SEC Form 10-Q filed by Retractable Technologies Inc.

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. The Company recorded no lower of cost or net realizable value inventory adjustment associated with the VanishPoint^® 3mL and EasyPoint^® needle product segments as of March 31, 2025 and December 31, 2024.  

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. Once inventory items are deemed to be either excess or obsolete, they are written down to their net realizable value.

Investments in debt and equity securities

The Company holds mutual funds, debt, and equity securities as investments.  These assets are held as trading securities and are carried at fair value as of the date of the Condensed Balance Sheets. Net unrealized and realized gains or losses on these investments are reflected separately on the Condensed Statements of Operations. Realized gains or losses on investments are recognized using the specific identification method.

Property, plant, and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. 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 costs associated with significant capital additions.  Gains or losses from disposals are included in Interest and other income.

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.

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 debt and equity securities consist primarily of individual equity securities and mutual funds and are reported at their fair value based upon quoted prices in active markets.  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, exchange-traded and closed-end funds, mutual funds, equity securities, 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 equity securities through consultation with its outside investment advisors.  Management is responsible for directing investment activity based on current economic conditions.  The majority of accounts receivable are due from companies which are well-established entities. Management considers any exposure from concentrations of credit risks to be limited.

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China.  The Company obtained 62.7% of its products in the first three months of 2025 from its Chinese manufacturers.  Purchases from Chinese manufacturers aggregated 90.4% of products in the first quarter of 2024.  In the event that the Company becomes unable to purchase product from its Chinese manufacturers or produce those products domestically, the Company may need to find an alternate manufacturer for its blood collection set, IV catheter, Patient

Revenue recognition

The Company recognizes revenue when control of performance obligations passes to the customer, generally when the product ships.  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 purchased the products, and (ii) a provision for estimated contractual pricing allowances for products for which the Company has not received tracking reports.  When rebates are issued, they 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 $1.7 million and $2.1 million as of March 31, 2025 and December 31, 2024, 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 has not historically incurred significant returns.

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

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.  As of March 31, 2025, and December 31, 2024, the Company recorded valuation allowances of $11.3 million and $9.1 million, respectively, against its net deferred tax asset.

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 and/or common stock issuable upon the conversion of convertible preferred stock.

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Shipping and handling costs

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

Share-based Compensation

The Company’s share-based payments are accounted for using the Black-Scholes fair value method.  The Company generally records share-based compensation expense on a straight-line basis over the requisite service period.  The Company records forfeitures as they occur.

Self-insured employee benefit costs

The Company self-insures certain health insurance benefits for its employees under certain policy limits.  The Company has additional coverage provided by an insurance company for any individual with claims in excess of $110,000 and/or total plan claims in excess of $1.4 million for the plan year.

Research and development costs

Research and development costs are expensed as incurred.

Technology Investment Agreement (TIA)

Effective July 1, 2020, the Company entered into a Technology Investment Agreement (“TIA”) with the United States Government Department of Defense, U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA), as amended, for $81,029,518 in government funding for expanding the Company’s domestic production of needles and syringes. At the request of the US government, the TIA was transferred to a successor agreement, identified as Other Transaction Agreement in April 2023.  Such agreement contains no additional requirements and, for the purposes of this report, the agreement shall continue to be referred to herein as the “TIA”.  Under this agreement, the Company has made significant additions to its facilities which allows the Company to increase domestic production capacity.  For further explanation, please refer to Note 7 – Technology Investment Agreement.

As reimbursements were received from the U.S. government for expenditures under the TIA, the Company recorded a deferred liability. In 2021, the deferred liability began to be systematically amortized as a gain over the life of the related property, plant, and equipment and is presented as Other income – TIA on the Statements of Operations.  For any reimbursements received for expenditures not capitalized as property, plant, and equipment, Other income – TIA was recognized in the same period as the expense.

Recently Adopted Pronouncements

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure." The amendments expand segment disclosures for public entities by requiring the disclosure of significant segment expenses regularly provided to the chief operating decision maker, along with other new and enhanced disclosures, including those for interim periods.  Under ASU 2023-07, public entities with a single reportable segment must provide all disclosures required by this standard, as well as existing segment disclosures under Topic 280, on both an interim and annual basis. The standard is effective for annual periods beginning after December 15, 2023, and for interim periods starting after December 15, 2024, with retrospective application allowed and early adoption permitted.  As of December 31, 2024, the Company has adopted ASU 2023-07. While the adoption has not affected the Company's financial statements, it has resulted in additional disclosures.  Refer to Note 9 – Business Segment for required disclosures.

In March 2024, the FASB issued ASU 2024-02, “Codification Improvements — Amendments to Remove References to the Concepts Statements”, which amends the Codification to remove references to various concepts statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas.   ASU 2024-02 is effective for public business entities for fiscal periods beginning after December 15, 2024.  For all other entities, it is effective for fiscal years, including interim periods within those fiscal years beginning after December 15, 2025.  Early adoption is permitted for all entities for any fiscal year or interim period for which financial statements have not yet been issued or made available for issuance.   The Company adopted ASU 2024-02 as of January 1, 2025 with no impact on the Company’s financial statements.

Recently Issued Pronouncements

In November 2024, the FASB issued ASU 2024-03,  "Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses." This update enhances the requirements for public companies to provide more detailed and structured disclosures of their expenses, aiming to improve transparency in financial reporting. The new guidance is effective for fiscal reporting periods beginning after December 15, 2026, and for interim periods starting after December 15, 2027. Early adoption is permitted for fiscal financial statements that have not yet been issued or made available for issuance.  Companies can choose to apply the amendment either prospectively to periods beginning after the effective date or retrospectively to prior periods presented in their financial statements. The Company is evaluating the adoption of the amendments and the potential impact it may have, if any, on its financial statements.