UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from         to

Commission file number:    001-16465

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

Texas	75-2599762
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
511 Lobo Lane
Little Elm, Texas	75068-5295
(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 since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	RVP	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 32,674,954 shares of Common Stock, no par value, outstanding on November 1, 2019.

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS

	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
CONDENSED BALANCE SHEETS		1
CONDENSED STATEMENTS OF OPERATIONS		2
CONDENSED STATEMENTS OF CASH FLOWS		3
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY		4
NOTES TO CONDENSED FINANCIAL STATEMENTS		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 3.	Defaults Upon Senior Securities	20
Item 6.	Exhibits	21
SIGNATURES		21

PART I—FINANCIAL INFORMATION

Item 1.       Financial Statements.

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

		September 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	5,554,859	$	9,647,292
Accounts receivable, net		6,296,739		4,912,356
Investments in debt and equity securities, at fair value		7,731,228		2,986,156
Inventories, net		6,746,114		7,545,094
Income taxes receivable		100,887		100,887
Other current assets		695,480		644,803
Total current assets		27,125,307		25,836,588
Property, plant, and equipment, net		10,697,780		10,851,747
Income taxes receivable		100,835		100,835
Other assets		109,195		165,856
Total assets	$	38,033,117	$	36,955,026
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,686,761	$	5,369,677
Current portion of long-term debt		285,715		406,361
Accrued compensation		627,408		540,852
Dividends payable		54,800		55,113
Accrued royalties to shareholder		936,458		769,324
Other accrued liabilities		1,220,801		1,467,935
Income taxes payable		17,944		10,025
Total current liabilities		8,829,887		8,619,287
Other long-term liabilities		20,899		82,359
Long-term debt, net of current maturities		2,446,345		2,639,647
Total liabilities		11,297,131		11,341,293
Stockholders’ equity:
Preferred stock, $1 par value:
Series I, Class B		96,000		98,500
Series II, Class B		171,200		171,200
Series III, Class B		129,245		129,245
Series IV, Class B		342,500		342,500
Series V, Class B		34,000		40,000
Common stock, no par value		—		—
Additional paid-in capital		61,715,544		61,871,756
Accumulated deficit		(35,752,503	)	(37,039,468	)
Total stockholders’ equity		26,735,986		25,613,733
Total liabilities and stockholders’ equity	$	38,033,117	$	36,955,026

See accompanying notes to condensed unaudited financial statements

1

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

		Three Months Ended September 30, 2019		Three Months Ended September 30, 2018			Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Sales, net	$	11,639,586	$	9,863,272	$		29,167,950	$	25,011,066
Cost of sales
Cost of manufactured product		6,935,269		6,203,842			17,450,038		15,112,538
Royalty expense to shareholder		936,458		863,295			2,528,377		2,174,778
Total cost of sales		7,871,727		7,067,137			19,978,415		17,287,316
Gross profit		3,767,859		2,796,135			9,189,535		7,723,750
Operating expenses:
Sales and marketing		1,007,831		1,033,295			2,862,991		3,251,231
Research and development		134,919		146,487			377,881		432,179
General and administrative		1,646,685		1,676,579			4,816,214		5,196,224
Total operating expenses		2,789,435		2,856,361			8,057,086		8,879,634
Income (loss) from operations		978,424		(60,226	)		1,132,449		(1,155,884	)
Interest and other income		91,105		39,290			292,476		102,133
Interest expense		(40,701	)	(42,481	)		(130,085	)	(136,446	)
Income (loss) before income taxes		1,028,828		(63,417	)		1,294,840		(1,190,197	)
Provision for income taxes		4,394		—			7,875		210
Net income (loss)		1,024,434		(63,417	)		1,286,965		(1,190,407	)
Preferred stock dividend requirements		(175,456	)	(176,249	)		(527,162	)	(528,747	)
Income (loss) applicable to common shareholders	$	848,978	$	(239,666	)	$	759,803	$	(1,719,154	)
Basic income (loss) per share	$	0.03	$	(0.01	)	$	0.02	$	(0.05	)
Diluted income (loss) per share	$	0.03	$	(0.01	)	$	0.02	$	(0.05	)
Weighted average common shares outstanding:
Basic		32,674,954		32,666,454			32,671,648		32,666,454
Diluted		32,674,954		32,666,454			32,671,648		32,666,454

See accompanying notes to condensed unaudited financial statements

2

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Cash flows from operating activities
Net income (loss)	$	1,286,965	$	(1,190,407	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		641,224		669,584
Realized gains on investments		(7,925	)	—
Net unrealized gains on investments		(129,728	)	—
(Increase) decrease in operating assets:
Accounts receivable		(1,384,383	)	629,861
Inventories		798,980		(1,179,252	)
Other current assets		(50,677	)	13,624
Other assets		56,661		—
Increase (decrease) in operating liabilities:
Accounts payable		317,084		(49,414	)
Other accrued liabilities		(54,904	)	821,128
Insurance proceeds		—		(153,869	)
Income taxes payable		7,919		(1,173	)
Net cash provided (used) by operating activities		1,481,216		(439,918	)
Cash flows from investing activities
Purchase of property, plant, and equipment		(487,256	)	(290,153	)
Purchase of debt and equity securities		(6,969,552	)	—
Proceeds from the sales of debt and equity securities		2,362,134		—
Net cash used by investing activities		(5,094,674	)	(290,153	)
Cash flows from financing activities
Repayments of long-term debt		(313,949	)	(341,795	)
Payment of preferred stock dividends		(165,026	)	(165,337	)
Net cash used by financing activities		(478,975	)	(507,132	)
Net decrease in cash and cash equivalents		(4,092,433	)	(1,237,203	)
Cash and cash equivalents at:
Beginning of period		9,647,292		14,877,899
End of period	$	5,554,859	$	13,640,696
Supplemental schedule of cash flow information:
Interest paid	$	130,085	$	136,446
Income taxes paid	$	—	$	1,050
Supplemental schedule of noncash investing and financing activities:
Preferred dividends declared, not paid	$	54,800	$	55,112
Conversion of preferred stock to common stock	$	8,500	$	—

