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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2016

or

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)

972-294-1010

Registrant’s telephone number, including area code

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

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

Preferred Stock

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o   No  x

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes  x   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  The aggregate market value of the common equity held by non-affiliates as of June 30, 2016, was $35,012,406, assuming a closing price of $2.52 and outstanding shares held by non-affiliates of 13,893,812.

APPLICABLE ONLY TO REGISTRANTS 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 Section 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  o

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of March 1, 2017, there were 31,666,454 shares of our Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:  (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

None except exhibits.

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RETRACTABLE TECHNOLOGIES, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2016

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PART I

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, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, 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, specifically Becton, Dickinson and Company (“BD”), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

Item 1. Business.

DESCRIPTION OF BUSINESS

General Development of Business

On May 9, 1994, our company was incorporated in Texas to design, develop, manufacture, and market innovative patented safety medical products for the healthcare industry.  Our goal is to become a leading provider of safety medical products. Advantages of our safety products include protection from needlestick injuries, prevention of cross contamination through reuse, and reduction of disposal and other associated costs.

We have designed, developed, and currently market the VanishPoint® and Patient Safe® products.  The VanishPoint® products are designed specifically to prevent needlestick injuries and to prevent reuse.  The patented designs permit the automated retraction of the needle directly from the patient after completion of the procedure.

Our VanishPoint® safety products currently consist of tuberculin, insulin, and allergy antigen VanishPoint® syringes; 0.5mL, 1 mL, 2mL, 3mL, 5mL, and 10mL VanishPoint® syringes; and the VanishPoint® autodisable syringe.

We also sell the VanishPoint® IV catheter; the VanishPoint® blood collection tube holder; and the VanishPoint® blood collection set.

The Patient Safe® syringe embodies a unique patented design and protects patients by reducing the risk of bloodstream infections associated with catheter hub contamination.  Our Patient Safe® products currently consist of 3mL, 5mL, 10mL, 20mL, 30mL, 60mL syringes and the Patient Safe® Luer cap.

In the second quarter of 2016, we began selling a new product, the EasyPoint® needle.  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.  According to a December 2016 press release from Zion Market Research, prefilled syringes play an important role in the injectable drug delivery devices market and the compound annual growth rate is expected to be approximately 9.5% between 2016 and 2021.  The global market size for prefilled syringes was approximately 4.1 billion units ($3.5 billion) in 2015.

We currently have under development additional safety products that add to or build upon our current product line offering.  These products include: retractable needles and syringes, glass syringes, dental syringes, IV catheter introducers, and blood collection sets.

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Our products have been and continue to be distributed nationally through numerous distributors.  However, we have been blocked from access to the market by the practices engaged in by BD which dominates our market.  We initiated a lawsuit in 2007 against BD.  As previously reported, on December 2, 2016, the Fifth Circuit Court of Appeals overturned a district court judgment that had previously awarded us $340 million in antitrust damages from BD, but affirmed a finding of false advertising liability against BD and remanded the case to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled.  Although the result of the damages redetermination is unknown, our stock price materially declined following the entry of the Fifth Circuit’s opinion.  The Eastern District of Texas trial date is May 11, 2017.  Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.

We have taken steps to reduce our future litigation expenses and expect such expenses to be significantly less in 2017.

We reevaluated several compensation strategies in late 2016 and early 2017.  See Compensation Discussion and Analysis.  We also approved three of our executive officers to purchase shares directly from the Company.  Thomas J. Shaw exercised a portion of such right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million.

In April of 2016, Mr. Shaw exercised an option for one million shares for an aggregate exercise price of $810 thousand.  Another director exercised a portion of a stock option for an aggregate exercise price of $16 thousand in March of 2016 and $12 thousand in March of 2015.

We continue to attempt to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.

The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium on the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191.  Thus, the medical device excise tax was suspended beginning on January 1, 2016 and ending on December 31, 2017.  The impact of this tax was $360,000 in 2015 and $856,000 in 2014.

In 2014, the Company took steps to decrease non-litigation legal costs by approximately $1.1 million.  In 2014 and 2015, the Company reduced its workforce to further cut costs.  In the future, if such cost cutting measures prove insufficient, we may reduce other operating expenses, reduce the workforce, reduce the salaries of officers as well as other employees, and/or defer royalty payments.  The Company instituted two percent raises for most non-executive employees in early 2016 and engaged in other compensation increases for executive officers in late 2016 and early 2017.  See Compensation Discussion and Analysis.

We exchanged 728,000 shares of Common Stock for 200,000 shares of our Series IV Class B Convertible Preferred Stock as of November 30, 2015, pursuant to an agreement with a shareholder.  Such shareholder agreed to waive all unpaid dividends in arrears associated with the tendered preferred stock, equaling $3,094,795.  Future dividend requirements of $200,000 per year are avoided as a result of this transaction.

Financial Information

Please see the financial statements in Item 8. Financial Statements and Supplementary Data for information about our revenues, profits, and losses for the last three years and total assets, liabilities, and stockholder equity for the last two years.

Principal Products

Our products, with Notice of Substantial Equivalence to the U.S. Food and Drug Administration (“FDA”) and which are currently sold, include the 1mL tuberculin; insulin syringes; allergy antigen VanishPoint® syringes; 0.5mL, 2mL, 3mL, 5mL, and 10mL VanishPoint® syringes; EasyPoint® needle, the VanishPoint® blood collection tube holder; the VanishPoint® IV safety catheter; small diameter tube adapter; the allergy tray; the Patient Safe® syringes; the Patient Safe® Luer Cap; and the VanishPoint® Blood Collection Set.  We are also selling VanishPoint® autodisable syringes in the international market in addition to our other products.

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Syringe sales comprised 97.3%, 98.2%, and 93.0% of revenues in 2014, 2015, and 2016, respectively.  EasyPoint® needles, which were introduced in the second quarter of 2016, made up 4.5% of revenues in 2016.

Principal Markets

Our products are sold to and used by healthcare providers primarily in the U.S. (with 11.8% of revenues in 2016 generated from sales outside the U.S.) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, long-term care facilities, Veterans Administration facilities, military organizations, public health facilities, and prisons.

