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, the impact of COVID-19 on all facets of logistics and operations, as well as costs, our ability to complete capital improvements and ramp up domestic production in response to government agreements, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to access the market, production costs, 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 in Part II. Given these uncertainties, undue reliance should not be placed on forward-looking statements.

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       MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS



                                    Overview

We have been manufacturing and marketing our products since 1997. VanishPoint® syringes comprised 80.8% of our sales in the first six months of 2020. We also manufacture and market the EasyPoint® needle, blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set. We currently provide other safety medical products in addition to safety products utilizing retractable technology. One such product is the Patient Safe® syringe, which is uniquely designed to reduce the risk of bloodstream infections associated with catheter hub contamination.

In the second quarter of 2016, we began selling the EasyPoint® needle. EasyPoint® needles made up 10.6% of revenues for the six months ended June 30, 2020. 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.

Our products have been and continue to be distributed nationally and internationally through numerous distributors.

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

On May 1, 2020, we were awarded a delivery order under an existing contract by the Department of Health and Human Services of the United States to supply automated retraction safety syringes. The total fixed price under the delivery order is $83,788,440. The existing contract was executed in September 2018, but the order placed on May 1, 2020 is unusually significant. In the second quarter of 2020, our sales under this order were approximately $1.4 million and we expect such sales to increase each quarter through May 2021.

Effective July 1, 2020, we 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) ("Government") for $53,664,286 in government funding for expanding our domestic production of needles and syringes. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. Additionally, the TIA provides for reimbursement for equipment and supplies. To date, we have negotiated contracts for the purchase of automated assembly equipment, as well as portions of auxiliary equipment for approximately $20 million. There are ongoing contract negotiations for additional auxiliary equipment as well as molds and molding machines. We have also engaged architects and general construction contractors for the completion of controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion.

On April 17, 2020, we entered into a promissory note in the principal amount of $1,363,000 (the "PPP Loan") in favor of Independent Bank (the "Lender") pursuant to the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act, administered by the U.S. Small Business Administration ("SBA"). The PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.0% per annum. Commencing November 17, 2020, we may be required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize the principal amount outstanding by the maturity date. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

In late April 2020, we invested approximately $2 million in individual stocks within the energy sector. The investment represents approximately 27% of our overall investment position as of June 30, 2020. The investment in these equity securities is highly liquid. We continually monitor our invested balances. The unrealized gain on these investments was approximately $900 thousand dollars in the second quarter of 2020.

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Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost. In the first six months of 2020, our Chinese manufacturers produced approximately 83.5% of our products. Despite the global disruption of the coronavirus pandemic, we have not experienced a significant disruption to our supply chain. In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales of products subject to the license and he receives fifty percent (50%) of the royalties paid to us by certain sublicensees of the technology subject to the license.

With increased volumes, our manufacturing unit costs have generally tended to decline. Factors that could affect our unit costs include possible tariffs, increases in costs by third party manufacturers, changing production volumes, costs of petroleum products, and transportation costs. Increases in such costs may not be recoverable through price increases of our products. Decreases in costs of petroleum products during the first six months of 2020 have reduced certain raw material costs.

                             RESULTS OF OPERATIONS

The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties. Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements. Dollar amounts have been rounded for ease of reading. All period references are to the periods ended June 30, 2020 or 2019.

        Comparison of Three Months Ended June 30, 2020 and June 30, 2019

Domestic sales accounted for 81.5% and 83.2% of the revenues, excluding product licensing fees, for the three months ended June 30, 2020 and 2019, respectively. Domestic revenues increased 20.1% principally due to the increase in units sold. Domestic unit sales increased 25.4%. Domestic unit sales were 78.7% of total unit sales for the three months ended June 30, 2020. International revenue and unit sales increased 35.6% and 25.2%, respectively, due to increased orders. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 25.3%. With the exception of the Department of Health and Human Services, our increased sales are predominantly attributable to existing customers. Despite the global disruption of the pandemic, none of the markets in which we sell our products have experienced material decline. Our sales to the Department of Health and Human Services in the quarter ended June 20, 2020 were approximately $1.4 million and we expect such sales to increase each quarter through May 2021.

The Cost of manufactured product increased by 21.1% principally due to the increase in the volume of units sold. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense increased 2.7% due to increased gross sales.

Gross profit increased 25.3% primarily due to the increase in net revenues.

Operating expenses increased 4.3%. The increase was due to employee expenses such as added payroll and related costs and consulting fees.

Our operating income was $960 thousand compared to an operating income of $329 thousand for the same period last year due primarily to the increase in net revenues and resulting gross profit.

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Interest and other income increased $1.0 million for the quarter ended June 30, 2020 compared to the same period last year principally due to a $900 thousand unrealized gain from an April 2020 investment in individual energy stocks. In addition to our operating income, our increase in Interest and other income contributed significantly to our increase in net income for the second quarter of 2020.