See accompanying notes to condensed unaudited financial statements

3

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

The following shows the changes in stockholders’ equity for the three month period ended September 30, 2019:

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital			Accumulated Deficit			Total
Balance at June 30, 2019	$	—	$	96,000	$	171,200	$	129,245	$	342,500	$	34,000	$	61,770,344		$	(36,776,937	)	$	25,766,352
Dividends		—		—		—		—		—		—		(54,800	)		—			(54,800	)
Net Income		—		—		—		—		—		—		—			1,024,434			1,024,434
Balance at September 30, 2019	$	—	$	96,000	$	171,200	$	129,245	$	342,500	$	34,000	$	61,715,544		$	(35,752,503	)	$	26,735,986

The following shows the changes in stockholders’ equity for the three month period ended September 30, 2018:

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital			Accumulated Deficit			Total
Balance at June 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,981,981		$	(36,826,515	)	$	25,936,911
Dividends		—		—		—		—		—		—		(55,112	)		—			(55,112	)
Net Loss		—		—		—		—		—		—		—			(63,417	)		(63,417	)
Balance at September 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,926,869		$	(36,889,932	)	$	25,818,382

The following shows the changes in stockholders’ equity for the nine month period ended September 30, 2019:

		Common Stock		Series I Class B Preferred Stock			Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock			Additional Paid-In Capital			Accumulated Deficit			Total
Balance at December 31, 2018	$	—	$	98,500		$	171,200	$	129,245	$	342,500	$	40,000		$	61,871,756		$	(37,039,468	)	$	25,613,733
Dividends		—		—			—		—		—		—			(164,712	)		—			(164,712	)
Conversion		—		(2,500	)		—		—		—		(6,000	)		8,500			—			—
Net Income		—		—			—		—		—		—			—			1,286,965			1,286,965
Balance at September 30, 2019	$	—	$	96,000		$	171,200	$	129,245	$	342,500	$	34,000		$	61,715,544		$	(35,752,503	)	$	26,735,986

The following shows the changes in stockholders’ equity for the nine month period ended September 30, 2018:

		Common Stock		Series I Class B Preferred Stock		Series II Class B Preferred Stock		Series III Class B Preferred Stock		Series IV Class B Preferred Stock		Series V Class B Preferred Stock		Additional Paid-In Capital			Accumulated Deficit			Total
Balance at December 31, 2017	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	62,092,206		$	(35,699,525	)	$	27,174,126
Dividends		—		—		—		—		—		—		(165,337	)		—			(165,337	)
Net Loss		—		—		—		—		—		—		—			(1,190,407	)		(1,190,407	)
Balance at September 30, 2018	$	—	$	98,500	$	171,200	$	129,245	$	342,500	$	40,000	$	61,926,869		$	(36,889,932	)	$	25,818,382

See accompanying notes to condensed unaudited financial statements

4

RETRACTABLE TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1.BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION

Business of the Company

Retractable Technologies, Inc. (the “Company”) was incorporated in Texas on May 9, 1994, and designs, develops, manufactures, and markets safety syringes and other safety medical products for the healthcare profession.  The Company began to develop its manufacturing operations in 1995.  The Company’s manufacturing and administrative facilities are located in Little Elm, Texas.  The Company’s products are the VanishPoint® 0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 0.5mL, 1mL, 2mL, 3mL, 5mL, and 10mL syringes; the blood collection tube holder; the small diameter tube adapter; the allergy tray; the IV safety catheter; the Patient Safe® syringes; the Patient Safe® Luer Cap; the VanishPoint® Blood Collection Set; and the EasyPoint® needle.  The Company also sells VanishPoint® autodisable syringes in the international market in addition to the Company’s other products.

Basis of presentation

The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented.  All such adjustments are of a normal and recurring nature.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year.  The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 28, 2019 for the year ended December 31, 2018.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting estimates

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

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and investments with original maturities of three months or less.

Accounts receivable

The Company records trade receivables when revenue is recognized.  No product has been consigned to customers.  The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables.  Those accounts that are doubtful of collection are included in the allowance.  This provision is reviewed to determine the adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when there is certainty as to their being uncollectible.  Trade receivables are considered delinquent when payment has not been made within contract terms.  The Allowance for bad debt was $146 thousand and $150 thousand as of September 30, 2019 and December 31, 2018, respectively.

The Company requires certain customers to make a prepayment prior to beginning production or shipment of their order.  Customers may apply such prepayments to their outstanding invoices or pay the invoice and continue to carry forward the deposit for future orders.  Such amounts are included in Other accrued liabilities on the Condensed Balance Sheets and are shown in Note 6, Other Accrued Liabilities.

5

The Company records an allowance for estimated returns as a reduction to Accounts receivable and Gross sales.  Historically, returns have been immaterial.

