Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

**(Mark One)**

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

 

**For thequarterly period ended June 30, 2009**

 

**or**

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

 

**For the transition periodfrom          to**

 

**Commission file number:  000-30885**

** **

**RetractableTechnologies, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                                       |   | **75-2599762**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **511 Lobo Lane**                                               |   |                                  |
| **Little Elm, Texas**                                           |   | **75068-0009**                        |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

**(972) 294-1010**

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such 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

 

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

 

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

 

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

 

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURINGTHE PRECEDING FIVE YEARS:

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 23,800,064 shares of Common Stock, no par value,issued and outstanding on July 31, 2009.

 

 

 

----

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**RETRACTABLETECHNOLOGIES, INC.**

**FORM 10-Q**

**Forthe Quarterly Period Ended June 30, 2009**

** **

**TABLEOF CONTENTS**

 

**PART I—FINANCIALINFORMATION**

 
| **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**                                 | **16**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 4.**                                  | **Controls and  Procedures**                                                                    | **16**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **PART II—OTHER  INFORMATION**     | ** **                                                                                      |
|                                         | ** **                                                                                      | ** ** |
| **Item 1.**                                  | **Legal Proceedings**                                                                           | **16**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 1A.**                                 | **Risk Factors**                                                                                | **17**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 2.**                                  | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                | **18**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 3.**                                  | **Defaults  Upon Senior Securities**                                                            | **18**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 4.**                                  | **Submission  of Matters to a Vote of Security Holders**                                        | **18**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 5.**                                  | **Other Information**                                                                           | **18**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **Item 6.**                                  | **Exhibits**                                                                                    | **19**     |
| ** **                                   | ** **                                                                                      | ** ** |
| **SIGNATURES**                               | **20**                                                                                          |

 

Tableof Contents

 

**PART I—FINANCIALINFORMATION**

 

**Item 1.        Financial Statements.**

 

**RETRACTABLETECHNOLOGIES, INC.**

## **CONDENSED BALANCE SHEETS**

 

 
| ** **                                      | ** ** | **June 30, 2009** | ** ** | ** **                 | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**        | ** ** | **December 31, 2008** | ** ** |
|                                            |       |                   |       |                       |       |
| **ASSETS**                                      | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current assets:                                 |       |                   |       |                       |       |
| Cash and cash equivalents                       |       | $                      | 20,975,485 |                       | $          | 33,283,740 |   |
| Accounts receivable, net                        |       | 2,613,909              |       | 3,288,942                  |       |
| Inventories, net                                |       | 10,292,680             |       | 6,641,532                  |       |
| Income taxes receivable                         |       | 111,360                |       | 6,576                      |       |
| Other current assets                            |       | 696,119                |       | 400,113                    |       |
| Total current assets                            |       | 34,689,553             |       | 43,620,903                 |       |
|                                            |       |                   |       |                       |       |
| Property, plant, and equipment, net             |       | 17,143,504             |       | 14,435,667                 |       |
| Intangible assets, net                          |       | 457,395                |       | 470,115                    |       |
| Other assets                                    |       | 9,750                  |       | 18,750                     |       |
| Total assets                                    |       | $                      | 52,300,202 |                       | $          | 58,545,435 |   |
|                                            |       |                   |       |                       |       |
|                                            |       |                   |       |                       |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**  |       |                   | ** ** | ** **                 | ** ** |
| Current liabilities:                            |       |                   |       |                       |       |
| Accounts payable                                |       | $                      | 4,938,929  |                       | $          | 6,144,435 |   |
| Current portion of long-term debt               |       | 2,556,729              |       | 451,865                    |       |
| Accrued compensation                            |       | 656,160                |       | 650,704                    |       |
| Marketing fees payable                          |       | 1,419,760              |       | 1,419,760                  |       |
| Accrued royalties to shareholders               |       | 429,063                |       | 620,987                    |       |
| Other accrued liabilities                       |       | 1,195,210              |       | 852,602                    |       |
| Income taxes payable                            |       | 103,319                |       | 103,744                    |       |
| Total current liabilities                       |       | 11,299,170             |       | 10,244,097                 |       |
|                                            |       |                   |       |                       |       |
| Long-term debt, net of current maturities       |       | 5,125,899              |       | 6,095,535                  |       |
| Total liabilities                               |       | 16,425,069             |       | 16,339,632                 |       |
|                                            |       |                   |       |                       |       |
| 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                      |       | 54,298,518             |       | 53,952,183                 |       |
| Retained deficit                                |       | (20,708,651            | )          | (14,031,646                | )          |
| Total stockholders’ equity                 |       | 35,875,133             |       | 42,205,803                 |       |
| Total liabilities and stockholders’ equity |       | $                      | 52,300,202 |                       | $          | 58,545,435 |   |

 

See accompanying notes tocondensed financial statements

 

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**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

 

 
| ** **                                 | ** ** | **Three Months********Ended********June 30,  2009** | ** ** | **Three Months********Ended********June 30,  2008** | ** ** | **Six Months********Ended********June 30,  2009** | ** ** | **Six Months********Ended********June 30,  2008** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Sales, net                                 |       | $                                                        | 5,752,613  |                                                     | $          | 6,474,227                                              |       | $                                                      | 11,011,078 |   | $ | 11,789,382 |   |
| Cost of sales                              |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Cost of manufactured product               |       | 2,983,784                                                |       | 3,035,014                                                |       | 6,579,241                                              |       | 6,631,927                                              |       |
| Royalty expense to shareholders            |       | 429,063                                                  |       | 463,269                                                  |       | 862,895                                                |       | 895,780                                                |       |
| Total cost of sales                        |       | 3,412,847                                                |       | 3,498,283                                                |       | 7,442,136                                              |       | 7,527,707                                              |       |
| Gross profit                               |       | 2,339,766                                                |       | 2,975,944                                                |       | 3,568,942                                              |       | 4,261,675                                              |       |
|                                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Operating expenses:                        |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Sales and marketing                        |       | 1,399,932                                                |       | 1,301,002                                                |       | 2,535,599                                              |       | 2,468,910                                              |       |
| Research and development                   |       | 352,365                                                  |       | 267,324                                                  |       | 630,726                                                |       | 532,832                                                |       |
| General and administrative                 |       | 3,368,279                                                |       | 2,459,853                                                |       | 7,225,151                                              |       | 5,388,433                                              |       |
| Total operating expenses                   |       | 5,120,576                                                |       | 4,028,179                                                |       | 10,391,476                                             |       | 8,390,175                                              |       |
| Loss from operations                       |       | (2,780,810                                               | )          | (1,052,235                                               | )          | (6,822,534                                             | )          | (4,128,500                                             | )          |
|                                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Interest and other income                  |       | 11,446                                                   |       | 241,449                                                  |       | 40,183                                                 |       | 495,118                                                |       |
| Interest expense, net                      |       | —                                                   |       | (22,269                                                  | )          | —                                                 |       | (63,268                                                | )          |
| Net loss before income taxes               |       | (2,769,364                                               | )          | (833,055                                                 | )          | (6,782,351                                             | )          | (3,696,650                                             | )          |
| Provision (benefit) for income taxes       |       | —                                                   |       | —                                                   |       | (105,346                                               | )          | —                                                 |       |
| Net loss                                   |       | (2,769,364                                               | )          | (833,055                                                 | )          | (6,677,005                                             | )          | (3,696,650                                             | )          |
| Preferred stock dividend requirements      |       | (342,717                                                 | )          | (342,717                                                 | )          | (685,434                                               | )          | (687,585                                               | )          |
| Loss applicable to common shareholders     |       | $                                                        | (3,112,081 | )                                                        | $          | (1,175,772                                             | )          | $                                                      | (7,362,439 | ) | $ | (4,384,235 | ) |
|                                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Loss per share – basic and diluted    |       | $                                                        | (0.13      | )                                                        | $          | (0.05                                                  | )          | $                                                      | (0.31      | ) | $ | (0.18 | ) |
|                                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Weighted average common shares outstanding |       | 23,800,064                                               |       | 23,800,064                                               |       | 23,800,064                                             |       | 23,789,068                                             |       |