The need to change to safety devices is due to the risk that is carried with each needlestick injury which includes the potential transmission of over 20 bloodborne pathogens, including the human immunodeficiency virus (“HIV,” which causes AIDS), hepatitis B, and hepatitis C.  Because of the occupational and public health hazards posed by conventional disposable syringes, public health policy makers, domestic organizations, and government agencies have been involved in the effort to get more effective safety needle products to healthcare workers.  Federal legislation was signed into law on November 6, 2000, by former President William Jefferson Clinton.  This legislation, which became effective for most states on April 12, 2001, requires safety needle products be used for the vast majority of procedures.  However, even with this requirement, some hospitals are neglecting to follow the law intended to protect healthcare workers.

A healthcare journal (AOHP Journal) published an article in 2013 indicating that over 320,000 needlestick injuries occur every year in the United States.

Methods of Marketing and Distribution

Under the current supply chain system in the U.S. acute care market, the vast majority of decisions relating to the contracting for and purchasing of medical supplies are made by the representatives of group purchasing organizations (“GPOs”) and purchasing representatives rather than the end-users of the product (nurses, doctors, and testing personnel).  The GPOs and larger manufacturers often enter into contracts which can prohibit or limit entry in the marketplace by competitors.

We distribute our products throughout the U.S. through general line and specialty distributors.  We also use international distributors.  We have developed a national direct marketing network in order to market our products to health care customers and their purchaser representatives.  Our marketers make contact with all of the departments that affect the decision-making process for safety products, including the purchasing agents.  They call on acute care and alternate care sites and speak directly with the decision-makers of these facilities.  We employ trained sales representatives and clinicians, including nurses and/or medical technologists that educate healthcare providers and healthcare workers on the use of safety devices through on-site clinical training, exhibits at related tradeshows, and publications of relevant articles in trade journals and magazines.  These employees provide clinical support to customers.  In addition to marketing our products, the network demonstrates the safety and cost effectiveness of our products to customers.

In the needle and syringe market, the market share leader, BD, has utilized conduct which we believe has restricted the entry of VanishPoint® syringes into the market.  Other products manufactured by us that are being denied market access as a result of BD’s actions include the IV safety catheters and Patient Safe® syringes.

We have numerous agreements with organizations for the distribution of our products in foreign markets.  In Canada, the provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, and Saskatchewan have passed laws or regulations regarding healthcare worker safety and the use of safe needle products.  The European Union has issued Directive 2010/32/EU regarding safe procedures and the use of safe needle products to prevent needlestick injuries.  Peru’s vaccination manual mandates that all syringes used in that country’s national vaccination program must be retractable syringes.  Brazil has also initiated a regulation requiring the use of safe needle products to prevent needlestick injuries.  Except for Victoria and Western Australia, all of the states and territories of Australia have guidelines or directives regarding the prevention of needlestick injuries.

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Key components of our strategy to increase our market share are to: (a) defeat unfair practices through litigation; (b) focus on methods of upgrading our manufacturing capability and efficiency in order to enable us to reduce costs and improve profit margins; (c) continue marketing emphasis in the U.S.; (d) continue to add Veterans Administration facilities, health departments, emergency medical services, federal prisons, long-term care, home healthcare facilities, and retail pharmacies as customers; (e) educate healthcare providers, insurers, healthcare workers, government agencies, government officials, and the general public on the reduction of risk and the cost effectiveness afforded by our products; (f) market product through GPO contracts and supply Integrated Delivery Networks where possible; (g) consider possibilities for future licensing agreements and joint venture agreements for the manufacture and distribution of safety products in the U.S. and abroad; (h) introduce new products; and (i) increase international sales.

Status of Publicly Announced New Products

We have applied for patent protection and are in the process of developing additional safety medical products.

EasyPoint® needles, which were introduced in the second quarter of 2016, made up 4.5% of revenues in 2016.  Our application for a CE mark is under review by bsi.

Sources and Availability of Raw Materials

We purchase most of our product components from single suppliers, including needle adhesives and packaging materials.  There are multiple sources of these materials.  We own the printing plates that are used to print artwork on packaging materials and the molds that are used to manufacture the plastic components of our products in the U.S.  Our current suppliers include AMCOR, Bemis Healthcare Packaging Inc., Caraustar, Channel Prime Alliance, Exacto, Interwire, KovacMed, Plastic Ingenuity, and Polyone.

Patents, Trademarks, Licenses, and Proprietary Rights

Soon after the Company was formed in May 1994, in recognition of the preexisting technology, intellectual property rights, products, inventive knowhow and ongoing research and development projects (the “Core Technology”) that were brought into the Company by Thomas J. Shaw as its founder and CEO, the Company and Mr. Shaw entered into a Technology License Agreement dated June 23, 1995, which was subsequently amended July 3, 2008, and again to its present form September 7, 2012.

As amended, the Technology License Agreement encompasses the Core Technology, all technology and knowhow arising out of the Core Technology that has been developed since its inception, all related future improvements, and all the related domestic and foreign patents and patent applications naming Mr. Shaw as an inventor.  The knowhow component is broadly defined to include both technical and valuable proprietary business information.  Under the Technology License Agreement, Mr. Shaw has granted the Company an exclusive worldwide license in the inventions and under his related patent rights to manufacture, market, sell and distribute the licensed technology and improvements that perform the same function in a better or more economical way.  The Company has the right to grant sublicenses and assign the Technology License Agreement subject to Mr. Shaw’s approval.  The term of the Technology License Agreement is coextensive with the life of the patent rights that are subject to it.

In return for the rights granted, the Company paid Mr. Shaw an initial licensing fee and pays a continuing 5% royalty on gross sales, as well as the costs of obtaining and maintaining the patents subject to the license.  The Company has reserved the right to control patent prosecution and the right not to pursue or maintain any patent or patent application, in which case the rights in any non-elected technology revert to Mr. Shaw and are excluded from the license.  The Technology License Agreement also acknowledges a march-in right held by the U.S. government as a result of federal funding that was provided under Small Business Innovation Research grants made during the early development of what later became the Company’s VanishPoint® product line.

The Company holds exclusive rights under domestic and foreign patents and has pending applications related to the technology embodied in products that are currently marketed.  The Company also holds rights related

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to new products under development.  The patents exclusively licensed by the Company have varying remaining terms and expiration dates.  While patents covering some features of the VanishPoint® syringes have recently expired, another patent with a later expiration date will continue to provide patent coverage for VanishPoint® syringes until 2020.