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost being determined using actual average cost.  The Company compares the average cost to the net realizable value and records the lower value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  Management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time to sell such inventory, the shelf life of inventory, and current market conditions when determining excess or obsolete inventories.  A reserve is established for any excess or obsolete inventories or they may be written off.

Investments in Debt and Equity Securities

The Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, and debt securities as investments.  These assets are readily marketable and are carried at fair value as of the date of the Balance Sheets.  Net unrealized and realized gains or losses on investments in debt and equity securities are reflected as a component of interest and other income.  Realized gains or losses on investments in debt and equity securities are recognized using the specific identification method.

Property, plant, and equipment

Property, plant, and equipment are stated at cost.  Expenditures for maintenance and repairs are charged to operations as incurred.  Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity and interest cost associated with significant capital additions.  Gains or losses from property disposals are included in operations.

The Company’s property, plant, and equipment primarily consist of buildings, land, assembly equipment, molding machines, molds, office equipment, furniture, and fixtures.  Depreciation and amortization are calculated using the 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

Long-lived assets

The Company assesses the recoverability of long-lived assets using an assessment of the estimated undiscounted future cash flows related to such assets.  In the event that assets are found to be carried at amounts which are in excess of estimated gross future cash flows, the assets will be adjusted for impairment to a level commensurate with fair value determined using a discounted cash flow analysis or appraised values of the underlying assets.

Fair Value Measurements

For assets and liabilities that are measured using quoted prices in active markets, total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to that asset or liability.  For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or liabilities in active markets.  For all remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model.

6

Financial instruments

The Company estimates the fair value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information.  Judgment is required in interpreting data to develop estimates of fair value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange.  Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management’s estimates, equals their recorded values.  Investments in equity securities consist primarily of exchange-traded and closed-end funds and mutual funds and are reported at their fair value based upon quoted prices in active markets.  Investments in U.S. Treasury Notes are reported at their fair value based upon quoted prices in active markets.  Investments in certificates of deposit (CD) with original maturities of greater than three months are reported at their estimated fair value based upon the duration of the CD and the interest rate earned on the CD versus current interest rates of similar duration CDs.  The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values.

Concentration risks

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, certificates of deposit, U.S. Treasury Notes, exchange-traded and closed-end funds, mutual funds, and accounts receivable.  Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality.  The Company assesses market risk in debt and equity securities through consultation with its outside investment advisors.  Management is responsible for directing the investing activity based on current economic conditions.  The majority of accounts receivable are due from companies which are well-established entities.  As a consequence, Management considers any exposure from concentrations of credit risks to be limited.

The following table reflects our significant customers for the three and nine months ended September 30, 2019 and 2018:

	Three Months ended September 30, 2019	Three Months ended September 30, 2018	Nine Months ended September 30, 2019	Nine Months ended September 30, 2018
Number of significant customers	3	3	3	2
Aggregate dollar amount of net sales to significant customers	$5.0 million	$5.4 million	$12.6 million	$10.0 million
Percentage of net sales to significant customers	43.2%	55.2%	43.3%	39.9%

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China.  The Company obtained roughly 82.1% and 85.1% of its products in the first nine months of 2019 and 2018, respectively, from its Chinese manufacturers.  Purchases from Chinese manufacturers aggregated 84.2% and 79.9% of products in the three month periods ended September 30, 2019 and 2018, respectively.  In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

Revenue recognition

The Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of loss pass to the customer.  Payments from customers with approved credit terms are typically due 30 days from the invoice date.  Under certain contracts, revenue is recorded on the basis of sales price to distributors, less contractual pricing allowances.  Contractual pricing allowances consist of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the facility that

7

purchased the products, and (ii) a provision for estimated contractual pricing allowances for products for which the Company has not received tracking reports.  Rebates are recorded when issued and are applied against the customer’s receivable balance.  Distributors receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the distributor.  One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is recognized in the period the related sales are recognized and is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report.  Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted.  The estimated contractual allowance is included in Accounts payable in the Condensed Balance Sheets and deducted from Revenues in the Condensed Statements of Operations.  Accounts payable included estimated contractual allowances for $4,916,590 and $3,896,341 as of September 30, 2019 and December 31, 2018, respectively.  The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors.  Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company.  End-users do not receive any contractual allowances on their purchases.  Any product shipped or distributed for evaluation purposes is expensed.

The Company provides product warranties that: i) the products are fit for medical use as generally defined within the boundaries of United States FDA approval; ii) the products are not defective; and iii) the products will conform to the descriptions set forth in their respective labeling, provided that they are used in accordance with such labeling and the Company’s written directions for use.  The Company has historically not incurred significant warranty claims.

The Company’s domestic return policy provides that a customer may return incorrect shipments within 10 days following arrival at the distributor’s facility.  In all such cases, the distributor must obtain an authorization code from the Company and affix the code to the returned product.  The Company’s domestic return policy also generally provides that a customer may return product that is overstocked.  Overstocking returns are limited to two times in each 12-month period up to 1% of distributor’s total purchase of products for the prior 12-month period.  All product overstocks and returns are subject to inspection and acceptance by the Company.

The Company’s international distribution agreements generally do not provide for any returns.

The Company requires certain customers to pay in advance of product shipment.  Such prepayments from customers are recorded in Other accrued liabilities and are generally recognized as revenue within 30 to 60 days of receipt at the time product is shipped.