 

See accompanying notes to condensed financial statements

 

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**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

 

 
| ** **                                                                                 | ** ** | **Six Months********Ended********June 30,  2009** | ** **  | **Six Months********Ended********June 30,  2008** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|-------------|--------------------------------------------------------|------------|
| **Cash flows from  operating activities**                                                  |       |                                                   |        |                                                   |       |
| Net loss                                                                                   |       | $                                                      | (6,677,005) |                                                   | $          | (3,696,650 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used by) operating activities: |       |                                                   |        |                                                   |       |
| Depreciation and amortization                                                              |       | 678,986                                                |        | 700,539                                                |       |
| Capitalized interest                                                                       |       | (100,884                                               | )           | (96,094                                                | )          |
| Share-based compensation                                                                   |       | 346,335                                                |        | —                                                 |       |
| Provisions for doubtful accounts                                                           |       | —                                                 |        | 112,976                                                |       |
| Accreted interest                                                                          |       | 23,030                                                 |        | 28,539                                                 |       |
| (Increase) decrease in assets:                                                             |       |                                                   |        |                                                   |       |
| Inventories                                                                                |       | (3,651,148                                             | )           | (388,900                                               | )          |
| Accounts receivable                                                                        |       | 675,033                                                |        | (1,216,136                                             | )          |
| Income taxes receivable                                                                    |       | (104,784                                               | )           | 2,345,041                                              |       |
| Other current assets                                                                       |       | (296,006                                               | )           | (100,328                                               | )          |
| Increase (decrease) in liabilities:                                                        |       |                                                   |        |                                                   |       |
| Accounts payable                                                                           |       | (1,205,506                                             | )           | (2,100,500                                             | )          |
| Other accrued liabilities                                                                  |       | 156,140                                                |        | 27,053                                                 |       |
| Income taxes payable                                                                       |       | (425                                                   | )           | —                                                 |       |
| Net cash used by operating activities                                                      |       | (10,156,234                                            | )           | (4,384,460                                             | )          |
| ** **                                                                                 |       |                                                   |        |                                                   |       |
| **Cash flows from investing  activities**                                                  |       |                                                   |        |                                                   |       |
| Purchase of property, plant, and equipment                                                 |       | (1,901,618                                             | )           | (1,073,938                                             | )          |
| Acquisitions of patents, trademarks, licenses and  intangibles                             |       | —                                                 |        | (9,825                                                 | )          |
| Liquidation of investment in LLC                                                           |       | —                                                 |        | 497,690                                                |       |
| Net cash used by investing activities                                                      |       | (1,901,618                                             | )           | (586,073                                               | )          |
| ** **                                                                                 |       |                                                   |        |                                                   |       |
| **Cash flows from financing  activities**                                                  |       |                                                   |        |                                                   |       |
| Repayments of long-term debt and notes payable                                             |       | (250,403                                               | )           | (240,610                                               | )          |
| Net cash used by financing activities                                                      |       | (250,403                                               | )           | (240,610                                               | )          |
|                                                                                       |       |                                                   |        |                                                   |       |
| Net decrease in cash                                                                       |       | (12,308,255                                            | )           | (5,211,143                                             | )          |
|                                                                                       |       |                                                   |        |                                                   |       |
| Cash and cash equivalents at:                                                              |       |                                                   |        |                                                   |       |
| Beginning of period                                                                        |       | 33,283,740                                             |        | 40,507,431                                             |       |
| End of period                                                                              |       | $                                                      | 20,975,485  |                                                   | $          | 35,296,288 |   |
|                                                                                       |       |                                                   |        |                                                   |       |
| Supplemental disclosures of cash flow information:                                         |       |                                                   |        |                                                   |       |
| Interest paid                                                                              |       | $                                                      | 77,854      |                                                   | $          | 130,823 |   |
| Income taxes paid                                                                          |       | $                                                      | 15,883      |                                                   | $          | — |   |
|                                                                                       |       |                                                   |        |                                                   |       |
| Supplemental schedule of noncash financing  activities:                                    |       |                                                   |        |                                                   |       |
| Debt assumed to construct warehouse                                                        |       | $                                                      | 1,362,602   |                                                   | $          | — |   |

 

See accompanying notes to condensed financial statements

 

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**RETRACTABLETECHNOLOGIES, INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

**(unaudited)**

 

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

 

**Business of the Company**

 

RetractableTechnologies, Inc. (the “Company”) was incorporated in Texas on May 9,1994, and designs, develops, manufactures and markets safety syringes and othersafety medical products for the healthcare profession.  The Company began to develop its manufacturingoperations in 1995.  The Company’smanufacturing and administrative facilities are located in Little Elm,Texas.  The Company’s primary productswith Notice of Substantial Equivalence to the FDA are the VanishPoint® 0.5cc insulin syringe; 1cc tuberculin, insulin,and allergy antigen syringes; the 3cc, 5cc, and 10cc syringes; the 0.5ccautodisable syringe; the small diameter tube adapter; the blood collection tubeholder; the allergy tray; the IV safety catheter; and the Patient SafeTMsyringe.

 

**Basis of presentation**

 

Theaccompanying condensed financial statements are unaudited and, in the opinionof Management, reflect all adjustments that are necessary for a fairpresentation of the financial position and results of operations for theperiods presented.  All such adjustmentsare of a normal and recurring nature. The results of operations for the periods presented are not necessarilyindicative of the results to be expected for the entire year.  The condensed financial statements should beread in conjunction with the financial statement disclosures contained in theCompany’s audited financial statements incorporated into its Form 10-Kfiled on March 31, 2009 for the year ended December 31, 2008.  Certain prior year amounts have beenreclassified to conform with the current period’s presentation.

 

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

 

**Accounting estimates**

 

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

 

**Cash and cash equivalents**

 

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

 

**Accounts receivable**

 

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

 

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**Inventories**

 

Inventoriesare valued at the lower of cost or market, with cost being determined using astandard cost method, which approximates average cost.  A reserve is established for any excess orobsolete inventories.

 

**Property, plant, and equipment**

 

Property,plant, and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations asincurred.  Cost includes majorexpenditures for improvements and replacements which extend useful lives orincrease capacity and interest cost associated with significant capitaladditions.  Gains or losses from propertydisposals are included in income.

 

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

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

 

**Long-lived assets**

 

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

 

**Intangible assets**

 

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

 

**Financial instruments**

 

Effective January 1, 2008, the Company adoptedStatement of Financial Accounting Standard (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosure requirements about fairvalue measurements. In accordance with Financial Accounting Standards Board (“FASB”)Staff Position FAS 157-2, *Effective Date ofFASB Statement No. 157* (FSP 157-2), the Company deferred theadoption of SFAS 157 for its nonfinancial assets and nonfinancial liabilities,except those items recognized or disclosed at fair value on an annual or morefrequent recurring basis, until January 1, 2009.  The adoption of SFAS 157 did not have amaterial impact on the Company’s fair value measurements.

