowances for products that the Company has not received tracking reports.  Rebates are recorded when issued and areapplied 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 estimated contractualallowance is netted against individual distributor’s accounts receivablebalances for financial reporting purposes. The resulting net balance is reflected in accounts receivable oraccounts payable, as appropriate.  Theterms and conditions of contractual pricing allowances are governed bycontracts between the Company and its distributors.  Revenue for shipments directly to end-usersis recognized when title and risk of ownership pass from the Company.  Any product shipped or distributed for evaluationpurposes is expensed.

 

Certain distributors have taken rebates to whichthey are not entitled, such as utilizing a rebate for products not purchaseddirectly from the Company.  The Companyhas established a reserve for the collectibility of these amounts.  The expense for the reserve is recorded in Operatingexpense, General and administrative.  Thereserve for such non-contractual deductions is a reduction of accountsreceivable.

 

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

 

6

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The Company’s return policy also provides that acustomer may return product that is overstocked.  Overstocking returns are limited to two timesin each 12-month period up to 1% of distributor’s total purchase of productsfor the prior 12-month period.  Allproduct overstocks and returns are subject to inspection and acceptance by theCompany.

 

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

 

The Company requires certain distributors to make aprepayment prior to beginning production or shipment of their order.  Distributors may apply such prepayments totheir outstanding invoices or pay the invoice and continue to carryforward the depositfor future orders.  Such amounts areincluded in Other accrued liabilities on the Condensed Balance Sheets and areshown in Note 5, Other Accrued Liabilities.

 

The Company records an allowance for estimatedreturns as a reduction to Accounts receivable and Gross sales.  Historically, returns have been less than0.5% of net sales.

 

**Litigation settlements**

 

Proceeds from litigation settlements are recognizedwhen realizable.  Generally, realizationis not reasonably assured and expected until proceeds are collected.  Pursuant to a settlement agreement among theCompany, Abbott Laboratories (“Abbott”), and Hospira, Inc. (“Hospira”),Hospira delivered $6 million to the Company in the third quarter of 2010. TheCompany reduced its Litigation settlements by $144,000 attributable to anunpaid Abbott invoice.  Abbott alsowaived its rights to any Series IV Class B preferred stock dividends.

 

**Marketing fees**

 

In prior periods, Marketing fees payable to Abbottwere included in current liabilities in the Condensed Balance Sheets.  In connection with the settlement discussedabove, Marketing fees payable recorded in previous periods will not have to bepaid.  The reversal of this accrual isincluded in Litigation settlements, net on the Condensed Statements ofOperations.

 

**Income taxes**

 

The Company evaluates tax positions taken orexpected to be taken in a tax return for recognition in the financialstatements based on whether it is “more-likely-than-not” that a tax positionwill be sustained based upon the technical merits of the position.  Measurement of the tax position is based uponthe largest amount of benefit that is greater than 50% likely of being realizedupon ultimate settlement.

 

The Company provides for deferred income taxesthrough utilizing an asset and liability approach for financial accounting andreporting based on the tax effects of differences between the financialstatement and tax bases of assets and liabilities, based on enacted ratesexpected to be in effect when such differences reverse in future periods.  Deferred tax assets are periodically reviewedfor realizability.  Under recent tax lawchanges, companies are allowed to carryback taxable losses from either 2008 or2009.  The Company filed for a tax refundutilizing its 2009 taxable losses which resulted in a $4.0 million refundreceived in the quarter ending September 30, 2010.  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.