The Company has also registered the following trade names and trademarks: VanishPoint®, EasyPoint®, Patient Safe®, VanishPoint® logos, RT with a circle mark, the Spiral Logo used in packaging VanishPoint® products, the color coded spots on the ends of our VanishPoint® syringes and others.  The Company has also obtained federal trademark protection for the slogan “The New Standard for Safety.”  The Company has trademarked the slogan “We Make Safety Safe” and is awaiting registration for it.

We are involved in patent litigation detailed in Item 3. Legal Proceedings.  We have decided, on the advice of patent counsel, not to purchase patent insurance because it would require inappropriate disclosure of information that is currently proprietary and confidential.

Seasonality

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

Working Capital Practices

Cash and cash equivalents include unrestricted cash, money market accounts, and investments with original maturities of three months or less.

We record trade receivables when revenue is recognized.  No product has been consigned to customers.  Our 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.

Inventories are valued at the lower of cost or market, with cost being determined using actual average cost.  The Company compares the average cost to the market price and records the lower value.  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.

Receivables are established for federal and state taxes where we have determined we are entitled to a refund for overpayments of estimated taxes or loss carrybacks.

Accounts payable and other short-term liabilities include amounts that we believe we have an obligation for at the end of year.  These include charges for goods or services received in 2016 but not billed to us at the end of the year.  It also includes estimates of potential liabilities such as rebates and other fees.

Our domestic return policy is set forth in our standard Distribution Agreement.  This 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 us and affix the code to the returned product.  We will not accept returned goods without a returned goods authorization number.  We may refund the customer’s money or replace the product.

Our 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 upon the following terms: i) an “overstocked” product is that portion of distributor’s inventory of the product which exceeds distributor’s sales volume for the product during the preceding four months; ii) distributor must not have taken delivery of the product which is overstocked during the preceding

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four months; iii) overstocked product held by distributor in excess of 12 months from the date of original invoice will not be eligible for return; iv) the product must have an expiration date of at least 12 months from the date of return; v) the overstocked product must be returned to us in our saleable case cartons which are unopened and untampered, with no broken or re-taped seals; vi) distributor will be granted a credit which may be used only to purchase other products from us, the credit to be in the amount of the invoice price of the returned product less a 10% restocking fee which will be assessed against distributor’s subsequent purchase of product; vii) distributor must obtain an authorization code from our distribution department and affix the code to the returned product; and viii) distributor shall bear the cost of shipping the returned products to us.  All product overstocks and returns are subject to inspection and acceptance by us.

Our international contracts generally do not provide for any returns.

Dependence on Major Customers

One customer accounted for an aggregate of 31.4% of our revenue in 2016.  We have numerous other customers and distributors that sell our products in the U.S. and internationally.

Backlog Orders

Order backlog is not material to our business inasmuch as orders for our products generally are received and filled on a current basis, except for items temporarily out of stock.

Government Funding of Research and Right to License

Thomas J. Shaw received grants from the federal government for his initial 1991 version of a safety syringe, which may give the federal government the right to allow others to manufacture that syringe.  However, we believe the government has no right to allow others to manufacture the current version of the VanishPoint® syringe.

Government Approval and Government Regulations

For all products manufactured for sale in the domestic market, we have given notice of intent to market to the FDA, and the devices were shown to be substantially equivalent to the predicate devices for the stated intended use.

For all products manufactured for sale in the domestic market and foreign market, we hold a Quality Management System certification to ISO 13485. We also have approval to label products for sale into European Union countries with a CE mark. Both of these certifications are issued by our notified body, bsi, and are reviewed annually.

We will continue to comply with applicable regulations of all countries in which our products are registered for sale.

We cannot anticipate changes in trade policy from the current administration.

Competitive Conditions

Our products are sold to and used by healthcare providers primarily in the U.S. (with 11.8% of revenues in 2016 generated from sales outside the U.S.) which include, but are not limited to, acute care hospitals, alternate care facilities, doctors’ offices, clinics, emergency centers, surgical centers, long-term care facilities, Veterans Administration facilities, military organizations, public health facilities, and prisons.

We compete primarily on the basis of healthcare worker and patient safety, product performance, and quality.  We believe our competitive advantages include, but are not limited to, our leadership in quality and innovation. We believe our products continue to be the most effective safety devices in today’s market.  Our syringe products include passive safety activation, require less disposal space, and are activated while in the patient, reducing exposure to the contaminated needle.  Our price per unit is competitive or even lower than the competition

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once all the costs incurred during the life cycle of a syringe are considered. Such life cycle costs include disposal costs, testing and treatment costs for needlestick injuries, and treatment for contracted illnesses resulting from needlestick injuries.

Major domestic competitors include BD and Medtronic Minimally Invasive Therapies (“Medtronic,” formerly known as Covidien).  Terumo Medical Corp., Smiths Medical, and B Braun are additional competitors with smaller market shares.

Founded in 1897, BD is headquartered in New Jersey.  BD’s medical segment safety-engineered device sales accounted for approximately 15.4% of BD’s total 2016 sales.  BD’s classification of medical segment safety-engineered devices include the Safety-Lok™ syringe, which features a tubular plastic sheath that must be manually slid over the needle after removal from the patient, and the SafetyGlide™ hypodermic needle which utilizes a manually activated hinged lever to cover the needle tip after removal from the patient.  BD markets the SafetyGlide™ blood collection set that has a manually activated cover designed to extend over the needle after use.  The BD Eclipse™ safety blood collection needle and hypodermic needle is also designed to manually cover the needle after removal from the patient.  BD manufactures the Integra™ 3mL retracting needle and syringe product, as well as a spring activated Vacutainer® Passive Shielding Blood Collection Needle and spring activated retracting Vacutainer® blood collection set.  BD’s “Vacutainer®” brand name is commonly used as industry jargon to refer to blood collection products in general.

Medtronic offers the Monoject® safety syringe, which, like the BD SafetyLok™, requires the use of two hands to manually extend the tubular plastic shield to cover the needle after removal from the patient.  Medtronic also markets the Magellan™ needle, similar to BD’s SafetyGlide™ needle, which has a manually activated hinged lever to cover the needle tip after removal from the patient.