Our effective tax rate on the income before income taxes was (85.1)% and 0.9% for the three months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, we released our valuation allowance for deferred tax assets based on evidence supporting the position that the potential benefit would be "more-likely-than-not" realized. As a result of the release of the valuation allowance, we recognized approximately $1.8 million in deferred tax assets and recognized the corresponding amount as a beneficial income tax provision. The recognition of the benefit and deferred tax asset is reflected in the second quarter of 2020.

         Comparison of Six Months Ended June 30, 2020 and June 30, 2019

Domestic sales accounted for 78.0% and 80.5% of the revenues, excluding product licensing fees, for the six months ended June 30, 2020 and 2019, respectively. Domestic revenues increased 27.0% principally due to the increase in units sold. Domestic unit sales increased 27.8%. Domestic unit sales were 72.6% of total unit sales for the six months ended June 30, 2020. International revenue and unit sales increased 48.5% and 41.6%, respectively, due to increased orders and the timing of the same. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 31.3%. As discussed above, our sales to the Department of Health and Human Services contributed significantly to our second quarter results for 2020.

The Cost of manufactured product increased by 30.8% principally due to the increase in the volume of units sold. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense increased 14.4% due to increased gross sales.

Gross profit increased 32.9% primarily due to the increase in net revenues.

Operating expenses increased 9.4%. The increase was due to an increase in employee headcount and related costs as well as consulting fees and an increase in the allowance for doubtful accounts.

Our operating income was $1.4 million compared to an operating income for the same period last year of $154 thousand due primarily to increased net revenues and resulting gross profit.

Interest and other income for the first six months of 2020 increased $767 thousand compared to the same period last year principally due to unrealized gain on investments. As discussed above, our investment in individual stocks in April 2020 contributed significantly to this increase.

Our effective tax rate on the income (loss) before income taxes was (74.8)% and 1.31% for the six months ended June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020, we released our valuation allowance for deferred tax assets based on evidence supporting the position that the potential benefit would be "more-likely-than-not" realized. As a result of the release of the valuation allowance, we recognized approximately $1.8 million in deferred tax assets and recognized the corresponding amount as a beneficial income tax provision. The recognition of the benefit and deferred tax asset is reflected in the second quarter of 2020.

          Discussion of Balance Sheet and Statement of Cash Flow Items

Cash comprises 11.3% of total assets. Working capital was $24.5 million at June 30, 2020, an increase of $4.3 million from December 31, 2019.

Cash provided by operations was $212 thousand for the six months ended June 30, 2020 due primarily to net income for the period, offset by an increase in accounts receivable and inventories, and the increase in accounts payable.

Cash used by investing activities was $2.5 million for the six months ended June 30, 2020 due primarily to the purchase of additional equity securities.

Cash provided by financing activities was $1.7 million for the six months ended June 30, 2020. This was primarily due to the proceeds of the PPP Loan and proceeds from the exercise of stock options.

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                                   LIQUIDITY

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

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

Seasonality

Historically, unit sales have increased during the flu season.

Cash Requirements

We have sufficient cash reserves, recently received a PPP loan, and have begun to realize profits from operations. We also have access to our investments which have increased in value materially in the second quarter of 2020, which may be liquidated in the event that we need to access the funds for operations.

Contracts with the U.S. Government

As discussed above, we were awarded a material delivery order by the Department of Health and Human Services of the United States in the total amount of approximately $83.8 million. In the second quarter of 2020, our sales under this order were approximately $1.4 million and we expect such sales to increase each quarter through May 2021.

As discussed above, we entered into a TIA with United States government for approximately $53.7 million in Government funding for expanding our domestic production of needles and syringes. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production.

Option Exercises

Stock options were exercised by our employees and directors at various dates during the quarter ended June 30, 2020, and, consequently, we received approximately $627 thousand to exercise such options.

External Sources of Liquidity

We recently received a PPP Loan, as described above, in the principal amount of $1,363,000. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

We may obtain a construction loan for the construction of new facilities in connection with our expansion plans in connection with the TIA.

It is unlikely we would choose to raise funds by the public sale of equity despite recent increases in the value of our stock. Our stock price increased materially during the second quarter of 2020. The closing price per share on April 1, 2020 was $1.25 and it was $7.02 on June 30, 2020. On August 3, 2020, our stock price closed at $12.09 per share.

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We consider our investment portfolio a source of liquidity as well. As of June 30, 2020, $10.8 million was invested in third party securities. We have experienced recent unrealized gains in our portfolio, including highly liquid individual stocks.

                               CAPITAL RESOURCES

There were no material commitments for capital expenditures in the second quarter of 2020. Since the execution of the TIA on July 1, 2020, we have been planning significant expansion to our facilities. We have engaged architects and general construction contractors for the completion of controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. We have also contracted for additional automated assembly equipment, along with necessary auxiliary equipment.

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