 

The Company estimates the fair market value offinancial instruments through the use of public market prices, quotes fromfinancial institutions and other available information.  Judgment is required in interpreting data todevelop estimates of market value and, accordingly, amounts are not necessarilyindicative of the amounts that could be realized in a current marketexchange.  Short-term financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable and other liabilities, consist primarily of instruments withoutextended maturities, the fair value of which, based on Management’s estimates,equals their recorded values.

 

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**Concentration risks**

 

The Company’s financial instruments exposed to concentrationsof credit risk consist primarily of cash, cash equivalents, and accountsreceivable.  Cash balances, some of whichexceed federally insured limits, are maintained in financial institutions;however, Management believes the institutions are of high credit quality.  The majority of accounts receivable are duefrom companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.  The Company had a high concentration of saleswith one (1) significant customer, accounting for approximately $940,000,or 16.3% of net sales in the second quarter of 2009.

 

TheCompany manufactures syringes in Little Elm, Texas as well as utilizingmanufacturers in China.  The Company purchasesmost of its product components from single suppliers, including needleadhesives and packaging materials.  Thereare multiple sources of these materials. The Company obtained roughly 73.0% of its finished products in the firstsix months of 2009 through Double Dove, a Chinese manufacturer.  In the event that the Company becomes unableto purchase such product from Double Dove, the Company would need to find analternate supplier for its 0.5cc insulin syringe, its 5cc and 10cc syringes andits autodisable syringe and increase domestic production for 1cc and 3ccsyringes to avoid a disruption in supply.

 

**Revenue recognition**

 

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

 

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

 

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

 

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

 

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

 

**Marketing fees**

 

Undera sales and marketing agreement with Abbott Laboratories (“Abbott”), theCompany paid marketing fees until the Company terminated the contract forbreach.  The contracted services were toinclude participation in promotional activities, development of educational andpromotional materials, representation 

 

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attrade shows, clinical demonstrations, inservicing and training, and trackingreports detailing the placement of the Company’s products to end-users.  Marketing fees were accrued at the time ofthe sale of product to Abbott.  Thesefees were paid after Abbott provided the Company a tracking report of productsales to end-users.  These costs wereincluded in Sales and marketing expense in the Condensed Statements ofOperations.  No marketing fees have beenaccrued since October 15, 2003, the date the National Marketing andDistribution Agreement with Abbott was terminated.  The Company filed suit against Abbott in August 2005for breach of contract.  The DistrictCourt has issued a scheduling order calling for trial in May 2010. ** **See **Note 5. COMMITMENTS AND CONTINGENCIES** forfurther discussion.

 

**Income taxes**

 

TheCompany provides for deferred income taxes in accordance with SFAS No. 109,*Accounting for Income Taxes* (“SFAS109”).  SFAS 109 requires an asset andliability approach for financial accounting and reporting for income taxesbased on the tax effects of differences between the financial statement and taxbases of assets and liabilities, based on enacted rates expected to be ineffect when such differences reverse in future periods.  Deferred tax assets are periodically reviewedfor realizability.  The Company hadsufficient taxable income from prior carryback years to realize all of itstaxable losses through December 31, 2006. Taxable losses for 2007 and thereafter are subject to losscarryforwards.  The Company hasestablished a valuation allowance for its net deferred tax asset as futuretaxable income cannot be reasonably assured. Penalties and interest on uncertain tax positions are classified asincome taxes in the Condensed Statements of Operations.

 

**Earnings per share**

 

TheCompany has adopted SFAS No. 128, *EarningsPer Share*, which establishes standards for computing and presentingearnings per share.  Basic earnings pershare is computed by dividing net earnings for the period (adjusted for anycumulative dividends for the period) by the weighted average number of commonshares outstanding during the period. The Company’s potentially dilutive Common Stock equivalents, consistingof options, convertible debt and convertible Preferred Stock, are allantidilutive for the three and six months ended June 30, 2009 and2008.  Accordingly basic loss per shareis equal to diluted earnings per share.

 

**Shipping and handling costs**

 

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

 

**Research and development costs**

 

Researchand development costs are expensed as incurred.

 

**Share-based compensation**

 

TheCompany’s share-based payments are accounted for in accordance with theprovisions of SFAS No. 123 (Revised 2004) (“SFAS 123 R”), *Share-Based Payment*, using the fair valuemethod.  The Company records share-basedcompensation expense on a straight-line basis over the requisite serviceperiod.  In accordance with thedisclosure requirements of SFAS 123 R, the Company incurred the followingshare-based compensation costs:

 
| ** **          | ** ** | **Three  Months********Ended********June 30, 2009** | ** ** | **Three  Months********Ended********June 30, 2008** | ** ** | **Six  Months********Ended********June 30, 2009** | ** ** | **Six  Months********Ended********June 30, 2008** | ** ** |
|---------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Cost of sales       |       | $                                                        | 39,389     |                                                     | $          | —                                                 |       | $                                                      | 78,471     |   | $ | — |   |
|                |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| Sales and marketing |       | 48,389                                                   |       | —                                                   |       | 96,778                                                 |       | —                                                 |       |
|                     |            |                                                          |            |                                                          |            |                                                        |            |                                                        |            |  |  |  |  |

 

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| ** **                 | ** ** | **Three  Months********Ended********June 30, 2009** | ** ** | **Three  Months********Ended********June 30, 2008** | ** ** | **Six  Months********Ended********June 30, 2009** | ** ** | **Six  Months********Ended********June 30, 2008** | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Research and development   |       | 6,317                                                    |       | —                                                   |       | 12,634                                                 |       | —                                                 |       |
|                       |       |                                                     |       |                                                     |       |                                                   |       |                                                   |       |
| General and administrative |       | 79,226                                                   |       | —                                                   |       | 158,452                                                |       | —                                                 |       |
|                       |       | $                                                        | 173,321    |                                                     | $          | —                                                 |       | $                                                      | 346,335    |   | $ | — |   |
|                            |            |                                                          |            |                                                          |            |                                                        |            |                                                        |            |  |  |  |  |

 

**Recent Pronouncements**

 

In April 2008, the Financial AccountingStandards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 142-3, “*Determination of the Useful Life of Intangible Assets*”.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“*Goodwill and Other Intangible Assets*”(“SFAS 142”).  The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141R, and other GAAP.  FSP FAS 142-3 was effective for the Companybeginning January 1, 2009.  Theadoption of FSP FAS 142-3 did not have a material impact on the Company’sfinancial position, results of operations, or cash flows.

 

In May 2009, the FASB issued Statement No. 165,*Subsequent Events*, whichestablishes general standards of accounting for and disclosure of eventsoccurring after the balance sheet date, but before the financial statements areissued or available to be issued. Statement No. 165 also requires entities to disclose the datethrough which it has evaluated subsequent events and the basis for thatdate.  The Company adopted Statement No. 165for its second quarter ended June 30, 2009.  Its adoption did not have a material impacton the Company’s financial position, results of operations or cash flows.  Refer to **Note6 SUBSEQUENT EVENTS** for more information regarding the Company’sevaluation of subsequent events.

 

The FASB issued Statement No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles*(the “Codification”)*.* The Codification will become the source of authoritative US GAAPrecognized by the FASB to be applied by nongovernmental entities and willsupersede all non-SEC accounting and reporting standards.  This statement is effective for financialstatements ending after September 15, 2009 and is not expected to have amaterial impact on the Company’s financial statements.