Many of BD’s and Medtronic’s products result in exposure to the contaminated needle or allow for needle removal and potential syringe reuse.

In contrast, VanishPoint® syringes can be used without significant changes in injection technique.  The automated needle retraction is activated when the plunger handle is fully depressed, in conjunction with the delivery of the complete medication dose, while the needle is still in the patient.  This pre-removal activation virtually eliminates exposure to the contaminated needle, reducing the risk of needlestick injuries.  Activation is easily accomplished in one step, using one hand.  Upon activation of the retraction mechanism, VanishPoint® syringes are rendered unusable, reducing the risk of disposal-related injuries or reuse.

EasyPoint® retractable needles offer unique safety benefits not found in other commercially available safety needles.  Manually activated safety needles, such as BD’s SafetyGlide™ and Eclipse™ needles, and Medtronics’ Magellan™ needle, must be removed from the patient, exposing the contaminated needle prior to activation of the manual safety mechanism.  EasyPoint® needles allow for activation of the automated retraction mechanism while the needle is still in the patient, reducing exposure to the contaminated needle and effectively reducing the risk of needlestick injuries.  BD’s Integra™ needle allows for retraction from the patient but must be used in conjunction with a BD Integra™ 3mL syringe.  The Integra™ needle does not have a luer fitting, making it incompatible with commonly used luer-fitting syringes and pre-filled syringes.  In addition, the safety feature of the Integra™ needle/syringe combination can only be activated when the plunger handle is fully depressed and the contents have been expelled.  EasyPoint® retractable needles are compatible with luer-fitting syringes, including pre-filled syringes.  In addition, EasyPoint® retractable needles may be activated with fluid in the syringe, making it applicable for aspiration procedures such as blood collection.

Our safety needle products have several advantages over non-retracting safety needles, including, but not limited to: pre-removal activation; needle retraction; integrated safety mechanism; reuse prevention; ease of use; disposal safety and efficiency; and minimal training.

BD and Medtronic have controlling U.S. market share; greater financial resources; larger and more established sales, marketing, and distribution organizations; and greater market influence, including long-term and/or exclusive contracts.  Additionally, BD may be able to use its resources to improve its products through research or acquisitions or develop new products, which may compete with our products.

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Several factors could materially and beneficially affect the marketability of our products.  Demand could be increased by existing legislation and other legislative and investigative efforts.  Licensing agreements could provide entry into new markets and generate additional revenue.  Further, outsourcing arrangements could increase our manufacturing capacity with little or no capital outlay and provide a competitive cost.

Our competitive position is weakened by the method that providers use for making purchasing decisions and the fact that our initial price per unit for our safety needle products may be higher than some of the less effective safety needle products that are on the market.

Research and Development

We spent $572,000; $608,000; and $617,000 in 2016, 2015, and 2014, respectively, on research and development.  Costs in 2016 were primarily for employee compensation and validation and engineering samples. Our ongoing research and development activities are performed by an internal research and development staff and includes developing process improvements for current and future automated machines.  Our limited access to the market has slowed the introduction of products.

Environmental Compliance

We believe that we do not incur material costs in connection with compliance with environmental laws.  We are considered a Conditionally Exempt Small Quantity Generator because we generate less than 100 kilograms (220 lbs.) of hazardous waste per month.  Therefore, we are exempt from the reporting requirements set forth by the Texas Commission on Environmental Quality.  The waste that is generated at our facility is primarily made up of flammable liquids and paint-related waste and is sent for fuel blending by Safety Kleen.  This fuel blending process completely destroys our waste and satisfies our “cradle-to-grave” responsibility.

Other nonhazardous production waste includes clean polypropylene regrind, paper, and corrugated material that is recycled.  All other nonhazardous waste produced is considered municipal solid waste and sent to a sanitary landfill by CWD.

We also produce small amounts of regulated biohazardous waste from contaminated sharps and laboratory wastes.  This waste is sent for incineration by Stericycle.

Employees

As of March 1, 2017, we had 135 employees.  133 of such employees were full time employees.

Financial Information about Geographic Areas

We have minimal long-lived assets in foreign countries.  Shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit.  We do 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.  If customers designate a specific destination for its order, we attribute sales to countries based on the destination of shipment.

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Most large international sales of VanishPoint® products are filled by production from Chinese manufacturers.  In the event that we become unable to purchase such product 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.

We do not maintain patent or trademark protection in all foreign countries, but, where possible, have taken steps to protect our patents and trademarks in those countries where we routinely conduct a material amount of business.  Our lack of patent and trademark protection, particularly in certain foreign countries, heightens the risk that our designs may be copied by a competitor.

We cannot anticipate changes in trade policy from the current administration.

Available Information

We make available, free of charge on our website (www.retractable.com), our Form 10-K Annual Report and Form 10-Q Quarterly reports and current reports on Form 8-K (and any amendments to such reports) as soon as reasonably practical after such reports are filed.

Item 1A. Risk Factors.

We could be subject to complex and costly regulatory activities.  Our business could suffer if we or our suppliers encounter manufacturing problems.  We could be subject to risks associated with doing business outside of the U.S.  Current or worsening economic conditions may adversely affect our business and financial condition.

You should carefully consider the following material risks facing us.  If any of these risks occur, our business, results of operations, or financial condition could be materially affected.

We Compete in a Marketplace Dominated by BD

We operate in an environment that is dominated by BD, the major syringe manufacturer in the U.S.  We initiated a lawsuit in 2007 against BD.  The suit was for patent infringement, antitrust practices, and false advertising.  The court severed the patent claims from the other claims.  The antitrust and false advertising claims resulted in a final judgment for $352 million plus prejudgment and post-judgment interest at the district court level, but on December 2, 2016, the Fifth Circuit Court of Appeals overturned the antitrust damages.  The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled.  The Eastern District of Texas trial date is May 11, 2017.  Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.

Although we have made limited progress in some areas, such as the alternate care and some international markets, 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.  We believe this is due to BD’s activities, despite our litigation efforts described briefly above.