The Company recognizes revenue from licensing agreements when collection of such amounts from third parties is reasonably assured.  If the Company licenses its products for sale, the Company is obligated to pay Thomas J. Shaw, the owner of certain patented technology, a certain percentage of such revenue pursuant to the terms of the Technology License Agreement between the Company and Mr. Shaw.

Disaggregated information of revenue recognized from contracts with customers and licensing fees recognized are as follows:

		For the three months ended September 30, 2019:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	7,356,305	$	462,096	$	1,197,176	$	23,631	$	9,039,208
North and South America sales (excluding U.S.)		2,344,956		1,150		528		86,100		2,432,734
Other international sales		162,296		2,006		396		2,946		167,644
Total	$	9,863,557	$	465,252	$	1,198,100	$	112,677	$	11,639,586

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		For the three months ended September 30, 2018:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	6,454,432	$	466,392	$	1,803,904	$	22,968	$	8,747,696
North and South America sales (excluding U.S.)		803,414		240		—		—		803,654
Other international sales		290,760		12,490		—		8,672		311,922
Total	$	7,548,606	$	479,122	$	1,803,904	$	31,640	$	9,863,272

		For the nine months ended September 30, 2019:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	19,150,535	$	1,389,943	$	2,439,139	$	51,605	$	23,031,222
North and South America sales (excluding U.S.)		4,867,104		5,313		1,044		87,025		4,960,486
Other international sales		622,945		374,498		543		178,256		1,176,242
Total	$	24,640,584	$	1,769,754	$	2,440,726	$	316,886	$	29,167,950

		For the nine months ended September 30, 2018:
Geographic Segment		Syringes		Blood Collection Products		EasyPoint® Needles		Other Products		Total Product Sales
U.S. sales	$	18,097,760	$	991,318	$	2,519,973	$	55,988	$	21,665,039
North and South America sales (excluding U.S.)		2,595,634		8,805		252		900		2,605,591
Other international sales		682,134		36,024		456		21,825		740,436
Total	$	21,375,528	$	1,036,147	$	2,520,681	$	78,713	$	25,011,066

Income taxes

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

The Company provides for deferred income taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects of differences between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in effect when such differences reverse in future periods.  Deferred tax assets are periodically reviewed for realizability.  The Company has established a valuation allowance for its net deferred tax asset as future taxable income cannot be reasonably assured.  Penalties and interest related to income taxes are classified as General and administrative expense and Interest expense, respectively, in the Condensed Statements of Operations.

Earnings per share

The Company computes basic earnings per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period.  Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock.  The calculation of diluted EPS excluded shares of Common Stock underlying issued and outstanding stock options for the three and nine months ended September 30, 2019, as the exercise prices of the stock options were below the average stock price for the periods.  The calculation of diluted EPS excluded shares of Common Stock underlying issued and outstanding stock options for the three and nine months ended September 30, 2018, as their effect was antidilutive.  The calculation of diluted EPS also excludes the impact of the conversion of convertible preferred stock as the impact was antidilutive for all periods presented.  The potential dilution, if any, is shown on the following schedule:

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		Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Net income (loss)	$	1,024,434		$	(63,417	)	$	1,286,965		$	(1,190,407	)
Preferred stock dividend requirements		(175,456	)		(176,249	)		(527,162	)		(528,747	)
Income (loss) applicable to common shareholders	$	848,978		$	(239,666	)	$	759,803		$	(1,719,154	)
Average common shares outstanding		32,674,954			32,666,454			32,671,648			32,666,454
Average common and common equivalent shares outstanding – assuming dilution		32,674,954			32,666,454			32,671,648			32,666,454
Basic income (loss) per share	$	0.03		$	(0.01	)	$	0.02		$	(0.05	)
Diluted income (loss) per share	$	0.03		$	(0.01	)	$	0.02		$	(0.05	)

Shipping and handling costs

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

Self-insured employee benefit costs

The Company self-insures health insurance benefits for its employees under certain policy limits.  The Company has additional coverage provided by an insurance company.  The Company accrues for the cost of such benefits based on known claims and an estimate of incurred but not reported claims.

Research and development costs

Research and development costs are expensed as incurred.

Leases

The Company adopted ASU 2016-02, Leases (Topic 842), as amended, on January 1, 2019 effective for the quarter ended March 31, 2019.  The Company adopted the standard under the modified retrospective approach, which provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach.

The Company determines if an arrangement is a lease at inception.  Operating and finance leases are included in Other assets, Other accrued liabilities, and Other long-term liabilities on the Condensed Balance Sheets. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  As the Company’s leases do not provide an implicit rate, the incremental borrowing rate based on information available at the commencement date was used in determining the present value of lease payments.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives.  Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments is recognized on a straight-line basis over the lease term.  Leases with an initial term of twelve months or less are not recorded on the Condensed Balance Sheets;

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however, rent expense is recognized on a straight-line basis over the lease term.  The Company did not elect to separate lease and non-lease components at the transition date.  The Company elected the package of practical expedients permitted under the transition guidance, which among other things, allows the Company to carry forward the historical lease classification and elect hindsight to determine certain lease terms for existing leases.