 

**3.**                          **INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **         | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw  materials     |       | $                       | 3,090,822  |                        | $          | 1,885,157 |   |
| Finished  goods    |       | 7,407,458               |       | 4,961,975                   |       |
|               |       | 10,498,280              |       | 6,847,132                   |       |
| Inventory  reserve |       | (205,600                | )          | (205,600                    | )          |
|               |       | $                       | 10,292,680 |                        | $          | 6,641,532 |   |

 

**4.**                          **INCOMETAXES**

 

The Company’s effective tax rate on the net lossbefore income taxes was 1.6% and 0.0% for the six months ended June 30,2009 and June 30, 2008, respectively. During the quarter ended March 31, 2009, the Company recorded astate tax receivable of approximately $100,000 attributable to amended returns.

 

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**5.**                          **COMMITMENTSAND CONTINGENCIES**

 

On August 12,2005, the Company filed a lawsuit against Abbott in the U.S. District Court inthe Eastern District of Texas, Texarkana Division.  The Company isalleging fraud and breach of contract in connection with the National Marketingand Distribution Agreement dated as of May 4, 2000, which was terminatedon October 15, 2003.  It is seeking damages which it estimates to bein millions of dollars of lost profits, out of pocket expenses, and otherdamages.  In addition, it is seeking punitive damages, pre- andpost-judgment interest, and attorney’s fees.  Following Abbott’sunsuccessful attempt to get the case dismissed and ordered to arbitration,Abbott filed an answer and counterclaim on July 15, 2008, alleging severalbreaches of contract, breach of implied warranty of merchantability, and breachof express warranty, seeking in excess of $6,000,000 in compensatory damages aswell as seeking attorneys’ fees.  The Company denies the validity ofAbbott’s counterclaims.  Some discovery has already taken place (relatedto the hearings addressing the prior motion to compel arbitration) andadditional discovery is underway.  The District Court has issued a revisedscheduling order calling for trial in May 2010.

 

In April 2008,the Company sued Occupational and Medical Innovations Limited (“OMI”) in theU.S. District Court for the Eastern District of Texas, Tyler Division, allegingthat OMI has infringed two U.S. patents that were not at issue in theAustralian litigation (6,572,584 and 7,351,224).  The Company also allegedtheft of confidential information, intentional interference with contracts andengaging in false advertising that wrongfully disparaged and mischaracterizedour syringe products.  The Company further alleged that OMI made false allegationsregarding the source of origin of its safety syringe products being offered inthe U.S. The Company is seeking injunctive relief, unspecified damages(including treble damages) and reimbursement of attorneys’ fees in thesuit.  OMI has counterclaimed, seeking declaratory judgments ofnon-infringement and invalidity of the Company’s asserted patents.  OMI isnot seeking monetary damages.  Trial isset for December 2009 and discovery is ongoing.

 

In June 2007,the Company sued Becton Dickinson and Company (“BD”) in the U.S. District Courtfor the Eastern District of Texas, Marshall Division, alleging infringement ofthree patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of thefederal and state antitrust laws, and of the Lanham Act.  The Companysubsequently dropped the 5,578,011 patent allegations from the lawsuit. The Company and an officer, a co-plaintiff, are seeking injunctive relief,unspecified monetary damages and reimbursement of attorneys’ fees in thesuit.  BD counterclaimed for non-infringement and invalidity of theasserted patents.  In January 2008, the Court severed the patentclaims from the other claims pending resolution of the patent dispute, which isset for trial in October 2009.  In April 2008, the Company andthe officer sued BD in the U.S. District Court for the Eastern District ofTexas, Marshall Division, alleging infringement of another recently issuedpatent (7,351,224), and seeking injunctive relief, unspecified monetary damages(including treble damages) and reimbursement of attorneys fees.  BDcounterclaimed for non-infringement and invalidity of the assertedpatent.  The Company and the officer moved to consolidate this case withthe other patent case against BD that was pending in Marshall and the Courtgranted the motion, consolidating this case with the above-stated case filed inJune 2007. The Court issued its claim construction order in this matter onJanuary 4, 2009.  Discovery has nowbeen completed and the Company is currently set for trial on the Court’s October 2009docket.

 

In September 2007,BD and MDC Investment Holdings, Inc. (“MDC”) sued the Company in theUnited States District Court for the Eastern District of Texas, TexarkanaDivision, initially alleging that the Company is infringing two U.S. patents ofMDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seekinjunctive relief and unspecified damages.  The Company counterclaimed fordeclarations of non-infringement, invalidity and unenforceability of theasserted patents.  The plaintiffs subsequently dropped allegations withregard to patent no. 7,090,656 and the Company subsequently dropped itscounterclaims for unenforceability of the asserted patents.  The Courtconducted a claims construction hearing on September 25, 2008 and issuedits claims construction order on November 14, 2008.  No trial datehas been set.  The parties have agreed torequest a stay of this litigation until after the case against BD has beentried.

 

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In September 2008,the Company and an officer sued Safety Medical International (“SMI”) in theUnited States District Court for the Eastern District of Texas, Tyler Division,alleging infringement of U.S. patent nos. 6,572,584 and 7,351,224, and seekinginjunctive relief, unspecified monetary damages and reimbursement of attorneys’fees.  SMI has counterclaimed, seeking declaratory judgments ofnon-infringement and invalidity of the asserted patents.  SMI is notseeking monetary damages.  SMI has filed a notice of bankruptcy in thiscase and it has been stayed pending the outcome of those proceedings.

** **

**6.**                          **SUBSEQUENTEVENTS**

 

The Company has evaluated events occurring after thedate of its accompanying unaudited Condensed Balance Sheets through the date ofthe filing of this Quarterly Report on Form 10-Q.  The Company did not identify any materialsubsequent events requiring adjustment to our accompanying unaudited condensedfinancial statements (recognized subsequent events).  Those items requiring disclosure(unrecognized subsequent events) in the financial statements have beendisclosed accordingly.

 

TheBoard of Directors is currently soliciting proxies from the preferred shareholdersfor the amendment of the various Certificates of Designation so that theCompany may purchase shares of Common Stock and junior preferred shares evenwhile dividends are in arrears. Previously, the various Certificates of Designation provided that, ifdividends were in arrears on the preferred shares, there were certainprohibitions on acquisitions for consideration by the Company of stock rankingjunior to the preferred shares except on certain terms.  One of thelimitations included that no acquisitions for consideration could be madeunless the acquisition involved the acquisition of all of the preferred shares(upon a 50% vote of each series) or unless the preferred shares were convertedinto or exchanged into stock of the Company ranking junior to them.  The proposed amendment deletes theserequirements and includes an addition that specifically provides that theCompany can purchase any of its shares ranking junior to the preferred stock(including Common shares) on any terms it fixes, even where a dividend uponshares of preferred stock is in arrears, so long as:  (A) the cashassets of the Company as of its latest reporting period equals or exceeds$40,000,000 or (B) if the cash assets of the Company as of its latestreporting period was less than $40,000,000, the amount of funds utilized topurchase such shares within the next quarter does not exceed 25% of the valueof the cash assets as of the previous reporting period.  Accordingly, if the amendment is approved, itwould mean that the Company would no longer be legally bound to pay thepreferred stockholders their accrued dividends before the Company bought othershares, including shares of Common Stock.

 

The Compensation and Benefits Committee approved agrant of a stock option to an officer for the purchase of 3,000,000 shares of Common Stock, not pursuant toany existing  stock option plan, whichwill require shareholder approval prior to effectiveness.  Proxies are currently being solicited for,among other things, approval of this option.