We Have Generally Been Unable to Gain Sufficient Market Access to Achieve Profitable Operations

We have a history of incurring net operating losses.  We may experience operating losses in the future.  If we are unable to gain sufficient market access and market share, we may be unable to continue to finance research and development as well as support operations and expansion of production.

We Are Dependent on Our Aging Patent Protection

Our main competitive strength is our technology.  We are dependent on patent rights, and if the patent rights are invalidated or circumvented, our business would be adversely affected.  Patent protection is considered, in the aggregate, to be of material importance in the design, development, and marketing of products.

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The Company holds exclusive rights under domestic and foreign patents and has pending applications related to the technology embodied in products that are currently marketed.  The Company also holds rights related to new products under development.  The patents exclusively licensed by the Company have varying remaining terms and expiration dates.  While patents covering some features of the VanishPoint® syringes have recently expired, another patent with a later expiration date will continue to provide patent coverage for VanishPoint® syringes until 2020.

VanishPoint® syringes comprised 93.0% of our sales in 2016.  When the patents expire and we lose market exclusivity in 2020, we may experience a significant and rapid loss of sales from VanishPoint® syringes, which could have a material adverse effect on our business.

Patent life may be extended, not through the original patents, but through related improvements.  As our technology ages (and the associated patent life expires), our competitive position in the marketplace could weaken.  The patent protection may decrease and make us vulnerable to other competitors utilizing our technology.

We do not maintain patent or trademark protection in all foreign countries, but, where possible, have taken steps to protect our patents and trademarks in those countries where we routinely conduct a material amount of business.  Our lack of patent and trademark protection, particularly in certain foreign countries, heightens the risk that our designs may be copied by a competitor.

Our Patents Are Subject to Litigation

We have been sued by BD and MDC Investment Holdings, Inc. for patent infringement.  This case has been administratively closed until our case against BD is resolved.  Patent litigation and challenges involving our patents are costly and unpredictable and may deprive us of market exclusivity for a patented product or, in some cases, third party patents may prevent us from marketing and selling a product in a particular geographic area.

We Are Vulnerable to New Technologies

Because we have a narrow focus on particular product lines and technology (currently, predominantly retractable needle products), we are vulnerable to the development of superior competing products and to changes in technology which could eliminate or reduce the need for our products.  If a superior technology is created, the demand for our products could greatly diminish.

Our Competitors Have Greater Resources

Our competitors have greater financial resources, larger and more established sales and marketing and distribution organizations, and greater market influence, including long-term contracts.  These competitors may be able to use these resources to improve their products through research and acquisitions or develop new products, which may compete more effectively with our products.  If our competitors choose to use their resources to create products superior to ours, we may be unable to sell our products and our ability to continue operations would be weakened.

The Majority of Our Sales Are Filled Using Third Party Manufacturers

Most international sales, as well as a substantial portion of domestic sales, are filled by production from Chinese manufacturers.  In the event that we become unable to purchase such product 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.  Even with increased domestic production, we may not be able to avoid a disruption in supply.  In 2016, the 1mL and 3mL syringes made up 86.0% of our unit sales and 85.2% of our revenues. We have a strong relationship with our Chinese manufacturers and we communicate with them frequently.

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Fluctuations in Supplies of Inventory Could Temporarily Increase Costs

Fluctuations in the cost and availability of raw materials and inventory and the ability to maintain favorable third party manufacturing arrangements and relationships could result in the need to manufacture all of our products in the U.S.  This could temporarily increase unit costs as we ramp up domestic production.

We Are Controlled by One Shareholder

Thomas J. Shaw, our President and Chief Executive Officer, has investment or voting power over a total of 51.6% of the outstanding Common Stock.  He has the right to buy one million additional shares (3.1%) pursuant to private stock sales from the Company. Mr. Shaw therefore has the ability to direct our operations and financial affairs and to substantially influence the election of members of our Board of Directors.  His interests may not always coincide with the Company’s interests or the interests of other stockholders.  This concentration of ownership, for example, may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially adversely affect the market price of our Common Stock.  Mr. Shaw’s rights under the Technology License Agreement, as the owner of the technology we produce, present similar conflicts of interest.

Current Economic Conditions May Decrease Collectability of Accounts

Although we believe that we have granted credit to credit-worthy firms, current economic conditions may affect the timing and/or collectability of some accounts.

We Face Inherent Product Liability Risks

As a manufacturer and provider of safety needle products, we face an inherent business risk of exposure to product liability claims.  If a product liability claim is made and damages are in excess of our product liability coverage, our competitive position could be weakened by the amount of money we could be required to pay to compensate those injured by our products.  In the event of a recall, we have recall insurance.

Our business may be affected by changes in the health care regulatory environment

In the U.S. and internationally, government authorities may enact changes in regulatory requirements, reform existing reimbursement programs, and/or make changes to patient access to health care, all of which could adversely affect the demand for our products and/or put downward pressure on our prices.  In the U.S., significant debate surrounds the repeal and/or replacement of the Affordable Care Act.  Future health care rulemaking could affect our business.  We cannot predict the timing or impact of any future rulemaking or changes in the law.

International operations may be affected by legislation

We are subject to risks associated with our international operations.  In 2016, we used Chinese manufacturers to produce 78.4% of our products.  Trade protection measures and/or changes to import or export requirements could adversely impact our operations.  We cannot predict changes in U.S. foreign trade policy, but some trade protection measures have been recently discussed by the current administration.  Additionally, we derive 11.8% of our revenues from international sales.  International sales, particularly in emerging market countries, are further subject to a variety of regulatory, economic, and political risks as well.

Our new products may not replace lost VanishPoint® sales after 2020

Patent coverage for VanishPoint® syringes will expire in 2020.  Following the patent expiration, expected declines in sales of VanishPoint® syringes, which currently comprise 93.0% of our revenues, means that our future success is dependent on new products.  We have engaged in research and development for many years to develop other commercially successful products.  Often, new products take a number of years to develop and sales of a new

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product may be disappointing.  Based on industry-wide trends, we anticipate that demand may increase for one of our newer products, the EasyPoint® needle, but sales in 2016 for this product were only 4.5% of our total revenues.

Item 1B. Unresolved Staff Comments.

Not applicable and none.

Item 2. Properties.