 

**Earnings per share**

 

The Company computes basic earnings per share bydividing net earnings for the period (adjusted for any cumulative dividends forthe period) by the weighted average number of common shares outstanding duringthe period.  Diluted earnings per share (“EPS”)includes the determinants of basic EPS and, in addition, reflects the dilutiveeffect, if any, of the common stock deliverable pursuant to stock options orcommon stock 

 

7

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issuable upon the conversion of convertiblepreferred stock and convertible debt. The potential dilution, if any, is shown on the following schedule.

 
| ** **                                                                   | ** ** | **Three Months  Ended  September 30, 2010** | ** ** | ** ** | **Three Months  Ended  September 30, 2009** | ** ** | ** ** | **Nine Months  Ended  September 30, 2010** | ** ** | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|-------------------------------------------------------|------------|------------|------------------------------------------------------|------------|------------|------------------------------------------------------|------------|
| Net income (loss)                                                            | $          | 8,231,005                                             |       | $          | (3,434,317                                            | )          | $          | 3,194,431                                            |       | $          | (10,111,322                                          | )          |
| Preferred dividend requirements                                              |       | (342,717                                              | )          |       | (342,717                                              | )          |       | (1,028,151                                           | )          |       | (1,028,151                                           | )          |
| Earnings (loss) available to common shareholders                             |       | 7,888,288                                             |       |       | (3,777,034                                            | )          |       | 2,166,280                                            |       |       | (11,139,473                                          | )          |
| Effect of dilutive securities:                                               |       |                                                  |       |       |                                                  |       |       |                                                 |       |       |                                                 |       |
| Conversion of preferred stock                                                |       | 342,717                                               |       |       | —                                                |       |       | —                                               |       |       | —                                               |       |
| Convertible debt interest and loan fees                                      |       | (18,887                                               | )          |       | —                                                |       |       | (843                                                 | )          |       | —                                               |       |
| Earnings (loss) available to common shareholders  after assumed conversions  | $          | 8,212,118                                             |       | $          | (3,777,034                                            | )          | $          | 2,165,437                                            |       | $          | (11,139,473                                          | )          |
| Average common shares outstanding                                            |       | 23,887,028                                            |       |       | 23,803,397                                            |       |       | 23,845,775                                           |       |       | 23,801,175                                           |       |
| Dilutive stock equivalents from stock options                                |       | 2,342,119                                             |       |       | —                                                |       |       | 2,361,349                                            |       |       | —                                               |       |
| Shares issuable upon conversion of preferred stock                           |       | 2,285,266                                             |       |       | —                                                |       |       | —                                               |       |       | —                                               |       |
| Shares issuable upon conversion of convertible  debt                         |       | 212,279                                               |       |       | —                                                |       |       | 212,279                                              |       |       | —                                               |       |
| Average common and common equivalent shares  outstanding - assuming dilution |       | 28,726,692                                            |       |       | 23,803,397                                            |       |       | 26,419,403                                           |       |       | 23,801,175                                           |       |
| Basic earnings per share                                                     | $          | 0.33                                                  |       | $          | (0.16                                                 | )          | $          | 0.09                                                 |       | $          | (0.47                                                | )          |
| Diluted earnings per share                                                   | $          | 0.29                                                  |       | $          | (0.16                                                 | )          | $          | 0.08                                                 |       | $          | (0.47                                                | )          |

 

**Shipping and handling costs**

 

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

 

**Research and development costs**

 

Research and development costs are expensed asincurred.

 

**Share-based compensation**

 

The Company’s share-based payments are accounted forusing the fair value method.  The Companyrecords share-based compensation expense on a straight-line basis over therequisite service period.  The Companyincurred the following share-based compensation costs:

 

8

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| ** **                  | ** ** | **Three Months  Ended  September 30, 2010** | ** ** | **Three Months  Ended  September 30, 2009** | ** ** | **Nine Months  Ended  September 30, 2010** | ** ** | **Nine Months  Ended  September 30, 2009** | ** ** |
|-----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Cost  of sales              | $          | —                                                     | $          | 123,030                                                    | $          | 182,891                                                   | $          | 201,501                                                   |       |
|                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Sales  and marketing        |       | —                                                     |       | 74,414                                                     |       | 78,343                                                    |       | 171,192                                                   |       |
|                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Research  and development   |       | —                                                     |       | 16,903                                                     |       | 28,259                                                    |       | 29,537                                                    |       |
|                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| General  and administrative |       | —                                                     |       | 768,884                                                    |       | 1,050,807                                                 |       | 927,336                                                   |       |
|                        | $     | —                                                     | $          | 983,231                                                    | $          | 1,340,300                                                 | $          | 1,329,566                                                 |       |

 

All stock options were fully vested at June 30, 2010;therefore, all stock option expense was fully recognized at June 30, 2010.

 

**3.**                **INVENTORIES**

 

Inventories consist of the following:

 
| ** **         | ** ** | **September 30, 2010** | ** ** | ** ** | **December 31, 2009** | ** ** |
|--------------------|------------|----------------------------------|------------|------------|---------------------------------|------------|
| Raw  materials     | $     | 1,938,260                        |       | $     | 2,424,818                       |       |
| Finished  goods    |       | 8,322,909                        |       |       | 4,688,151                       |       |
|               |       | 10,261,169                       |       |       | 7,112,969                       |       |
| Inventory  reserve |       | (205,600                         | )          |       | (205,600                        | )          |
|               | $     | 10,055,569                       |       | $     | 6,907,369                       |       |

 

**4.**                    **INCOMETAXES**

 

The Company’s effective tax rate on the net income(loss) before income taxes was 11.7% (benefit) and 2.0% (benefit) for the ninemonths ended September 30, 2010 and September 30, 2009,respectively.  This benefit is due to acarryback of net operating loss for 2009 pursuant to a revision in the tax law.

** **

**5.**                    **OTHERACCRUED LIABILITIES**

 

Other accrued liabilities consist of the following:

 
| ** **                  | ** ** | **September 30, 2010** | ** ** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------|------------|----------------------------------|------------|------------|---------------------------------|------------|
| Prepayments  from customers | $          | 1,694,951                        |       | $          | 499,777                         |       |
| Accrued  property taxes     |       | 330,828                          |       |       | —                          |       |
| Accrued  professional fees  |       | 114,880                          |       |       | 191,416                         |       |
| Other  accrued expenses     |       | 64,708                           |       |       | 54,267                          |       |
|                        | $          | 2,205,367                        |       | $          | 745,460                         |       |

 

Prepayments from customers increased due to largerinternational orders that require prepayments.

 

**6.**                    **COMMITMENTSAND CONTINGENCIES**

 

In June 2010, Becton Dickinson and Company (“BD”)filed an appeal in the U.S. Court of Appeals for the Federal Circuit appealinga final judgment entered on May 19, 2010 for the Company and against BD’scounterclaims in patent litigation.  Suchfinal judgment ordered that the Company recover $5,000,000 plus prejudgmentinterest, and ordered a permanent injunction for BD’s 1mL and 3mL Integrasyringes until the expiration of certain patents.  The permanent injunction was stayed for thelonger of the exhaustion of the appeal of the district court’s case or twelvemonths from May 19, 2010.  Briefingfor the appeal will be completed in November 2010 with oral argumentlikely to take place in 2011.  At thistime, a final decision by the appellate court is anticipated to occur in 2011.

 

9

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In May 2010, the Company and an officer’s suitagainst BD in the U.S. District Court for the Eastern District of Texas,Marshall Division alleging violations of antitrust acts, false advertising,product disparagement, tortious interference, and unfair competition wasreopened.  The Company and an officerfiled a Second Amended Complaint on July 23, 2010 setting forth additionaldetail regarding the allegations of BD’s illegal conduct.  BD filed a motion to dismiss and briefing isin progress.  A scheduling conference hasbeen set for December 8, 2010 and it is possible that a trial date will beset at that time.

 

In September 2007, BD and MDC InvestmentHoldings, Inc. (“MDC”) sued the Company in the United States DistrictCourt for the Eastern District of Texas, Texarkana Division, initially allegingthat the Company is infringing two U.S. patents of MDC (6,179,812 and7,090,656) that are licensed to BD. BD and MDC seek injunctive relief andunspecified damages.  The Companycounterclaimed for declarations of non-infringement, invalidity, andunenforceability of the asserted patents. The plaintiffs subsequently dropped allegations with regard to patentno. 7,090,656 and the Company subsequently dropped its counterclaims forunenforceability of the asserted patents. The Court conducted a claims construction hearing on September 25,2008 and issued its claims construction order on November 14, 2008.  No trial date has been set.

 

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

 

**FORWARD-LOOKING STATEMENT WARNING**

 

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,” “intends,”“expects,” and similar such words constitute forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act.  Any forward-looking statements involve knownand unknown risks, uncertainties, and other factors that may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by suchforward-looking statements.  Such factorsinclude, among others, our ability to maintain liquidity, our maintenance ofpatent protection, the impact of current litigation, our ability to maintainfavorable supplier arrangements and relationships, our ability to quicklyincrease capacity in response to an increase in demand, our ability to accessthe market, our ability to maintain or lower costs, our ability to continue tofinance research and development as well as operations and expansion ofproduction, the increased interest of larger market players, specificallyBecton Dickinson and Company (“BD”), in providing devices to the safety market,and other factors referenced in Item1A. Risk Factors in Part II. Given these uncertainties, undue reliance should not be placed onforward-looking statements.

 

**MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Overview*

 

We have been manufacturing and marketing ourproducts into the marketplace since 1997. Safety syringes comprised 98.5% of our sales in the first nine months of2010.  We currently provide other safetymedical products in addition to safety syringe products.  One such product is the Patient Safe® syringe, which is uniquely designed to reducethe risk of bloodstream infections resulting from catheter hubcontamination.  Patient Safe®’s unique luer guard reducesthe risk of luer tip contact contamination and the risk of contamination ofintravenous fluid.  We also manufactureand market safety IV catheters and safety blood collection tube holders.  Both products have a retractable needle.

 

Historically, unit saleshave increased in the latter part of the year due, in part, to the demand forsyringes during the flu season.

 

Our products have been and continue to bedistributed nationally and internationally through numerous distributors.  Although we have made limited progress insome areas, such as the alternate care market, our volumes are not as high asthey should be given the nature and quality of our products and the federal andstate legislation requiring the use of safe needle devices.  The alternate care market is composed ofalternate care facilities that provide long-term nursing care out-patientsurgery, emergency care, and physician services.  The fact that our progress is limited isprincipally due to exclusive marketing practices engaged in by BD, the dominantmaker and seller of disposable syringes and other needle products, which practiceshave blocked us from access to the market. We believe that BD’s 

 

10

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monopolisticbusiness practices continue despite a prior settlement in 2004 foranticompetitive practices and a patent infringement verdict in 2010.  A suit against BD is currently pendingalleging violations of state and federal antitrust acts and false advertising.

 

We continue to pursue various strategies to havebetter access to the hospital market, as well as other markets, includingattempting to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products, and, when necessary,litigation.

 

We sued Occupational and Medical Innovations Limited(“OMI”) in April 2008 and separately sued BD in June 2007 for claimsof patent infringement (see Item 3. Legal Proceedings of the Form 10-K),and in March 2010 and May 2010, respectively, the products of suchcompanies were found to infringe our patents. These judgments may have increased the demand for our product.  OMI was immediately enjoined from furthersales of its products, but in the case of BD syringes, the Court’s injunctionwas stayed pending appeal, so that product remains in the market at this time.** **However, BDvoluntarily removed its 1cc syringes from the market, which may have positivelyaffected our sales.

 

In the event we continue to have only limited marketaccess, and the cash provided by the litigation settlements and generated fromoperations becomes insufficient, we would take additional cost cutting measuresto reduce cash requirements.  Suchmeasures could result in the reduction of units being produced, the reductionof workforce, the reduction of salaries of officers and other nonhourlyemployees, 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, weannounced that in the interest of the long-term survival of the Company wewould reorganize some of the Company’s functions and implement staffreductions, all in order to minimize our cash expenditures and conserve ourresources.  Although certain salaryreductions remain in place, we granted one-time payments to our employees tooffset such salary reductions in the third quarter of 2010.  We also granted one-time payments to ourindependent Directors in the third quarter of 2010.  Our workforce was reduced by 16% on July 1,2009.  However, due to the increase inproduction from sales to the Department of Health and Human Services, weincreased the workforce at the Little Elm facility beginning in the latter partof the third quarter of 2009.  The effectof Mr. Shaw’s waiver of $1,000,000 in royalties was fully realized in2009.  Salaries for all personnel above acertain salary level were cut by 10% in 2009 (subject to contract rights).  As a result of the cost cutting measures,compensation costs for the nine months ended September 30, 2010 includedin Operating expenses were reduced by $930,000 and 401 (k) matching expensedeclined $77,000.  Other costs related tosteps taken last year to reduce costs include reductions of $126,000 forconsulting, $193,000 for travel and entertainment, and $71,000 for marketingexpense for the nine months ended September 30, 2010.

 

We are bringing additional molding operations toLittle Elm as a cost saving measure.  Wecontinue to focus on methods of upgrading our manufacturing capability andefficiency in order to reduce costs.

 

Pursuant to a settlement agreement among us, AbbottLaboratories (“Abbott”), and Hospira, Inc. (“Hospira”) effective July 12,2010 (the “Effective Date”), Hospira delivered $6 million to us in the thirdquarter of 2010.  Also pursuant to thissettlement agreement, Abbott waived its rights to any Series IV Class Bpreferred stock dividends.  The marketingfee of $1,419,760 and payment of an Abbott invoice of $144,000 due to theCompany were also waived.  Additionally,Hospira was granted an exclusive one-year option to negotiate a licensingagreement for certain 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 is entered into, any remainingportion of the option fee shall, when paid, be credited against royaltiespayable by Hospira to us.  In the thirdquarter of 2010, we granted bonuses to certain officers and employees inrecognition of work leading to the Abbott settlement.

 

In the second quarter of 2010, we reached anagreement with our counsel, Locke Lord Bissell & Liddell, regardingfuture litigation expenditures that caps certain of our litigation costs inexchange for a contingent fee interest. We believe this agreement serves both the short-term and long-terminterests of the Company and will reduce the legal fee component of our Generaland administrative costs and will impact our cash flow in a positive manner.

 

11

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Product purchases from Double Dove, a Chinesemanufacturer, have enabled us to increase manufacturing capacity with littlecapital outlay and have provided a competitive manufacturing cost.  In the nine months ended September 30,2010, Double Dove manufactured approximately 64.9% of the units weproduced.  We believe we could make upany long-term disruption in these purchases by utilizing more of the capacityat the Little Elm facility, except for the 0.5mL insulin syringe, the 5mL and10mL syringes, and the autodisable syringe which altogether comprised about7.0% of our revenues for the nine months ended September 30, 2010.

 

With increased volumes, our manufacturing unit costshave generally tended to decline.  Factorsthat could affect our unit costs include increases in costs by third partymanufacturers, changing production volumes, costs of petroleum products, andtransportation costs.  Increases in suchcosts may not be recoverable through price increases of our products.

 

The following discussion may contain trendinformation and other forward-looking statements that involve a number of risksand uncertainties.  Our actual futureresults could differ materially from our historical results of operations andthose discussed in any forward-looking statements.  Variances have been rounded for ease ofreading.  All period references are tothe periods ended September 30, 2010 or 2009.

 

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

 

Domestic sales accounted for 80.1% and 84.8% of thenet sales for the three months ended September 30, 2010 and 2009,respectively.  International salesaccounted for the remaining revenues. Domestic revenues increased 7.5% principally due to higher average salesprices.  International revenues increased48.8% due primarily to higher volumes. Overall, unit sales increased 2.7%. Domestic unit sales decreased 8.9%, which may be attributable to areduction in flu vaccine being administered. International unit sales increased 38.4%, which may be due to the lowerinternational sales last year due to increased domestic demand by theDepartment of Health and Human Services during the same period.  Domestic unit sales were 67.0% of total unitsales for the three months ended September 30, 2010.

 

Gross profit increased primarily due to higherrevenues and lower unit manufacturing costs. The average cost of manufactured product sold per unit decreased by15.8% due to lower piece part prices due to increasing our molding operationsat the Little Elm facility and a significant increase in the number of unitsproduced, thereby reducing the unit costs attributable to fixed costs.  Profit margins can fluctuate depending upon,among other things, the Cost of manufactured product and the capitalized costof product recorded in inventory, as well as product sales mix.  Royalty expense increased 21.9% due to highergross revenue.

 

Operating expenses decreased 35.5%.  The decrease was due to lower litigationcosts and lower stock option expense, mitigated by amounts paid to employees whohad a salary reduction last year.  Thelower litigation costs are the result of an agreement between us and ourcounsel to cap certain litigation fees. This is the first quarter that the full effect of the agreement is beingrealized.

 

Operating income was $1.0 million compared to anoperating loss for the same period last year of $3.5 million.

 

Interest expense increased due to no interest beingcapitalized for the current period.

 

Litigation settlements, net reflect certainprovisions of our settlement with Abbott and Hospira pursuant to which wereceived a payment of $6.0 million.  Inaddition, Abbott waived a $1.4 million marketing fee and an invoice due fromAbbott to the Company was waived.

 

The Company’s effective tax rate on the net income(loss) before income taxes was zero percent and 2.8% (benefit) for the threemonths ended September 30, 2010 and September 30, 2009, respectively.  The benefit in 2009 is due to a carryback ofour net operating loss for 2009 pursuant to a revision in the tax law.

 

12

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*Comparison of Nine Months Ended September 30, 2010 and September 30,2009*

 

Domestic sales accounted for 87.0% and 83.6% of thenet sales for the nine months ended September 30, 2010 and 2009,respectively.  International salesaccounted for the remaining revenues. Domestic revenues increased 34.7% principally due to higher average salesprices.  International revenues increased2.2% due primarily to higher average prices. Overall, unit sales increased 14.2%. Domestic unit sales increased 21.7%, which may be attributable to fluseason purchases earlier in the year. International unit sales decreased 6.2%. Domestic unit sales were 77.9% of total unit sales for the nine monthsended September 30, 2010.

 

Gross profit increased primarily due to higherrevenues and lower unit manufacturing costs. The average cost of manufactured product sold per unit decreased by 6.3%due to lower piece part prices due to increasing our molding operations at theLittle Elm facility and a significant increase in the number of units produced,thereby reducing the unit costs attributable to fixed costs.  Profit margins can fluctuate depending upon,among other things, the Cost of manufactured product and the capitalized costof product recorded in inventory, as well as product sales mix.  Royalty expense increased 28.1% due to highergross revenue.

 

Operating expenses decreased 7.1%.  The decrease was due to lower litigationcosts and lower salary levels, along with reduced travel and entertainment,consulting, and marketing expense.  Thesereductions were mitigated by amounts paid to those employees who had a salaryreduction last year.  The lowerlitigation costs are the result of an agreement between us and our counsel tocap certain litigation fees.

 

Loss from operations decreased 59.5% due principallyto increased gross profit and reduced expenses.

 

Interest expense increased due to no interest beingcapitalized for the current period.

 

Litigation settlements, net reflect certainprovisions of our settlement with Abbott and Hospira pursuant to which wereceived a payment of $6.0 million.  Inaddition, Abbott waived a $1.4 million marketing fee and an invoice due fromAbbott to the Company was waived.

 

The Company’s effective tax rate on the net income(loss) before income taxes was 11.7% (benefit) and 2.0% (benefit) for the ninemonths ended September 30, 2010 and September 30, 2009,respectively.   This benefit is due to acarryback of our net operating loss for 2009 pursuant to a revision in the taxlaw.

 

*Discussion of Balance Sheet and Statement of Cash Flow Items*

 

Our balance sheet remains strong with cash making up39.1% of total assets.  Working capitalwas $30.6 million at September 30, 2010, an increase of $4.6 million from December 31,2009.

 

We expect to continue moving the manufacturing ofpiece parts to Little Elm as a cost saving measure.  Finished goods inventory increased 77.5%since December 31, 2009 because of our preparation for flu season.

 

Approximately $5.0 million in cash flow in the firstnine months of 2010 was provided by operating activities.  Provisions of cash, in addition to netincome, were accounts receivable and the payment to us of a $4.0 millionfederal tax refund.  Uses of cash foroperating activities were primarily for inventories and accounts payable.  Prepayments from customers increased due tolarger international orders that require prepayments.

 

**LIQUIDITY**

 

Historical Sources of Liquidity

 

We have historically funded operations primarilyfrom the proceeds from revenues, private placements, loans, and litigationsettlements.

 

13

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Internal Sources of Liquidity

 

*Margins and Market Access*

 

To achieve break-even quarters consistently, we needminimal access to hospital markets which has been difficult to obtain due tothe monopolistic marketplace which was the subject of our initial lawsuit andnow also included in our second antitrust lawsuit against BD. ** **Wewill continue to attempt to gain access to the market through our salesefforts, innovative technology, the introduction of new products, and, when necessary,litigation.

 

We continue to focus on methods of upgrading ourmanufacturing capability and efficiency in order to reduce costs.

 

Fluctuations in the cost and availability of rawmaterials and inventory and our ability to maintain favorable supplierarrangements and relationships could result in the need to manufacture all (asopposed to 33.4%) of our products in the U.S. This could temporarily increase unit costs as we ramp up domesticproduction.

 

The mix of domestic and international sales affectsthe average sales price of our products. Generally, the higher the ratio of domestic sales to internationalsales, the higher the average sales price will be.  Typically international sales are shippeddirectly from China to the customer. Purchases of product manufactured in China, if available, usuallydecrease the average cost of manufacture for all units.  Domestic costs, such as indirect labor andoverhead, 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.

 

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

 

*Seasonality*

 

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

 

*Licensing Agreements*

 

Pursuant to a settlement agreement among us, Abbott,and Hospira effective July 12, 2010 (the “Effective Date”), Hospira wasgranted an exclusive one-year option to negotiate a licensing agreement toproduce and market our Patient Safe® syringe forcertain uses.  In exchange for theoption, Hospira shall pay us $2 million per quarter for four quarters,beginning three months from the Effective Date and every three monthsthereafter, for a total of $8 million. In the event a licensing agreement is entered into, any remainingportion of the option fee shall, when paid, be credited against royaltiespayable by Hospira to the Company.

 

We are working with BTMD to renew its license agreement.

 

*Cash Requirements*

 

Due to funds received from prior litigationsettlements and income, we have sufficient cash reserves and intend to rely onoperations, cash reserves, and debt financing as the primary ongoing sources ofcash.  In the event we continue to haveonly limited market access and cash generated from operations becomesinsufficient to support operations, we would take additional cost cuttingmeasures to reduce cash requirements. Such measures could result in the reduction of units being produced, thereduction of workforce, the reduction of salaries of officers and othernonhourly employees, and the deferral of royalty payments.

 

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External Sources of Liquidity

 

We have obtained several loans from our inception,which have, together with the proceeds from the sales of equities andlitigation efforts, enabled us to pursue development and production of ourproducts.  Given the current economicconditions, our ability to obtain additional funds through loans isuncertain.  Furthermore, the shareholderspreviously authorized an additional 5,000,000 shares of a Class CPreferred Stock that could, if necessary, be designated and used to raise fundsthrough the sale of equity.  Due to thecurrent market price of our Common Stock, it is unlikely we would choose toraise funds by the sale of equity.

 

We obtained a loan from 1st International, for$2,500,000, secured by the land and existing buildings, which provided fundingfor the construction of the 47,250 square foot warehouse placed in service in2005.  This loan matured in late March 2010and we paid $2,122,445 to pay off the loan on April 23, 2010.

 

On August 29, 2008, we obtained a $4,210,000interim 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%.

 

Pursuant to a settlement agreement among us, Abbott,and Hospira, Hospira delivered $6 million to us in the third quarter of2010.  Also pursuant to this settlementagreement, Abbott waived its rights to any Series IV Class Bpreferred stock dividends.  The marketingfee of $1,419,760 and payment of an Abbott invoice of $144,000 due to theCompany were also waived.

 

**CAPITAL RESOURCES**

 

Trends in Capital Resources

 

Interest expense will increase due to the reductionof capitalized interest at the present time. It may also be affected by additional loans or rising interestrates.  Interest income may continue tobe negatively affected by lower interest rates and our prior movement of cashto 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 by the land and existing buildings, which provided fundingfor the construction of the 47,250 square foot warehouse placed in service in2005.  This loan matured in late March 2010and we paid $2,122,445 to pay off the loan on April 23, 2010.

 

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

 

No update.

 

**Item 4.****                      ****Controlsand Procedures.**

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) of theSecurities Exchange Act of 1934, Management, with the participation of ourPresident, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”),and our Vice President and Chief Financial Officer, Douglas W. Cowan (the “CFO”),acting in their capacities as our principal executive and principal financialofficers, evaluated the effectiveness of our disclosure controls andprocedures, as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934.  The term disclosure controls and procedures**means controls and otherprocedures 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

 

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disclosure.Based upon this evaluation, the CEO and CFO concluded that, as of September 30,2010, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes during the third quarterof 2010 or subsequent to September 30, 2010 in our internal control overfinancial reporting that has materially affected or is reasonably likely tomaterially affect our internal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

**Item 1.****                      ****LegalProceedings.**

 

Please refer to Note 6 to the financial statementsfor a complete description of all legal proceedings.

 

**Item 1A.****             ****RiskFactors.**

 

There were no material changes in the Risk Factorsapplicable to the Company as set forth in our Form 10-K annual report for2009 which was filed on March 31, 2010, and which is available on EDGAR.

 

**Item 2.****                      ****UnregisteredSales of Equity Securities and Use of Proceeds.**

 

Working Capital Restrictions and Limitations on the Payment ofDividends

 

The certificates of designation for each of the outstandingseries of Class B Convertible Preferred Stock each currently provide that,if a dividend upon any shares of Preferred Stock is in arrears, no dividendsmay be paid or declared upon any stock ranking junior to such stock andgenerally no junior preferred stock may be redeemed.  However, under certain conditions, and forcertain Series of Class B Convertible Preferred Stock, we maypurchase junior preferred stock even when dividends are in arrears.

 

**Item 3.****                      ****DefaultsUpon Senior Securities.**

 

Series I Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2010,the amount of dividends in arrears was $18,000 and the total arrearage was$18,000.

 

Series II Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2010,the amount of dividends in arrears was $54,000 and the total arrearage was$54,000.

 

Series III Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2010,the amount of dividends in arrears was $98,000 and the total arrearage was$3,343,000.

 

Series IV Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2010,the amount of dividends in arrears was $414,000 and the total arrearage was$5,844,000.  The total dividend arrearagehas been reduced due to the Abbott settlement whereby Abbott has foregone itsrights to its dividends.

 

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Series V Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2010,the amount of dividends in arrears was $297,000 and the total arrearage was$3,991,000.

 

**Item 6.****                      ****Exhibits.**

 
| Exhibit No.   |   | Description  of Document                                                                                                                         |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                             |
| 3(i) and 4(v) |   | Restated Certificate of Formation with Certificates of Designation,  Preferences, Rights and Limitations of Class B Preferred Stock (all Series) |
|               |   |                                                                                                                                             |
| 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 the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| DATE:       November 15,  2010 |  RETRACTABLE  TECHNOLOGIES, INC. |
|------------------------------------------------------------------------|--------------------------------------------|
|                                                                   | (Registrant)                               |
|                                                                   |                                       |   |
|                                                                   |                                       |   |
|                                                                   |  BY:                                  | /s/ Douglas W. Cowan |
|                                                                   |                                       | DOUGLAS W. COWAN

VICE  PRESIDENT, CHIEF FINANCIAL

OFFICER,  AND CHIEF ACCOUNTING

OFFICER |

 

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