 

TheCompensation and Benefits Committee also approved pursuant to the 2008 StockOption Plan, grants of incentive stock options (“ISOs”) for the purchase of1,566,931 shares of Common Stock and grants of non-qualified stock options (“NQSOs”)for the purchase of 319,494 shares of Common Stock.  Officers andDirectors received ISOs relating to the issuance of 269,956 of the 1,566,931shares subject to ISOs that were granted and 229,494 of the 319,494 sharessubject to the NQSOs that were granted.

 

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

 

**FORWARD-LOOKINGSTATEMENT WARNING**

 

Certainstatements included by reference in this filing containing the words “could,” “may,”“believes,” “anticipates,” “intends,” “expects,” and similar such wordsconstitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act.  Anyforward-looking statements involve known and unknown risks, uncertainties, andother factors that may cause our actual results, performance, or achievementsto be materially different from any future results, performance, orachievements expressed or implied by such forward-looking statements.  Such factors include, among others, ourability to maintain liquidity, our maintenance of patent protection, the impactof current litigation (as it affects our costs as well as market access and theviability of our 

 

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patents), our ability tomaintain favorable supplier arrangements and relationships, our ability toreceive royalties from Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”),  our ability to quickly increase capacity in theevent of a dramatic increase in demand (such as by increased orders due toswine flu vaccinations), our ability to access the market, our ability tomaintain or lower production costs, our ability to continue to finance researchand development as well as operations and expansion of production, theincreased interest of larger market players, specifically Becton Dickinson &Company (“BD”), in providing devices to the safety market, and other factorsreferenced in **Item 1A. Risk Factors**in**Part II**.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

**OVERVIEW**

 

Wehave been manufacturing and marketing our products into the marketplace since1997.  We currently provide other safetymedical products in addition to safety syringe products.  One such product, the Patient SafeTM syringe,which reduces the risk of infection resulting from IV line contamination,entered the market in 2008.  Safety syringescomprised 98.2% of our sales in the first six months of 2009.

 

Our productshave been and continue to be distributed nationally through numerousdistributors.  However, we have beenblocked from access to the market by exclusive marketing practices engaged inby BD, who dominates the market.  Webelieve that its monopolistic business practices continue despite its paying$100 million in 2004 to settle a prior lawsuit with us for anticompetitivepractices, business disparagement, and tortious interference.  Although we have made limited progress insome areas, such as the alternate care and international markets, our volumesare not as high as they should be given the nature and quality of our products,the federal and state legislation requiring the use of safe needle devices, andvarious Senate Subcommittee hearings on Group Purchasing Organizations.

 

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

 

In theevent we continue to have only limited market access, the cash provided by thelitigation settlements and generated from operations becomes insufficient, androyalties from BTMD are not forthcoming, we would take additional cost cuttingmeasures to reduce cash requirements. Such measures could result in the reduction of units being produced, thereduction of workforce, reduction of salaries of officers and other nonhourlyemployees, and the deferral of royalty payments.  We took such actions at the end of the secondquarter.

 

At theend of the second quarter we announced that in the interest of the long-termsurvival of the Company we would reorganize some of the Company’s functions andimplement staff reductions, all in order to minimize our cash expenditures andconserve our resources.  Our workforce was reduced by 16% on July 1,2009.  We expect the reduction inworkforce to decrease our annual compensation costs, as well as relatedexpenses, such as travel and entertainment, by $2.1 million annually.  An anticipated reduction of inventory shouldresult in a minimum of $1.0 million reduction in cash outlays over the nexttwelve months.  Our President and CEO,Thomas J. Shaw, waived future royalty payments beginning July 1, 2009,which will save an additional $1.0 million over the next three quarters.  Salaries for all personnel above a certainsalary level were cut by 10%.  Suchreduction, along with discontinuing the 401(k) matching, should save$600,000 over the next twelve months.  Weexpect to save an additional $1.6 million by the following actions: movingmost, if not all, of the molding of piece parts back to Little Elm; reducing professionalfees; and various other cost cutting measures. These measures will remain in place as long as Management deems themnecessary.

 

Werecorded a $200,000 charge in the second quarter for severance pay offered tothe terminated employees.  All severancepayments were paid in the third quarter. We will incur a noncash expense of$2.8 million related to the issuance of stock options, most of which will beamortized over twelve months.

 

We arefocusing on methods of upgrading our manufacturing capability and efficiency inorder to reduce costs.  We believe ourcurrent capitalization provides the resources necessary to implement some ofthese changes and improve our manufacturing capacity and efficiency, therebyreducing our unit cost.

 

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Productpurchases from Double Dove, a Chinese manufacturer, have enabled us to increasemanufacturing capacity with little capital outlay and have provided acompetitive manufactured cost.  DoubleDove manufactured, in the first six months of 2009, approximately 73.0% of theunits we produced.  The cost of productionper unit has generally declined as volumes increased.  Double Dove increased the prices in thefourth quarter of 2008 to us by $0.005 per unit.  Product cost reductions could be adverselyaffected by increased material and transportation costs.  We believe we could make up any long-termdisruption in these supplies by utilizing more of the capacity at the LittleElm facility, except for the 0.5cc insulin syringe, the 5cc and 10cc syringesand the autodisable syringe which altogether comprised about 5.2% of ourrevenues for the first six months of 2009.

 

We hada Licensing Agreement with BTMD which expired on May 13, 2008.  Royalties that were expected were notreceived due to the time needed to build the factory, assembly equipment, andthe related infrastructure as well as the need of BTMD to meet the requisiteChinese government requirements.  Thefacility has been completed and BTMD is in the process of meeting Chinesegovernment requirements.  We stillcontinue to expect royalty payments although we are unable to predict the datewe will begin to receive such royalties. We should begin earning royalties once we have an effective agreement,Chinese government requirements are met, and BTMD is able to produce and sellproducts.

 

Historically,unit sales have increased in the latter part of the year due, in part, to thedemand for syringes during the flu season. It is unclear how the upcoming flu season may be affected by additionaldemand for utilization for the swine flu vaccinations.  There is a possibility, if the U.S. doesindeed receive H1N1 (swine flu) vaccine, that our sales could increasesignificantly during the flu season.  Ourunderstanding is that two injections are required for H1N1 as well as aninjection for the “regular” flu.  We areprepared to ramp up production during flu season if the need arises.

 

Withincreased volumes, our manufacturing unit costs have generally tended todecline.  Factors that could affect ourunit costs, in addition to Double Dove’s increase in unit costs of $0.005,include changing production volumes, costs of petroleum products, and transportationcosts.  Increases in such costs may notbe recoverable through price increases of our products.

 

Wecompleted the expansion of an existing warehouse in the first quarter of2009.  This expansion increased ourwarehouse area, provided for additional office space, and added a secondControlled Environment.  This will enableus to do more molding in-house.

 

**LIQUIDITY**

 

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

 

Historical Sources of Liquidity

 

Wehave historically funded operations primarily from the proceeds from private placements,loans, and litigation settlements.

 

In2008, we received a construction line of credit for up to $4,210,000 to fund anexpansion of our warehouse.  We expect toreplace this loan with a permanent financing arrangement during the thirdquarter of 2009.

 

Internal Sourcesof Liquidity

 

*Marginsand Market Access*

 

Toachieve break even quarters, we need minimal access to hospital markets whichhas been difficult to obtain due to the monopolistic marketplace which was thesubject of our initial lawsuit and now also included in our second lawsuitagainst BD.  We will continue to attemptto gain access to the market through our sales efforts, innovative technology,the introduction of new products and, when necessary, litigation.

 

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We arefocusing on methods of upgrading our manufacturing capability and efficiency inorder to reduce costs.  We believe ourcurrent capitalization provides the resources necessary to implement some ofthese changes and improve our manufacturing capacity and efficiency, therebyreducing our unit cost.