Our headquarters is located at 511 Lobo Lane, on 35 acres, which we own, overlooking Lake Lewisville in Little Elm, Texas.  The headquarters is in good condition and houses our administrative offices and manufacturing facility.  The manufacturing facility produced approximately 21.6% of the units that were manufactured in 2016.  In the event that we become unable to purchase product 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.  The 5mL and 10mL syringes are sold principally in the international market.  In 2016, we used approximately 18.0% of our current U.S. productive capacity.

A loan in the original principal amount of $4,210,000 is secured by our land and buildings.  See Note 7 to our financial statements for more information.

In the opinion of Management, the property and equipment are suitable for their intended use and are adequately covered by an insurance policy.

Item 3. Legal Proceedings.

In May 2010, our and Mr. Shaw’s suit against BD in the U.S. District Court for the Eastern District of Texas, Marshall Division alleging violations of antitrust acts, false advertising, product disparagement, tortious interference, and unfair competition was reopened.  The trial commenced on September 9, 2013, in the U.S. District Court for the Eastern District of Texas, Tyler Division, and the jury found that BD illegally engaged in anticompetitive conduct with the intent to acquire or maintain monopoly power in the safety syringe market and engaged in false advertising under the Lanham Act.  The jury awarded us $113,508,014 in damages, which was trebled pursuant to statute.  The Court granted injunctive relief to take effect January 15, 2015.  In doing so, the Court found that BD’s business practices limited innovation, including false advertisements that suppressed sales of the VanishPoint®.  The specific injunctive relief includes: (1) enjoining BD’s use of “World’s Sharpest Needle” or any similar assertion of superior sharpness; (2) requiring notification to all customers who purchased BD syringe products from July 2, 2004, to date that BD wrongfully claimed that its syringe needles were sharper and that its statement that it had “data on file” was false and misleading; (3) requiring notification to employees, customers, distributors, GPOs, and government agencies that the deadspace of the VanishPoint® has been within ISO standards since 2004 and that BD overstated the deadspace of the VanishPoint® to represent that it was higher than some of BD’s syringes when it was actually less, and that BD’s statement that it had “data on file” was false and misleading, and, in addition, posting this notice on its website for a period of three years; (4) enjoining BD from advertising that its syringe products save medication as compared to VanishPoint® products for a period of three years; (5) requiring notification to all employees, customers, distributors, GPOs, and government agencies that BD’s website, cost calculator, printed materials, and oral representations alleging BD’s syringes save medication as compared to the VanishPoint® were based on false and inaccurate measurement of the VanishPoint®, and, in addition, posting this notice on its website for a period of three years; and (6) requiring the implementation of a comprehensive training program for BD employees and distributors that specifically instructs them not to use old marketing materials and not to make false representations regarding VanishPoint® syringes.  Final judgment was entered on January 15, 2015, awarding us $340,524,042 in damages and $11,722,823 in attorneys’ fees, as well as granting injunctive relief consistent with the orders as indicated above.  The parties stipulated that the amount of litigation costs recoverable by us is $295,000.  On January 14, 2015, the District Court stayed the portion of the injunctive relief that requires BD to notify end-user customers but also ordered BD to comply with internal correction activities as well as mandatory disclosures as set out above to its employees, customers, distributors and Group Purchasing Organizations.  BD filed an appeal of that ruling with the 5th Circuit Court of Appeals and that appeal was denied on February 3, 2015.  On February 12, 2015, BD filed a motion to amend the judgment directed most specifically to the

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issue of award of prejudgment interest.  On April 23, 2015, the Court entered an Amended Final Judgment that removed prejudgment interest but kept all other monetary and injunctive relief the same as was granted in the original Final Judgment.  BD filed its brief in the appeal on July 20, 2015.  Oral argument occurred on Monday, February 29, 2016.   On December 2, 2016, the 5th Circuit Court of Appeals overturned the antitrust damages.  The finding of false advertising liability was affirmed and the case was remanded to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled.  The Eastern District of Texas trial date is May 11, 2017.  Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.

In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued us in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that we are infringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD.  BD and MDC seek injunctive relief and unspecified damages.  We counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patents.  The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and we subsequently dropped our counterclaims for unenforceability of the asserted patents.  On June 30, 2015, the Court ordered that further proceedings in this matter be stayed and that this case remain administratively closed until resolution of all appeals in the case detailed in the preceding paragraph.  The case remains stayed as a result of the ongoing proceedings regarding the Lanham Act claims in the separate proceeding described above.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

MARKET INFORMATION

Our Common Stock has been listed on the NYSE MKT (or its predecessor entities) under the symbol “RVP” since May 4, 2001.  Our closing price on March 1, 2017, was $1.04 per share.  Shown below are the high and low sales prices of our Common Stock as reported by the NYSE MKT for each quarter of the last two fiscal years:

SHAREHOLDERS

As of March 1, 2017, there were 31,666,454 shares of Common Stock held by 204 shareholders of record not including shareholders who beneficially own Common Stock held in nominee or “street name.”

DIVIDENDS

We have not ever declared or paid any dividends on the Common Stock.  We have no current plans to pay any cash dividends on the Common Stock.  We intend to retain all earnings, except those required to be paid to the holders of the Preferred Stock as resources allow, to support operations and future growth.  Dividends on Common

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Stock cannot be paid so long as preferred dividends are unpaid.  As of December 31, 2016, there was an aggregate of $10.8 million in preferred dividends in arrears.  As of December 31, 2015, there was an aggregate of $10.3 million in preferred dividends in arrears.

EQUITY COMPENSATION PLAN INFORMATION

See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a chart describing compensation plans under which equity securities are authorized.

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return for our Common Stock from December 31, 2011 to December 31, 2016, to the total returns for the Russell Microcap® and Becton, Dickinson and Company (or “BDX”), a peer issuer.  The graph assumes an investment of $100 in the aforementioned equities as of December 31, 2011, and that all dividends are reinvested.

RECENT SALES OF UNREGISTERED SECURITIES

No unregistered securities were sold during the period covered by this report.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

There were no repurchases during the period covered by this report.

Item 6. Selected Financial Data.

The following selected financial data is qualified by reference to, and should be read in conjunction with, our audited financial statements and the notes to those statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein.  The selected Statements of Operations data presented below for the years ended December 31, 2013 and 2012 and the Balance Sheet data as of December 31, 2014, 2013, and 2012 have been derived from our audited financial statements, which are not included herein.