Recently Adopted Pronouncements

In August 2018, the Securities and Exchange Commission (SEC) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, “Disclosure Update and Simplification”. The amendments were effective November 5, 2018.  The amendments eliminate or revise several redundant or duplicative requirements between SEC rules and GAAP, including the elimination of the disclosure of the ratio of earnings to fixed charges and the presentation of dividends per share on the face of the statement of operations for interim periods.  Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC staff indicated that it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.  The Company elected to adopt the provisions of Securities Act Release No. 33-10532 for the quarter ended September 30, 2018.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, as well as several subsequently issued clarifying amendments. Under the ASU, as amended, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged. The lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. This amendment clarifies Topic 842 and corrected unintended application of guidance and is effective concurrent with Topic 842 or upon issuance if Topic 842 was early adopted.  In August 2018, the FASB issued ASU 2018-11, “Leases (Topic 842):  Targeted Improvements”. This amendment provides additional transition options allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented and provides a practical expedient to lessors to elect, by class of underlying assets, to account for non-lease and lease components as a single arrangement.  The Company adopted the provisions of ASU 2018-11 through a cumulative effect adjustment.  Topic 842, and its subsequent amendments, was effective for the Company’s quarter ended March 31, 2019. The Company has completed evaluating the various accounting policy elections associated with this ASU, as amended, including transition methods and practical expedients, identifying contracts for evaluation, and reviewing contracts to determine if they contain leases.  The Company completed evaluating the timing and impact of adopting ASU 2016-02, as amended, and recorded lease assets and liabilities of $163,007 on its Balance Sheets in the quarter ended March 31, 2019, with no impact to its accumulated deficit.

Recently Issued Pronouncements

In June 2016, the FASB issued Accounting Standards Update 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as well as subsequent clarifying amendments.  Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  This ASU is effective for the Company’s quarter ending March 31, 2020 with early application permitted.  The Company has considered the potential impact from adoption of ASU 2016-13, as well as the Targeted Transition Relief as provided by ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326) – Targeted Transition Relief.”  The Company expects that the adoption of ASU 2016-13, along with the provisions of ASU 2019-05, will not have a material impact on the Company’s financial statements, but may require expanded disclosure.

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In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)”.  This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should be accounted for in accordance with ASC 350-40.  Accordingly, costs incurred during the preliminary project and post-implementation stages are expensed and costs associated with the application development phase are capitalized.  The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.  The amendment is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods.  The Company has completed its assessment of the standard and does not anticipate a material impact on its financial statements or disclosures.

3.INVENTORIES

Inventories consist of the following:

		September 30, 2019			December 31, 2018
Raw materials	$	1,356,287		$	1,399,543
Finished goods		5,687,035			6,442,759
		7,043,322			7,842,302
Inventory reserve		(297,208	)		(297,208	)
	$	6,746,114		$	7,545,094

4.FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820, “Fair Value Measurements”, defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements.  ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:

·Level 1 – quoted market prices in active markets for identical assets and liabilities

·Level 2 – inputs other than quoted prices that are directly or indirectly observable

·Level 3 - unobservable inputs where there is little or no market activity

The following tables summarize the values of assets designated as Investments in debt and equity securities:

		September 30, 2019
		Level 1		Level 2		Level 3		Total
Mutual funds and exchange traded funds	$	6,315,788	$	—	$	—	$	6,315,788
Certificates of deposit		—		1,415,440		—		1,415,440
	$	6,315,788	$	1,415,440	$	—	$	7,731,228

		December 31, 2018
		Level 1		Level 2		Level 3		Total
US Treasury Notes	$	—	$	1,411,156	$	—	$	1,411,156
Certificates of deposit		—		1,575,000		—		1,575,000
	$	—	$	2,986,156	$	—	$	2,986,156

The Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, and debt securities as investments.  These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. The Company intends to hold these assets for possible future operating requirements.

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The following table summarizes gross unrealized gains and losses from investments in debt and equity securities:

		September 30, 2019
				Gross Unrealized				Aggregate
		Cost		Gains		Losses		Fair Value
Mutual funds and exchange traded funds	$	6,201,500	$	114,288	$	—	$	6,315,788
Certificates of deposit		1,400,000		15,440		—		1,415,440
	$	7,601,500	$	129,728		—	$	7,731,228

		December 31, 2018
				Gross Unrealized				Aggregate
		Cost		Gains		Losses		Fair Value
US Treasury Notes	$	1,411,156	$	—	$	—	$	1,411,156
Certificates of deposit		1,575,000		—		—		1,575,000
	$	2,986,156	$	—		—	$	2,986,156

5.INCOME TAXES

The Company’s effective tax rate on the net income (loss) before income taxes was 0.6% and 0.0% for the nine months ended September 30, 2019 and September 30, 2018, respectively.  For the three months ended September 30, 2019 and September 30, 2018, the Company’s effective tax rate on the net income (loss) before income taxes was 0.4% and 0.0%, respectively.

6.OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

		September 30, 2019		December 31, 2018
Prepayments from customers	$	530,997	$	860,926
Accrued property taxes		351,100		170,568
Accrued professional fees		188,257		294,903
Other accrued expenses		150,447		141,538
Total	$	1,220,801	$	1,467,935

7.BUSINESS SEGMENT

The Company does not operate in separate reportable segments.  Shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit.  The Company does extend credit to international customers on some occasions depending upon certain criteria, including, but not limited to, the credit worthiness of the customer, the stability of the country, banking restrictions, and the size of the order.  All transactions are in U.S. currency.

Revenues by geography are as follows:

		Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
U.S. sales	$	9,039,208	$	8,747,696	$	23,031,222	$	21,665,039
North and South America sales (excluding U.S.)		2,432,734		803,654		4,960,486		2,605,591
Other international sales		167,644		311,922		1,176,242		740,436
Total sales	$	11,639,586	$	9,863,272	$	29,167,950	$	25,011,066

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Long-lived assets by geography are as follows:

	September 30, 2019		December 31, 2018
Long-lived assets
U.S.	$	10,602,380	$	10,738,253
International		95,400		113,494
Total	$	10,697,780	$	10,851,747

8.DIVIDENDS

The Board declared and the Company paid dividends in 2018 in the amounts of $12,313 and $42,800 paid to Series I Class B and Series II Class B Preferred Stockholders, respectively, on January 19, 2018, April 24, 2018, July 20, 2018, and October 23, 2018.  The Board declared and the Company paid dividends in 2019 in the amounts of $12,313 and $42,800 paid to Series I Class B and Series II Class B Preferred Stockholders, respectively, on January 18, 2019 and April 22, 2019.  Additionally, the Board declared and the Company paid dividends of $12,000 and $42,800 to Series I Class B and Series II Class B Preferred Stockholders, respectively, on July 19, 2019 and October 21, 2019.

In the second quarter of 2019, shareholders converted a total of 2,500 shares of Series I Class B Preferred Stock and 6,000 shares of Series V Class B Preferred Stock into the same number of shares of Common Stock.

9.LEASES

The Company has operating leases for a corporate office and equipment.  The leases have remaining lease terms of one to two years.  The Company currently has no finance leases.  The ROU asset is determined based on the lease liability adjusted for lease incentives received.  Lease expense is recognized on a straight-line basis over the lease term.  The leases may include various expenses incidental to the use of the property, such as common area maintenance, property taxes and insurance.  These costs are separate from the minimum rent payment and are not considered in the determination of the lease liability and ROU asset.  The Company has not noted any material instances in its leases where these costs were combined with the minimum rent payment and has therefore elected the policy to not separate lease from non-lease components if they are combined with the minimum rent payment.  The option periods are not included in the determination of the lease liability and right-of-use asset as the Company is not reasonably certain if it will extend at the time of lease commencement.

The operating lease cost component of the lease expense was $20,264 and $60,175 for the three and nine months ended September 30, 2019.  The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $20,264 and $60,175 for the three and nine months ended September 30, 2019.

Assets and liabilities associated with these leases included in the Balance Sheets are as follows:

		September 30, 2019		December 31, 2018
OPERATING LEASES
Other assets	$	102,832	$	163,007
Other accrued liabilities	$	81,933	$	80,648
Other long-term liabilities		20,899		82,359
Total operating lease liabilities	$	102,832	$	163,007

The weighted average remaining lease term is 1.24 years and the weighted average discount rate is 4.02%.

Future minimum payments under non-cancelable operating leases and financing leases consist of the following at September 30, 2019:

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Year ending December 31,
Remainder of 2019	$	21,436
2020		84,155
Total		105,591
Less imputed interest		(2,759	)
Total	$	102,832

10.HELD-TO-MATURITY SECURITIES – CORRECTION OF ERRORS

The Condensed Balance Sheet as of December 31, 2018 has been revised to reflect a correction of an error to the classification of investments previously recorded as Held-to-Maturity.  During the quarter ended June 30, 2019, the Company determined that, during 2018, it had incorrectly classified certain investments as Held-to-Maturity that should have been classified as Available-for-Sale.  The Company views the correction of the classification error to be immaterial to previously filed financial statements.  Nonetheless, the Company has revised the presentation of the Condensed Balance Sheet at December 31, 2018 to reflect the reclassification of all previously recorded Held-to-Maturity investments as Available-for-Sale.  The effect on the Condensed Balance Sheet as of December 31, 2018 is to reclassify $2,986,156 from Held-to-Maturity securities to Investments in debt and equity securities, at fair value.  In addition, Total current assets at December 31, 2018 were increased by $1,989,923 as a result of this reclassification.  There was no impact to the Statement of Operations for 2018.  The Company will revise its previously-issued financial statements on a prospective basis for this classification error as well as the related disclosures of the fair value of financial instruments.

11.SUBSEQUENT EVENTS

On November 7, 2019, the Company filed a lawsuit in the 44th District Court of Dallas County, Texas (No. DC-19-17946) against Locke Lord, LLP and Roy Hardin in connection with their legal representation of the Company in its previous litigation against Becton, Dickinson and Company (“BD”).  The Company alleges that the defendants breached their fiduciary duties, committed malpractice, and were negligent in their representation of the Company.  The Company seeks actual and exemplary damages, disgorgement, costs, and interest.

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

FORWARD-LOOKING STATEMENT WARNING

Certain statements included by reference in this filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to quickly increase capacity in response to an increase in demand, our ability to access the market, our ability to maintain or lower production costs, our ability to continue to finance research and development as well as operations and expansion of production, the impact of larger market players, in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors in Part II.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We have been manufacturing and marketing our products since 1997.  VanishPoint® syringes comprised 85.0% of our sales in the first nine months of 2019.  We also manufacture and market the EasyPoint® needle, blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set.  We currently provide other safety

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medical products in addition to safety products utilizing retractable technology.  One such product is the Patient Safe® syringe, which is uniquely designed to reduce the risk of bloodstream infections associated with catheter hub contamination.

In the second quarter of 2016, we began selling the EasyPoint® needle.  EasyPoint® needles made up 10.3% of revenues for the year ended December 31, 2018 and 8.4% of revenues in the first nine months of 2019.  The EasyPoint® is a retractable needle that can be used with Luer lock syringes, Luer slip syringes, and prefilled syringes to give injections.  The EasyPoint® needle can also be used to aspirate fluids and collect blood.

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.

Our products have been and continue to be distributed nationally and internationally through numerous distributors.  Although we have made limited progress in some areas, such as the alternate care market, our volumes are not as high as they should be given the nature and quality of our products and the federal and state legislation requiring the use of safe needle devices. The alternate care market is composed of facilities that provide long-term nursing and out-patient surgery, emergency care, physician services, health clinics, and retail pharmacies.

We continue to pursue various strategies to have better access to the hospital market, as well as other markets, including attempting to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.

Effective May 3, 2019, we settled and released all past claims against BD and MDC in return for a settlement and release of past claims against us from BD and MDC.  On May 6, 2019, filings were made with the U.S. Court of Appeals for the Fifth Circuit to cease further proceedings in our antitrust and false advertising suit against BD and in the U.S. District Court for the Eastern District of Texas to dismiss BD and MDC’s suit against us for patent infringement.

In November 2018, we terminated 19 employees earning total annual compensation of approximately $1.12 million.  Severance costs associated with the 2018 terminations were $244 thousand.

In January 2018, Congress imposed another two-year moratorium on the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191.  Thus, the medical device excise tax is not expected to go into effect until January 1, 2020.

Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost.  In the first nine months of 2019, our Chinese manufacturers produced approximately 82.1% of our products.  In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology.  This technology is the subject of various patents and patent applications owned by Mr. Shaw.  The license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales.  The license agreement also provides for royalties to Mr. Shaw in the event the Company receives licensing fees, as described herein.

With increased volumes, our manufacturing unit costs have generally tended to decline.  Factors that could affect our unit costs include possible tariffs, increases in costs by third party manufacturers, changing production volumes, costs of petroleum products, and transportation costs.  Increases in such costs may not be recoverable through price increases of our products.

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RESULTS OF OPERATIONS

The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties.  Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements.  Dollar amounts have been rounded for ease of reading.  All period references are to the periods ended September 30, 2019 or 2018.

Comparison of Three Months Ended September 30, 2019 and September 30, 2018

Domestic sales accounted for 77.7% and 88.7% of revenues for the three months ended September 30, 2019 and 2018, respectively.  Domestic revenues increased 3.3%. The domestic product mix may be more heavily weighted to syringes.  Domestic unit sales decreased 6.7% principally because the flu season shifted to later in the year.  Domestic unit sales were 69.2% of total unit sales for the three months ended September 30, 2019.  International revenue and unit sales increased 133.1% and 152.3%, respectively, due to increased unit sales.  Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders.  Overall unit sales increased 15.8%.

The Cost of manufactured product increased by 11.8% principally due to an increase in the units sold.  Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix.  Royalty expense increased 8.5% due to increased gross sales.

Gross profit increased 34.8% primarily due to an increase in international sales.

Operating expenses were almost flat, with a 2.3% decrease.

Our operating income was $978 thousand compared to an operating loss for the same period last year of $60 thousand due primarily to an increase in international sales.

Interest and other income increased $52 thousand for the quarter ended September 30, 2019 compared to the same period last year due to recognition of unrealized gains on investments and accrued interest on deposits.

Our effective tax rate on the net income (loss) before income taxes was 0.4% for the three months ended September 30, 2019 and 0.0% for the three months ended September 30, 2018.

Comparison of Nine Months Ended September 30, 2019 and September 30, 2018

Domestic sales accounted for 79.4% and 86.6% of revenues, excluding product licensing fees, for the nine months ended September 30, 2019 and 2018, respectively.  Domestic revenues increased 6.3%. The domestic product mix may be more heavily weighted to syringes.  Domestic unit sales increased 5.8%.  Domestic unit sales were 72.3% of total unit sales for the nine months ended September 30, 2019.  International revenue, excluding product licensing fees, and unit sales increased 78.5% and 76.3%, respectively, due to increased unit sales.  Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders.  Overall unit sales increased 18.9%.

The Cost of manufactured product increased by 15.5% principally due to an increase in the units sold.  Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix.  Royalty expense increased 16.3% due to increased gross sales and product licensing fees.  The Company recognized $163 thousand in product licensing fees in the first nine months of 2019.  Such licensing fees are subject to a 50% royalty to Mr. Shaw under the terms of his Technology License Agreement.

Gross profit increased 19.0% primarily due to an overall increase in sales.

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Operating expenses decreased 9.3%.  The decrease was due to cost cutting measures implemented in the fourth quarter of 2018.  The cost cutting measures included a decrease in payroll costs initiated in November of 2018, as well as a reduction in legal expenses.

Our operating income was $1.1 million compared to an operating loss for the same period last year of $1.2 million due primarily to a combination of an increase in sales and a reduction of expenses.

Interest and other income increased $190 thousand for the nine months ended September 30, 2019.  This is a result of the increase in the unrealized value of investments and accrued interest on deposits.

Our effective tax rate on the net income (loss) before income taxes was 0.6% for the nine months ended September 30, 2019 and 0.0% for the nine months ended September 30, 2018.

Discussion of Balance Sheet and Statement of Cash Flow Items

Cash comprises 14.6% of total assets.  Working capital was $18.3 million at September 30, 2019, an increase of $1.1 million from December 31, 2018.

Cash flow provided by operations was $1.5 million for the nine months ended September 30, 2019 due primarily to net income for the period.

Investments in debt and equity securities accounts for $7.7 million, or 28.5% of current assets at September 30, 2019, an increase of $4.7 million from December 31, 2018. The balance of $7.7 million includes a $129 thousand net unrealized gain for the nine months ended September 30, 2019.

LIQUIDITY

At the present time, Management does not intend to publicly raise equity capital.  We have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing, when available, as the primary ongoing sources of cash. Our ability to obtain additional funds through loans is uncertain.

In the first quarter of 2019, we invested approximately $4.5 million in exchange-traded and closed-end funds (ETFs) and mutual funds.  These investments significantly decreased our cash accounts since December 31, 2018.  However, we believe that these investments, along with our investment of approximately $3.0 million in the fourth quarter of 2018, may increase our investment income in the future.  During the second quarter of 2019, we sold approximately $1.4 million in debt securities and reinvested in mutual funds.  We believe that the alteration of our portfolio of invested funds may provide greater returns on investment.  We continue to assess the performance of our investments and will monitor opportunities to utilize invested funds as a means of providing income and adding overall value.  Our investments are classified as available for sale and can be readily sold if cash is needed.  The timing of any sale, depending on the prevailing market value of the investments at the time, could result in loss of the principal invested.

Historical Sources of Liquidity

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

Internal Sources of Liquidity

Margins and Market Access

To routinely achieve routinely positive or break even quarters, we need increased access to hospital markets which has been difficult to obtain.  We will continue to attempt to gain access to the market through our sales efforts, innovative technology, the introduction of new products, and, when necessary, litigation.

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

Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable manufacturing arrangements and relationships could result in the need to manufacture all (as opposed to 17.9%) of our products in the U.S. or find other manufacturers.  This could temporarily increase unit costs as we ramp up domestic production.

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The mix of domestic and international sales affects the average sales price of our products.  Generally, the higher the ratio of domestic sales to international sales, the higher the average sales price will be.  Some international sales of our products are shipped directly from China to the customer.  The number of units produced by us versus manufactured in China can have a significant effect on the carrying costs of Inventory as well as Cost of sales.  We will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in China to achieve economic benefits as well as to maintain our domestic manufacturing capability.

Seasonality

Historically, unit sales have increased during the flu season.

Cash Requirements

We have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing, when available, as the primary ongoing sources of cash.  We have taken steps to decrease our legal and other costs and we continue to evaluate these costs.  In the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, further reduce the workforce, reduce the salaries of officers and other employees, and/or defer royalty payments.

External Sources of Liquidity

We have obtained several loans since our inception, which have, together with the proceeds from the sales of equities and litigation efforts, enabled us to pursue development and production of our products.  Our ability to obtain additional funds through loans is uncertain.  Due to the current market price of our Common Stock, it is unlikely we would choose to raise funds by the public sale of equity.

CAPITAL RESOURCES

There were no material commitments for capital expenditures in the third quarter of 2019.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.Controls and Procedures.

Disclosure Controls and Procedures

Pursuant to 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, John W. Fort III (the “CFO”), acting in their capacities as our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in our periodic reports is: i) recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and ii) accumulated and communicated to our Management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

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Changes in Internal Control Over Financial Reporting

There have been no changes during the third quarter of 2019 or subsequent to September 30, 2019 in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.Legal Proceedings.

On November 7, 2019, we filed a lawsuit in the 44th District Court of Dallas County, Texas (No. DC-19-17946) against Locke Lord, LLP and Roy Hardin in connection with their legal representation in the litigation against BD.  We allege that the defendants breached their fiduciary duties, committed malpractice, and were negligent in their representation.  We are seeking actual and exemplary damages, disgorgement, costs, and interest.

Item 1A.Risk Factors.

There were no material changes in our Risk Factors as set forth in our most recent annual report which is available on EDGAR.

Item 3.Defaults Upon Senior Securities.

Working Capital Restrictions and Limitations on the Payment of Dividends

The Company declared a dividend to the Series I Class B and Series II Class B Convertible Preferred Shareholders in the aggregate amount of $54,800.  This dividend was paid on October 21, 2019.

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

Series I Class B Convertible Preferred Stock

For the nine months ended September 30, 2019, no dividends were in arrears.

Series II Class B Convertible Preferred Stock

For the nine months ended September 30, 2019, no dividends were in arrears.

Series III Class B Convertible Preferred Stock

For the nine months ended September 30, 2019, the amount of dividends in arrears was $96,934 and the total arrearage was $4,372,000 as of September 30, 2019.

Series IV Class B Convertible Preferred Stock

For the nine months ended September 30, 2019, the amount of dividends in arrears was $256,875 and the total arrearage was $6,740,000 as of September 30, 2019.

Series V Class B Convertible Preferred Stock

For the nine months ended September 30, 2019, the amount of dividends in arrears was $8,640 and the total arrearage was $1,017,000 as of September 30, 2019.

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Item 6.Exhibits.

Exhibit No.	Description of Document
31.1	Certification of Principal Executive Officer
31.2	Certification of Principal Financial Officer
32	Certification Pursuant to 18 U.S.C. Section 1350
101	The following materials from Retractable Technologies, Inc.’s Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Condensed Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, (iv) Condensed Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018; and (v) Notes to Condensed Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE:    November 14, 2019	RETRACTABLE TECHNOLOGIES, INC.
	(Registrant)
	BY:	/s/ JOHN W. FORT III
		JOHN W. FORT III VICE PRESIDENT, CHIEF FINANCIAL OFFICER, AND CHIEF ACCOUNTING OFFICER

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