 

Beginningin early 2004, we began to receive shipment of product from Double Dove whichenabled us to lower our unit costs. Fluctuations in the cost and availability of raw materials and inventoryand our ability to maintain favorable supplier arrangements and relationshipscould result in the need to manufacture all (as opposed to approximately 26%)of our products in the U.S.  This couldtemporarily increase unit costs as we ramp up domestic production.

 

Themix of domestic and international sales affects the average sales price of ourproducts.  Generally, the higher theratio of domestic sales to international sales, the higher the average salesprice will be.  Typically internationalsales are shipped directly from China to the customer.  Purchases of product manufactured in China,if available, usually decrease the average cost of manufacture for all units asdomestic costs, such as indirect labor and overhead, remain relativelyconstant.  Double Dove increased theirprices to us by $0.005 per unit in the fourth quarter of 2008.  The number of units produced by the Companyversus manufactured in China can have a significant effect on the carryingcosts of inventory as well as Cost of sales. We will continue to evaluate the appropriate mix of productsmanufactured domestically and those manufactured in China to achieve economicbenefits as well as to maintain our domestic manufacturing capability.  Currently, approximately 26%****of our products are produced domestically.

 

Fluctuationsin the cost of oil (since our products are petroleum based), transportationcosts, and the volume of units purchased from Double Dove may have an impact onthe unit costs of our products. Increases in such costs may not be recoverable through price increasesof our products.  Reductions in oilprices may not quickly affect petroleum product prices.

 

*Seasonality*

 

Historically,unit sales have increased in the latter part of the year due, in part, to thedemand for syringes during the flu season. It is unclear how the upcoming fluseason may be affected by additional demand for utilization for the swine fluvaccinations.  There is a possibility, ifthe U.S. does indeed receive H1N1 (swine flu) vaccine, that our sales couldincrease significantly during the flu season. Our understanding is that two injections are required for H1N1 as wellas an injection for the “regular” flu. We are prepared to ramp up production during flu season if the needarises.

 

*LicensingAgreement*

 

We hada Licensing Agreement with BTMD which expired on May 13, 2008.  Royalties that were expected were notreceived due to the time needed to build the factory, assembly equipment, andthe related infrastructure as well as the need of BTMD to meet the requisiteChinese government requirements.  Thefacility has been completed and BTMD is in the process of meeting Chinesegovernment requirements.  We stillcontinue to expect royalty payments, although we are unable to predict the datewe will begin to receive such royalties. We should begin earning royalties once we have an effective agreement,Chinese government requirements are met, and BTMD is able to produce and sellproducts.

 

*CashRequirements*

 

Due tofunds received from prior litigation settlements, we have sufficient cashreserves and intend to rely on operations, cash reserves, and debt financing asthe primary ongoing sources of cash.  However,working capital decreased $10 million since December 31, 2008.  Litigation costs continue to be a significantexpense but we expect this expense to be reduced after the Abbott Laboratories(“Abbott”) trial in April 2010.  Inthe event we continue to have only limited market access and cash generatedfrom operations becomes insufficient to support operations, we would take costcutting measures 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. We took such actionsat the end of the second quarter.  At theend of the second quarter we announced that in the interest of the long-termsurvival of the Company we would reorganize some of the

 

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Company’s functions andimplement staff reductions, all in order to minimize our cash expenditures andconserve our resources.  Our workforce was reduced by 16% on July 1,2009.  We expect the reduction inworkforce to decrease our annual compensation costs, as well as relatedexpenses, such as travel and entertainment by $2.1 million annually.  An anticipated reduction of inventory shouldresult in a minimum of $1.0 million reduction in cash outlays over the nexttwelve months.  Our President and CEO,Thomas J. Shaw, waived future royalty payments beginning July 1, 2009,which will save an additional $1.0 million over the next three quarters.  Salaries for all personnel above a certainsalary level were cut by 10%.  Suchreduction, along with discontinuing the 401(k) matching, should save$600,000 over the next twelve months.  Weexpect to save an additional $1.6 million by the following actions: movingmost, if not all, of the molding of piece parts back to Little Elm; reducingprofessional fees; and various other cost cutting measures.  These measures will remain in place as longas Management deems them necessary.  Weexpect these cost cutting measures to mitigate the reduction in our cashbalance.

 

Werecorded a $200,000 change in the second quarter for severance pay offered tothe terminated employees.  All severancepayments were paid in the third quarter. We will incur a noncash expense of$2.8 million related to the issuance of stock options, most of which will beamortized over twelve months.

 

External Sources ofLiquidity

 

Wehave obtained several loans since our inception, which have, together with theproceeds from the sales of equities and litigation efforts, enabled us topursue development and production of our products.  Given the current economic conditions, ourability to obtain additional funds through loans may be limited.

 

Theshareholders previously 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.

 

**CAPITALRESOURCES**

 

Trendsin Capital Resources

 

Interest expense will increase due to the recentloan****of approximately $4.2million, but will be somewhat mitigated by lower borrowing rates if currentconditions in the credit markets continue. Interest income will be negatively affected by lower interest rates andour prior movement of cash to U.S. Treasury bills and other U.S. governmentbacked securities.  Although we believethat we have granted credit to credit-worthy firms, current economic conditionsmay affect the timing and/or collectability of some accounts.

 

MaterialCommitments for Expenditures

 

We completed expansion of our warehouse (includingadditional warehouse space, additional office space, and a new ControlledEnvironment) in the first quarter of 2009. We funded most of this expansion with a construction line of credit fromLewisville State Bank, a division of 1st International Bank, for approximately $4.2million, secured by a second lien deed on the land and existing buildings.  This will be replaced by permanent financingin the third quarter.

 

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

 

Thefollowing discussion contains trend information and other forward-lookingstatements that involve a number of risks and uncertainties.  Our actual future results could differmaterially from our historical results of operations and those discussed in theforward-looking statements.  Varianceshave been rounded for ease of reading. All period references are to the periods ended June 30, 2009, or 2008.

 

*Comparisonof Three Months Ended June 30, 2009 and June 30, 2008*

 

Domesticsales accounted for 85.6% and 80.7% of the revenues for the three months ended June 30,2009 and 2008, respectively. International sales accounted for the remaining revenues.  Domestic revenues decreased 5.8% principallydue to lower unit sales mitigated by higher average sales prices andinternational revenues 

 

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decreased 33.6% dueprimarily to lower unit sales.  Overall,unit sales decreased 17.9%.  Domesticunit sales decreased 7.2% due to a one-time purchase lastyear.  We also believe some purchasingpractices have changed, resulting in lower inventory levels at some of ourdistributors. Internationalunit sales decreased 38.4% primarily due to decreased funding for non-governmentalorganizations which provide product internationally as well as a one-time orderfor the same period last year.  Domestic unitsales were 74.2% of total unit sales for the three months ended June 30,2009.

 

Grossprofit decreased primarily due to lower unit sales mitigated by somewhat higherprices.  The average cost of manufacturedproduct sold per unit increased by 19.7% due to higher capitalized unit costs ininventory in the same period last year. Profit margins can fluctuate depending upon, among other things, thecost of product manufactured and the capitalized cost of product recorded ininventory, as well as product sales mix. Royalty expense decreased 7.4% due to lower gross sales revenues.

 

Operatingexpenses increased 27.1%.  The increasein expense for Sales and marketing was attributable primarily to compensationexpense related to severance costs, stock option expense, and travel andentertainment.  The increase wasmitigated by lower marketing and supplies. Research and development costs increased due to engineering andvalidation samples, severance costs, and consulting costs.  General and administrative costs increaseddue primarily to litigation costs, and accounting fees related to tax servicesand Sarbanes-Oxley audit costs.  Stockoption expense also increased as the stock option grants in November 2008are being amortized.  Previously issuedstock option grants were fully amortized. We expensed $200,000 for severance costs related to the reduction inforce.

 

Lossfrom operations increased due principally to lower margins and higher expenses.

 

Interestexpense decreased due to lower interest rates and lower volumes.  Interest expense for the second quarter of2009 was zero because capitalized interest exceeded interest expense.

 

TheCompany’s effective tax rate on the net loss before income taxes was 0.0% forthe three months ended June 30, 2009 and June 30, 2008, respectively.

 

*Comparisonof Six Months Ended June 30, 2009 and June 30, 2008*

 

Domesticsales accounted for 82.4% and 83.3% of the revenues for the six months ended June 30,2009 and 2008, respectively. International sales accounted for the remaining revenues.  Domestic revenues decreased 7.6% principallydue to lower unit sales mitigated by higher average selling prices andinternational revenues decreased 1.5% due primarily to lower unit salesmitigated by higher unit prices. Overall, unit sales decreased 10.2%. Domestic unit sales decreased 9.0% due to a one-time purchase lastyear as well as some distributors having financial difficulty this year. Wealso believe some purchasing practices have changed, resulting in lowerinventory levels at some of our distributors. International unit sales decreased 13.1% primarily dueto a one-time purchase last year. Domestic unit sales were 70.7% of total unit sales for the six monthsended June 30, 2009.

 

Grossprofit decreased primarily due to lower unit sales and lower profitmargins.  The average cost ofmanufactured product sold per unit increased by 10.5% due principally to highercapitalized unit costs in inventory in the same period last year.  Profit margins can fluctuate depending upon,among other things, the cost of product manufactured and the capitalized costof product recorded in inventory, as well as product sales mix.  Royalty expense decreased 3.7% due to lowergross sales.

 

Operatingexpenses increased 23.9%.  The increasein expense for Sales and marketing was attributable primarily to stock optionexpense, severance costs, and travel and entertainment.  The increase was mitigated by lower marketingcosts, fees, and office supplies. Research and development costs increased due to testing, severancecosts, and stock option expense.  Generaland administrative costs increased due primarily to litigation, stock optionexpense, consulting, and accounting fees. Stock option expense also increased as the stock option grants in November 2008are being amortized.  Previously issuedstock option grants were fully amortized. We expensed $200,000 for severance costs related to the reduction inforce.

 

Lossfrom operations increased due principally to lower gross profit and higherexpenses.

 

Interestexpense decreased due to lower interest rates and balances.  Interest expense for the second quarter of2009 was zero because capitalized interest exceeded interest expense.

 

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TheCompany’s effective tax rate on the net loss before income taxes was 1.6% and0.0% for the six months ended June 30, 2009 and June 30, 2008,respectively.

 

The Company’sbalance sheet remains strong with cash making up 40.0% of total assets.  Working capital was $23.4 million at June 30,2009, a decrease of $10.0 million from December 31, 2008.  The current ratio was 4.3 at December 31,2008 and 3.1 at June 30, 2009.  Thequick ratio was 3.6 at December 31, 2008 and 2.2 at June 30,2009.  One reason for the decline in thecurrent ratio as well as the quick ratio was the decline in our cashbalances.  However, these indicatorscontinue to demonstrate a strong financial position. We expect the cost cuttingmeasures described earlier will mitigate the reduction in our cash balance.

 

Rawmaterials inventory increased 64.0% due to the transition of molding activitiesto Little Elm.  We expect to be movingthe manufacturing of those piece parts to Little Elm as a cost saving measure.  In the meantime, we increased inventory toensure a smooth transition of the move of molding from California to the LittleElm facility.  Finished goods inventoryincreased 49.3% because of expected demand for flu season and the transition ofmolding activities to Little Elm.  Weexpect to reduce inventory levels over the next 12 months.

 

Approximately$10.2 million in cash flow was used by operating activities.  The remaining uses of cash were primarily forpurchases of fixed assets.

 

**Item 3.****                      ****Quantitative andQualitative Disclosures About Market Risk.**

 

No update

 

**Item 4.****                      ****Controls and Procedures.**

 

Disclosure Controls andProcedures

 

Pursuantto Rule 13a-15(b) of the Securities Exchange Act of 1934, Management,with the participation of our President, 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 executiveand principal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures, as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934.  Theterm disclosure controls and procedures**meanscontrols and other procedures that are designed to ensure that informationrequired to be disclosed by us in our periodic reports is: i) recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms; and ii) accumulatedand communicated to our Management, including our principal executive andprincipal financial officers, as appropriate to allow timely decisionsregarding required disclosure. Based upon this evaluation, the CEO and CFOconcluded that, as of June 30, 2009, our disclosure controls andprocedures were effective.

 

Changes in InternalControl Over Financial Reporting

 

Therehave been no changes during the second quarter of 2009 or subsequent to June 30,2009 in our internal control over financial reporting or in any other factorthat has materially affected or is reasonably likely to materially affect ourinternal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

**Item 1.****                      ****Legal Proceedings.**

 

Thefollowing is a summary of all currently outstanding material legal proceedings:

 

On August 12,2005, we filed a lawsuit against Abbott in the United States District Court inthe Eastern District of Texas, Texarkana Division.  We are alleging fraudand breach of contract in connection with the National Marketing andDistribution Agreement dated as of May 4, 2000, which was terminated on October 15,2003.  We are seeking damages which we estimate to be in millions ofdollars of lost profits, out of pocket expenses, and other damages.  Inaddition, we are seeking punitive damages, pre- and post-judgment interest, 

 

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and attorney’sfees.  Following Abbott’s unsuccessful attempt to get the case dismissedand ordered to arbitration, Abbott filed an answer and counterclaim on July 15,2008, alleging several breaches of contract, breach of implied warranty ofmerchantability, and breach of express warranty, seeking in excess of$6,000,000 in compensatory damages as well as seeking attorneys’ fees.  Wedeny the validity of Abbott’s counterclaims.  Some discovery has alreadytaken place (related to the hearings addressing the prior motion to compelarbitration) and additional discovery is underway.  The District Court hasissued a revised scheduling order calling for trial in May 2010.

 

In April 2008,we sued Occupational and Medical Innovations Limited (“OMI”) in the UnitedStates District Court for the Eastern District of Texas, Tyler Division,alleging that OMI has infringed two U.S. patents that are not at issue in theAustralian litigation (6,572,584 and 7,351,224).  We also allege theft ofconfidential information, intentional interference with contracts and engagingin false advertising that wrongfully disparages and mischaracterizes oursyringe products.  We further allege that OMI made false allegationsregarding the source of origin of its safety syringe products being offered inthe U.S. We seek injunctive relief, unspecified damages (including trebledamages) and reimbursement of attorneys’ fees in the suit.  OMI hascounterclaimed against us, seeking declaratory judgments of non-infringementand invalidity of our asserted patents.  OMI is not seeking monetarydamages.  Trial is set for December 2009 and discovery is ongoing.

 

In June 2007,we sued BD in the United States District Court for the Eastern District ofTexas, Marshall Division, alleging infringement of three patents (5,578,011;5,632,733; and 6,090,077) and violations by BD of the federal and stateantitrust laws, and of the Lanham Act.  We subsequently dropped the5,578,011 patent allegations from the lawsuit.  We and Thomas J. Shaw, aco-plaintiff, are seeking injunctive relief, unspecified monetary damages andreimbursement of attorneys’ fees in the suit.  BD counterclaimed fornon-infringement and invalidity of the asserted patents.  In January 2008,the Court severed the patent claims from the other claims pending resolution ofthe patent dispute, which is set for trial in October 2009.  In April 2008,we and Thomas J. Shaw sued BD in the United States District Court for theEastern District of Texas, Marshall Division, alleging infringement of anotherrecently issued patent (7,351,224), and seeking injunctive relief, unspecifiedmonetary damages (including treble damages) and reimbursement of attorneysfees.  BD counterclaimed for non-infringement and invalidity of theasserted patent.  We and Thomas J. Shaw moved to consolidate this case withthe other patent case against BD that was pending in Marshall and the Courtgranted our motion, consolidating this case with our above-stated case filed inJune 2007. The Court issued its claim construction order in this matter onJanuary 4, 2009.  Discovery has nowbeen completed and we are currently set for trial on the Court’s October 2009docket.

 

In September 2007,BD and MDC Investment Holdings, Inc. (“MDC”) sued us in the United StatesDistrict Court for the Eastern District of Texas, Texarkana Division, initiallyalleging that 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.  We counterclaimed for declarations ofnon-infringement, invalidity and unenforceability of the assertedpatents.  The plaintiffs subsequently dropped allegations with regard topatent no. 7,090,656 and we subsequently dropped our counterclaims forunenforceability of the asserted patents.  The Court conducted a claims constructionhearing on September 25, 2008 and issued its claims construction order on November 14,2008.  No trial date has been set. The parties have agreed to request a stay of this litigation until afterour case against BD has been tried.

 

In September 2008,we and Thomas J. Shaw sued SMI in the United States District Court for theEastern District of Texas, Tyler Division, alleging infringement of U.S. patentnos. 6,572,584 and 7,351,224, and seeking injunctive relief, unspecifiedmonetary damages and reimbursement of attorneys’ fees.  SMI hascounterclaimed against us, seeking declaratory judgments of non-infringementand invalidity of the asserted patents.  SMI is not seeking monetarydamages.  SMI has filed a notice of bankruptcy in this case and it hasbeen stayed pending the outcome of those proceedings.

 

**Item 1A.****             ****Risk Factors.**

 

Therewere no material changes in the Risk Factors applicable to the Company as setforth in our Form 10-K annual report for 2008 which was filed on March 31,2009, and which is available on EDGAR.

 

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

 

Unregistered Sales ofEquity Securities and Use of Proceeds

 

None.

 

Working CapitalRestrictions and Limitations on the Payment of Dividends

 

Wemaintain cash for use as collateral for letters of credit we provide from timeto time to enable, among other things, the purchase of product from China.  As of June 30, 2009, we had no fundsheld as restricted cash for such purposes. The Board of Directors has authorized Management to borrow and incurindebtedness in the form of letters of credit in an aggregate amount, at anyone time, of $5,000,000.

 

The certificates of designation for each of theoutstanding series of Class B Convertible Preferred Stock each currentlyprovide that, if a dividend upon any shares of Preferred Stock is in arrears,no dividends may be paid or declared or any other distribution made upon anystock ranking junior to such stock and generally no such junior stock may beredeemed.

 

**Item 3.****                      ****Defaults Upon SeniorSecurities.**

 

Series I Class BConvertible Preferred Stock

 

As ofthe six months ended June 30, 2009, the amount of dividends in arrears was$36,000 and the total arrearage was $144,000.

 

Series II Class BConvertible Preferred Stock

 

As ofthe six months ended June 30, 2009, the amount of dividends in arrears was$110,000 and the total arrearage was $441,000.

 

Series III Class BConvertible Preferred Stock

 

As ofthe six months ended June 30, 2009, the amount of dividends in arrears was$65,000 and the total arrearage was $3,181,000.

 

Series IV Class BConvertible Preferred Stock

 

As ofthe six months ended June 30, 2009, the amount of dividends in arrears was$276,000 and the total arrearage was $7,307,000.

 

Series V Class BConvertible Preferred Stock

 

As ofthe six months ended June 30, 2009, the amount of dividends in arrears was$198,000 and the total arrearage was $3,495,000.

 

**Item 4.****                      ****Submission of Matters toa Vote of Security Holders.**

 

Not applicable

 

**Item 5.****                      ****Other Information.**

 

Ourannual meeting of shareholders will be held on September 25, 2009 at 10:00 a.m.Central time and we are soliciting the vote of shareholders of Common Stockwith regard to the election of Directors and the effectiveness of a grant of astock option for the purchase of 3,000,000 shares to Thomas J. Shaw.  SuchProxy Statement will be delivered via the new notice and access method meaningCommon Stockholders will receive a one

 

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page noticenotifying them of where they can download copies of the proxy materials.  Shareholders desiring paper copies of theproxy materials may request them.

 

Wewill also hold a special meeting of preferred shareholders at 11:00 a.m.later that day and we are soliciting the vote of Series I through V Class BConvertible Preferred Stockholders with regard to the amendment of the variousCertificates of Designation (generally to allow the purchase of shares ofjunior stock [including Common Stock] without buying the preferred stock orpaying preferred dividends first).  Suchamendments will be voted upon individually by the holders of each Series ofClass B Convertible Preferred Stock.  Such Proxy Statement will bedelivered via the traditional method of delivery of physical copies of allproxy materials.

 

Subsequentto June 30, 2009, the Compensation and Benefits Committee approved a grantof a stock option to Thomas J. Shaw for the purchase of 3,000,000 shares ofCommon Stock, not pursuant to a stock option plan, which will requireshareholder approval prior to effectiveness. The Compensation and Benefits Committee also approved, pursuant to the2008 Stock Option Plan, grants of incentive stock options (“ISOs”) for thepurchase of 1,566,931 shares of Common Stock and grants of non-qualified stockoptions (“NQSOs”) for the purchase of 319,494 shares of Common Stock. Officers and Directors received ISOs relating to the issuance of 269,956 of the1,566,931 shares subject to ISOs that were granted and 229,494 of the 319,494shares subject to the NQSOs that were granted.

 

# **Item6.****                      ****Exhibits.**

** **
| Exhibit No. |   | Description  of Document                                                                                                                                          |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                              |
| 3(i)             |   | Third Amended and Restated Articles of Incorporation of RTI filed on  November 1, 2004* as amended by that Statement of Change of Registered  Office/Agent** |
|             |   |                                                                                                                                                              |
| 3(ii)            |   | Third Amended and Restated Bylaws of RTI***                                                                                                                       |
|             |   |                                                                                                                                                              |
| 31.1             |   | Certification of Principal Executive Officer ** **                                                                                                                |
|             |   |                                                                                                                                                              |
| 31.2             |   | Certification of Principal Financial Officer ** **                                                                                                                |
|             |   |                                                                                                                                                              |
| 32               |   | Certification Pursuant to 18 U.S.C. Section 1350 ** **                                                                                                       |

 

 
| *      |   | Incorporated herein by reference to RTI’s Form 10-Q filed on  November 14, 2005 |
|--------|--------|------------------------------------------------------------------------------------------------|
|   |   |                                                                                           |
| **     |   | Incorporated herein by reference to RTI’s Form 10-K filed on  March 31, 2008    |
|   |   |                                                                                           |
| ***    |   | Incorporated  herein by reference to RTI’s Form 10-Q filed on November 14, 2008 |
|   |   |                                                                                           |
| **  ** |   | Attached hereto                                                                                |

 

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**SIGNATURES**

 

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

 

DATE:  August 14, 2009

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

 

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