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(In thousands except for earnings per share, shares, and percentages)

Events that could affect the trends indicated above include changes in manufacturing costs, changing average sales prices, changing raw material cost, the gaining of market access, protection of our patents, foreign currency exchange rates, the Medical Device Excise Tax, the impact of flu season requirements, new or changing regulations, and new products.  As our products are made from petroleum products, the changing cost of oil and transportation may have an impact on our costs to the extent increases may not be recoverable through price

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increases of our products and reductions in oil prices may not quickly affect petroleum product prices.  Our purchase of 200,000 shares of our Preferred Stock in 2015 reduced Preferred Stock Dividend Requirements.  The receipt of $7,724,826 from BD pursuant to litigation affects both the current assets and current liabilities in 2013 and 2014.  The recognition of the $7,724,826 in the second quarter of 2015 had a significant impact on 2015 income.  The introduction of the Medical Device Excise Tax in 2013 affects comparability between 2013 and prior years.  The Medical Device Excise Tax was suspended for two years beginning January 1, 2016.  In 2014, we took steps to decrease our non-litigation legal costs by approximately $1.1 million.  Additionally, in 2014, we reduced our workforce by 13.7% in an effort to cut costs.  Any recovery from BD in our lawsuit against them, if received, could materially affect our future financial condition.  Future legal expenses are expected to be lower in 2017 due to an anticipated reduction in litigation fees.  Some increases in compensation were instituted in 2016 and 2017, both for existing employees and new hires.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

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, our ability to maintain liquidity, our maintenance of patent protection, the impact of current and future Court decisions regarding current litigation, 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, specifically BD, in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors.  Given these uncertainties, undue reliance should not be placed on forward-looking statements.

Overview

We have been manufacturing and marketing our products since 1997.  Safety syringes comprised 93.0% of our sales in 2016.  We also manufacture and market the blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set.  We currently provide other safety 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 a new product, the EasyPoint® needle.  EasyPoint® needles made up 4.5% of revenues in 2016.  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.  According to a December 2016 press release from Zion Market Research, prefilled syringes play an important role in the injectable drug delivery devices market and the compound annual growth rate is expected to be approximately 9.5% between 2016 and 2021.  The global market size for prefilled syringes was approximately 4.1 billion units ($3.5 billion) in 2015.  A March 2016 article published in Medical Design Technology details the benefits of the EasyPoint® needle as well as the existing VanishPoint® syringe.  The article states, “for the first time, clinicians will be able to change needles and have the safety of automated needle retraction.”  The article is available on the Resource Center link on our website at www.retractable.com.

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

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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.

We have reported in the past that our progress is limited principally due to the practices engaged in by BD, the dominant maker and seller of disposable syringes.  We initiated a lawsuit in 2007 against BD.  As previously reported, on December 2, 2016, the Fifth Circuit Court of Appeals overturned a district court judgment that had previously awarded us $340 million in antitrust damages from BD, but affirmed a finding of false advertising liability against BD and remanded the case to the Eastern District of Texas for a redetermination as to the amount of damages to which we are entitled.  The Eastern District of Texas trial date is May 11, 2017.  Our petition for certiorari to the U.S. Supreme Court was denied on March 20, 2017.

We have taken steps to reduce our future litigation expenses and expect such expenses to be significantly less in 2017.

In 2014, the Company took steps to decrease non-litigation legal costs by approximately $1.1 million.  In 2014 and 2015, the Company reduced its workforce to further cut costs.  In the future, if such cost cutting measures prove insufficient, we may reduce other operating expenses, reduce the workforce, reduce the salaries of officers as well as other employees, and/or defer royalty payments.  Some increases in compensation were made in 2016 and 2017.

The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on December 18, 2015, includes a two year moratorium on the 2.3% medical device excise tax imposed by Internal Revenue Code section 4191.  Thus, the medical device excise tax was suspended beginning on January 1, 2016 and ending on December 31, 2017.  The impact of this tax was $360,000 in 2015.

We reevaluated several compensation strategies in late 2016 and early 2017.  See Compensation Discussion and Analysis.  We also approved three of our executive officers to purchase shares directly from the Company.  Thomas J. Shaw exercised a portion of such right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million.  In April 2016, Mr. Shaw exercised an option for one million shares for an aggregate exercise price of $810,000.

We exchanged 728 thousand shares of our Common Stock for 200 thousand shares of our Series IV Class B Convertible Preferred Stock as of November 30, 2015 pursuant to an agreement with a shareholder.  Such shareholder agreed to waive all unpaid dividends in arrears associated with the tendered preferred stock, equaling $3.1 million.  Future dividend requirements of $200 thousand per year are avoided as a result of this transaction.

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 2016, our primary Chinese manufacturer produced approximately 86.3% of our VanishPoint® syringes.  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.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing automated retraction 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.

With increased volumes, our manufacturing unit costs have generally tended to decline.  Factors that could affect our unit costs include 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 contains 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 the forward-looking statements.  All period references are to our fiscal years ended December 2016, 2015, or 2014.  Dollar amounts have been rounded for ease of reading.

Comparison of Year Ended

December 31, 2016 and Year Ended December 31, 2015

Domestic sales accounted for 88.2% and 77.9% of the revenues in 2016 and 2015, respectively.  Domestic revenues increased 14.2% principally due to sales of our 1 mL syringe and EasyPoint® needles.  Domestic unit sales increased 15.6%.  Domestic unit sales were 83.3% of total unit sales for 2016.  International revenues decreased from $6.5 million in 2015 to $3.5 million in 2016, primarily due to fluctuation in the timing of orders.  Overall unit sales decreased 7.0%.  Our international orders may be subject to significant fluctuation over time.  Such orders may fluctuate due to health initiatives at various times as well as economic conditions.

Cost of manufactured product increased $448 thousand principally due to higher manufacturing costs.  Royalty expense increased $50 thousand due to increased gross sales.  Gross profit margins decreased from 35.8% in 2015 to 34.7% in 2016.

Operating expenses increased 0.6% from the prior year due to an impairment charge of $456 thousand, stock option expense, consulting costs, and 401(k) plan matching expense.  The impairment charge of $456 thousand was related to Patient Safe® assembly equipment.  These expenses were largely offset by decreases in the Medical Device Excise tax of $360 thousand, severance pay, professional fees, and bonus pay.

A non-recurring recognition of $7,724,826 received from BD in the second quarter of 2015 pursuant to a patent infringement case had a significant impact on 2015 income.  Recognizing this payment also significantly decreased 2015 current liabilities on the Balance Sheets.

In 2015, earnings per share was positively affected by our acquisition of 200,000 shares of IV Class B convertible preferred stock. Under the guidelines of ASC 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, we reflected the gain on extinguishment of this preferred stock in net income per common stockholder used to calculate earnings per share.  This accounting treatment had the effect of increasing the income applicable to common shareholders by $2.3 million in 2015 which had a material effect on the determination of earnings per share for that year.

The loss from operations was $3.2 million in 2015 compared to an operating loss of $3.6 million in 2016.

Cash flow from operations was a negative $795 thousand for 2016 due to our Net loss, mitigated by noncash expense consisting principally of Depreciation, Impairment of assets, Share based compensation, and reduced working capital.

Comparison of Year Ended

December 31, 2015 and Year Ended December 31, 2014

Domestic sales accounted for 77.9% and 80.1% of the revenues in 2015 and 2014, respectively.  Domestic revenues decreased 16.7% principally due to reduced flu demand.  Domestic unit sales decreased 17.6%.  Domestic unit sales were 67.0% of total unit sales for 2015.  International revenues decreased from $6.9 million in 2014 to $6.5 million in 2015, primarily due to more restrictive qualification requirements by the Company.  Overall unit sales decreased 11.9%.  Our international orders may be subject to significant fluctuation over time.  Such orders may fluctuate due to health initiatives at various times as well as economic conditions.

Cost of manufactured product decreased $3.3 million principally due to lower volumes.  Royalty expense decreased $251 thousand due to decreased gross sales.  Gross profit margins increased from 34.8% in 2014 to 35.8% in 2015.

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Operating expenses decreased 2.9% from the prior year due to decreased Medical Device Excise Taxes attributable to refunds, lower compensation costs, and lower travel and entertainment costs.

A non-recurring recognition of $7,724,826 received from BD in the second quarter of 2015 pursuant to a patent infringement case had a significant impact on 2015 income.  Recognizing this payment also significantly decreased 2015 current liabilities on the Balance Sheets.

The loss from operations was $3.2 million in 2015 compared to an operating loss of $2.2 million in 2014.

Earnings per share were positively affected by our acquisition of 200,000 shares of IV Class B convertible preferred stock. Under the guidelines of ASC 260-10-S99-2, Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, we reflected the gain on extinguishment of this preferred stock in net income per common stockholder used to calculate earnings per share.

Cash flow from operations was a negative $3.3 million for 2015 due primarily to the loss from operations and changes in working capital, namely increased inventories and other current assets, mitigated by a decrease in Accounts receivable and an increase in Accounts payable.

LIQUIDITY AND CAPITAL RESOURCES

At the present time, Management does not intend to publicly raise equity capital.  Due to the funds received from prior litigation, 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.  We cannot predict any recovery of damages in our litigation against BD at this time.  The ultimate outcome of this suit could have a material effect on our financial condition.

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 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 21.6%) of our products in the U.S.  This could temporarily increase unit costs as we ramp up domestic production.

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.  Typically, large international sales of VanishPoint® products are shipped directly from China to the customer.  Purchases of product manufactured in China usually decrease the average cost of manufacture for all units.  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.

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Fluctuations in the cost of oil (since our products are petroleum based) and transportation and the volume of units purchased from our Chinese manufacturers may have an impact on the unit costs of our product.  Increases in such costs may not be recoverable through price increases of our products.  Reductions in oil prices may not quickly affect petroleum product prices.

Seasonality

Historically, unit sales have increased during the flu season.

Cash Requirements

Due to funds received from prior litigation, 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 non-litigation legal costs and we continue to evaluate these costs.  Additionally, in 2014 and 2015, we reduced our workforce.  We have also taken steps to reduce our future litigation expenses and expect such expenses to be significantly lower in 2017.  In the future, if such cost cutting measures prove insufficient, we may reduce the number of units being produced, reduce the workforce, reduce the salaries of officers and other employees, and/or defer royalty payments.  Some increases in compensation were made in 2016 and 2017.

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.  We have approved three of our executive officers to engage in private purchases of stock at market prices.  Mr. Shaw exercised a portion of his purchase right on January 12, 2017, buying two million shares at market price for an aggregate purchase price of $1.78 million.

Capital Resources

In 2016, we purchased additional equipment for manufacturing for approximately $1.9 million.  Most of this expenditure was specifically for the manufacture of the EasyPoint® needle, with the remainder being for molding machines which may be utilized for any of our molds.

OFF-BALANCE SHEET ARRANGEMENTS

None.

CONTRACTUAL OBLIGATIONS

Contractual Obligations and Commercial Commitments

The following chart summarizes our material obligations and commitments to make future payments under contracts for long-term debt as of December 31, 2016:

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We believe that our market risk exposures regarding our cash and cash equivalents are immaterial as we do not have instruments for trading purposes.  Additionally, reasonable, possible near-term changes in market rates or prices will not result in material changes in near-term earnings.

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Item 8. Financial Statements and Supplementary Data.

RETRACTABLE TECHNOLOGIES, INC.

FINANCIAL STATEMENTS AND

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

DECEMBER 31, 2016 AND 2015

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RETRACTABLE TECHNOLOGIES, INC.

INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of Retractable Technologies, Inc.

We have audited the accompanying balance sheets of Retractable Technologies, Inc. as of December 31, 2016, and 2015, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016.  Our audits also included the financial statement schedule of Retractable Technologies, Inc., listed in Item 15(a).  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Retractable Technologies, Inc. as of December 31, 2016, and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Dallas, Texas

March 31, 2017

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RETRACTABLE TECHNOLOGIES, INC.

BALANCE SHEETS

See accompanying notes to financial statements

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RETRACTABLE TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

See accompanying notes to financial statements

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RETRACTABLE TECHNOLOGIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY