FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number 0-26694
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0945003
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
655 East Medical Drive, Bountiful, Utah 84010
(Address of principal executive offices)
(Zip Code)
(801) 298-3360
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 5, 1996
Common Stock, $.02 par value 8,589,153
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
Assets September 30, December 31,
1996 1995
(unaudited) (unaudited)
Current assets:
Cash and cash equivalents $1,061,815 $4,251,584
Accounts receivable 1,212 350,718
Related party receivable 162,069 122,850
Inventories 15,785 16,322
Prepaid expenses and other 118,681 34,017
---------- ----------
Total current assets 1,359,562 4,775,491
Property and equipment, net 1,301,839 812,049
Other assets, net 311,894 363,188
---------- ----------
Total assets $2,973,295 $5,950,728
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $88,531 $134,449
Accrued liabilities 91,006 446,474
---------- ----------
Total current liabilities 179,537 580,923
---------- ----------
Stockholders' equity:
Preferred stock, $.001 par value;
5,000,000 shares authorized; no
shares outstanding - -
Common stock, $.02 par value; 50,000,000 shares
authorized; 8,589,153 and 8,566,653
shares outstanding, respectively 171,783 171,333
Common stock subscription receivable (209,200) (259,500)
Additional paid-in capital 9,458,353 9,316,028
Accumulated deficit (6,586,978) (3,858,056)
Deferred consulting expense (40,200) -
---------- ----------
Total stockholders' equity 2,793,758 5,369,805
---------- ----------
Total liabilities and stockholders' equity $2,973,295 $5,950,728
========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
Three months ended
September 30, September 30,
1996 1995
(unaudited) (unaudited)
Sales $ 2,487 $ 89,804
Cost of sales 2,673 55,480
-------- ---------
Gross margin (186) 34,324
-------- ---------
Operating expenses:
General and administrative 701,886 474,593
Research and development 341,337 212,202
Consulting expense related to the
issuance of stock options 93,800 -
Total operating expenses (1,137,023) 686,795
---------- --------
Loss from operations (1,137,209) (652,471)
Interest income, net 18,567 67,549
Other income 6,459 -
Net loss $(1,112,183) $ (584,922)
========= =======
Net loss per common share $ (.13) $ (.10)
========== ========
Weighted average number of common
shares outstanding 8,589,153 5,688,123
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
Nine months ended
September 30, September 30,
1996 1995
(unaudited) (unaudited)
Sales $ 72,854 $ 442,341
Cost of sales 62,562 252,801
-------- ---------
Gross margin 10,292 189,540
Operating expenses:
General and administrative 1,810,825 1,108,129
Research and development 968,515 430,698
Consulting expense related to
the issuance of stock options 93,800 -
--------- ---------
Total operating expenses 2,873,140 1,538,827
---------- -----------
Loss from operations (2,862,848) (1,349,287)
Interest income, net 102,467 49,153
Other income 31,459 -
Net loss $(2,728,922) $(1,300,134)
=========== ===========
Net loss per common share $ ($.32) $ ($.46)
=========== ===========
Weighted average number of
common shares outstanding 8,581,680 2,820,883
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Nine months ended
September 30, September 30,
1996 1995
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(2,728,922) $(1,300,134)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 84,051 56,984
Common stock and options issued for
services 93,800 8,500
Write off of operating assets 50,360 -
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable 349,506 (346,075)
(Increase) decrease in related party
receivable (39,219) 38,793
Decrease (increase) in inventories 537 (32,862)
Increase in prepaid expenses and othe
assets (84,664) (49,497)
Decrease in due to stockholder - (229,419)
(Decrease) increase in accounts payable
and accrued liabilities (401,386) 75,794
---------- ----------
Net cash used in operating activities (2,675,937) (1,777,916)
Cash flows from investing activities:
Capital expenditures (570,263) (659,797)
Acquisition of patents and technology (2,644) (58,736)
---------- ----------
Net cash used in investing activities (572,907) (718,533)
---------- ----------
Cash flows from financing activities:
Payments on line of credit - (177,295)
Borrowings under line of credit - 123,825
Loans from stockholders - 41,500
Payments on loans from stockholders - (17,500)
Proceeds from issuance of common stock 8,775 7,279,060
Proceeds from issuance of preferred stock - 604,001
Payments on redeemable preference stock and
dividends - (268,169)
Proceeds from stock subscriptions receivable 50,300 190,000
--------- ---------
Net cash provided by financing
activities 59,075 7,775,422
--------- ---------
Net (decrease) increase in cash and cash
equivalents (3,189,769) 5,278,973
Cash and cash equivalents at beginning of
period 4,251,584 -
---------- ----------
Cash and cash equivalents at end of period $1,061,815 $5,278,973
========== ==========
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Noncash dividends on redeemable preferred
stock $ - $ 495,860
Common stock issued for subscription
receivable - 349,500
Related party receivable for issuance of
common stock - 158,500
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Financial Statements
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows as of
September 30, 1996 and for the periods presented herein have been made.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 1995 Annual Report on Form 10-K.
The results of operations for the periods ended September 30, 1996 are not
necessarily indicative of the operating results that may result for the year
ended December 31, 1996. The accounting policies followed by the Company are set
forth in Note 1 to the Company's consolidated financial statements in its 1995
Annual Report on Form 10-K.
(2) Distribution Agreement
On August 26, 1996, the Company entered into an exclusive distribution
agreement (the "Distribution Agreement") with Becton Dickinson and Company
("BD") relating to the Company's Safety Cradle(registered) sharps container
products. The Distribution Agreement grants BD an exclusive world-wide right to
market and distribute the Company's Safety Cradle(registered) sharps container
products for an initial term of three years, which term may be extended by BD
annually thereafter. The first sales pursuant to the Distribution Agreement are
expected to occur in the fourth quarter of 1996, after the Company has made
additional modifications to the Safety Cradle(registered) sharps container
products and completed other items as required by the Distribution Agreement.
The Distribution Agreement provides that products may be sold, at BD's
option, either under the Company's name or under BD's label. The products will,
however, be imprinted with the Company's name. The sales price of the products
to BD under the Distribution Agreement can be adjusted under certain
circumstances for changes in the initial term of the Distribution Agreement. The
company is not required to distribute any future, unrelated products through BD.
(3) 401(k) Profit Sharing Plan
In June 1996, the Company approved and implemented a 401(k) profit sharing
plan and trust (the "Plan"). Employees over age twenty-one are eligible to
participate in the Plan. The Company matches 100% of employee contributions to
the Plan up to the limits allowed by the Internal Revenue Code. At September 30,
1996, the Company had made contributions to the Plan of approximately $26,800.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Result
of Operations.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto. Wherever in this discussion the term "Company" is
used, it should be understood to refer to the Company and Specialized Health
Products, Inc. its wholly owned subsidiary ("SHP"), on a consolidated basis,
except where the context clearly indicates to the contrary.
Overview
From its inception, the Company has incurred losses from operations. As of
September 30, 1996, the Company had cumulative net losses totaling $6,586,978.
During the nine months ended September 30, 1996, the Company's principal focus
was the design, development, testing, and evaluation of its Safety
Cradle(registered) sharps containers, SafetyStrip(trademarked) Lancet,
ExtreSafe(trademark) medical needle technology, intravenous flow gauge system,
blood collection device, and other products, and the improvement of its molds
and production processes relating to its Safety Cradle(registered) sharps
containers.
Financial Position
The Company had $1,061,815 in cash and cash equivalents as of September 30,
1996. This represented a decrease of $3,189,769 from December 31, 1995. Working
capital as of September 30, 1996 also decreased to $1,180,025 as compared to
$4,194,568 from December 31, 1995. These decreases were largely due to the
Company's net loss of $2,728,922 and $570,263 in capital expenditures during the
nine months ended September 30, 1996.
Results of Operations
During the three and nine months ended September 30, 1996, the Company had
sales of $2,487 and $72,854, respectively, compared with sales of $89,804 and
$442,341 for the comparable periods from the prior year. All sales relate to the
Company's sharps container products which are the only products the Company is
currently selling. Sales during the three and nine months ended September 30,
1996 were hampered because the Company entered into an agreement (the
"Agreement") with Becton, Dickinson and Company ("BD") on March 11, 1996,
whereby BD was given the right to evaluate the Company's Safety
Cradle(registered) sharps container for a period of three months while BD and
the Company considered entering into an exclusive marketing and distribution
agreement. This Agreement prohibited the Company from entering into distributor
agreements that would interfere with the Company executing an exclusive
marketing and distribution agreement with BD upon expiration of the Agreement.
The Agreement, therefore, limited sales of the Company's Safety
Cradle(registered) sharps container products in the second and third quarters of
1996. In addition, sales during the first and second quarters of 1996 were
hampered due to improvements that were being made to the molds used to produce
the Company's sharps container products. The improvements were completed in the
first quarter of 1996.
On August 26, 1996, the Company entered into an exclusive distribution
agreement (the "Distribution Agreement") with BD relating to the Company's
Safety Cradle(registered) sharps container products. The Distribution Agreement
grants BD an exclusive world-wide right to market and distribute the Company's
Safety Cradle(registered) sharps container products for an initial term of three
years, which term may be extended by BD annually thereafter. the first sales
pursuant to the Distribution Agreement are expected to occur in the fourth
quarter of 1996 or the first quarter of 1997, after the Company has made
additional modifications to the Safety Cradle(registered) sharps container
products and completed other items as required by the Distribution Agreement.
<PAGE>
The Distribution Agreement provides that products may be sold, at BD's
option, either under the Company's name or under BD's label. The products will,
however, be imprinted with the Company's name. The sales price of the products
to BD under the Distribution Agreement can be adjusted under certain
circumstances for changes in the initial term of the Distribution Agreement. The
Company is not required to distribute any future, unrelated products through BD.
The Distribution Agreement presents certain risks to the Company. These
include, among other things (i) reliance for sale of the products on BD, and
therefore reliance on BD's marketing ability, marketing plans and
credit-worthiness; (ii) if the products are marketed under BD's label, goodwill
associated with the products may inure to the benefit of BD rather than the
Company; (iii) the Company has only limited protection from changes in
manufacturing costs (other than raw materials costs) during the initial term of
the Distribution Agreement; and (iv) if the Company is reliant on BD for all or
substantially all of its sales, the Company may be restricted in its ability to
effectively negotiate with BD for renewal of the Distribution Agreement.
The Company's accounts receivable were $1,212 at September 30, 1996,
compared with $350,718 at December 31, 1995. Of the $350,718 amount, $348,266
was owed to the Company by a single distributor of the Company's sharps
container products. The $348,266 was collected in full from the distributor on
March 15, 1996.
Research and development expenses were $341,337 and $968,515 for the three
and nine months ended September 30, 1996, respectively, compared with $313,202
and $430,698 for the comparable periods from the prior year. The Company's
efforts in the nine months ended September 30, 1996, were focused on
refining the design and molds for its Safety Cradle(registered) sharps container
products, and upon the design and development of its SafetyStrip(trademarked)
and ExtraSafe(trademarked) medical needle technology, intravenous flow gauge
system, and blood collection device. The Company's efforts in the nine months
ended September 30, 1995, were focused on refining the design and producing
molds for its Safety Cradle(registered) sharps container products.
General and administrative expenses were $701,886 and $1,810,825 for the
three and nine months ended September 30, 1996, respectively, compared to
$474,593 and $1,108,129 for the comparable periods from the prior year. The
increased costs resulted largely from the increases in expenditures in two
principal areas. First, salaries and benefits increased from $203,559 and
$387,559 for the three and nine month periods ended September 30, 1995,
respectively, to $240,842 and $630,356 for the comparable periods for the
current year. The increase resulted primarily from the hiring of additional
product development, sales and marketing personnel to support sales and
commercialization of the Company's products as well as pay increases granted to
certain of the Company's employees, including executive officers. Next, legal,
accounting, financial advisory and other professional and consulting fees
increased from $32,210 and $129,770 for the three and nine month periods ended
September 30, 1995, respectively, to $94,751 and $378,434 for the comparable
periods for the current year. The increase in costs was primarily from financial
advisory, accounting and legal expenses associated with the filing of an amended
Form S-1 registration statement and other securities filings required or
permitted by law, the hiring and payment of the Company's exclusive financial
advisor, and expenses associated with litigation.
Net interest income was $18,567 and $102,467 for the three and nine
month periods ended September 30, 1996, respectively, compared to $67,549 and
$49,153 for the comparable periods from the prior year.
Liquidity and Capital Resources
The Company's need for funds has increased from period to period as it has
increased its research and development activities, expanded staff, and commenced
the purchase and construction of molds and production equipment. The Company's
need for funds has also increased due to the low level of sales during 1996. To
date the Company has financed its operations principally through borrowings and
private placements of equity securities and debt. Through September 30, 1996,
<PAGE>
the Company had received net cash from financing activities totaling
approximately $9,100,000. At September 30, 1996, the Company had no long-term
debt.
The Company's working capital and other capital requirements during the
next year or more will vary based upon a number of factors, including the cost
to complete development and bring the SafetyStrip and ExtreSafe medical needle
technology, intravenous flow gauge system, phlebotomy device and other products
to commercial viability, and the level of sales and marketing for the Safety
Cradle sharps containers. At September 30, 1996, the Company had committed to
spend $342,400 through the next twelve months on projects relating to the
development and manufacture of its products.
The Company believes that if sales of the Safety Cradle(registered) sharps
container products increase substantially from their current level, the working
capital of $1,180,025 will be sufficient to support the Company's operations and
planned capital expenditures through the third quarter of fiscal year 1997. If
sales do not begin to increase sufficiently during the fourth quarter of 1996,
the Company can and will cut operating costs and capital expenditures by
focusing only on its sharps container products and other products that are or
will shortly be ready to sell. In addition, the Company will attempt to raise
additional funds through a public or private offering of securities. The
Company's failure, however, to produce or sell sufficient quantities of Safety
Cradle(registered) sharps container products, raise additional funds, or
sufficiently cut the cost of operations and capital expenditures could
materially and adversely affect the Company's cash flows. In addition, the
Company's business plans may change or unforeseen events may occur which require
the Company to raise additional funds.
Forward-Looking Statements
This document contains both historical facts and forward-looking
statements. Any forward-looking statements involve risks and uncertainties,
including but not limited to risk of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, commercialization, and technology, and other risks. Furthermore,
manufacturing delays may result from additional mold redesigns or delays may
result from the failure to timely obtain FDA approval to sell future products.
In addition, sales through BD may not commence as anticipated due to delays by
BD or otherwise. If and when such sales commence, the sales may not be as
substantial as anticipated. As a result, the Company's actual future operations
could differ significantly from those discussed in the forward-looking
statements.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
During 1994, SHP entered into various agreements with Mold Threads, Inc., a
Connecticut corporation ("MT"), whereby MT would constuct various molds and
manufacture sharps containers for SHP. SHP alleges that MT did not complete its
obligations in a timely or satisfactory manner. When SHP attempted to move the
mold work and production to another mold maker/manufacturer, MT refused to
release SHP's molds. In January 1995, SHP filed suit in the United States
District Court for the District of Utah against MT alleging breach of contract,
conversion, and intentional interference with business relations. Thereafter, MT
agreed to release SHP's molds. In January 1996, MT counterclaimed in the amount
of $22,328, exclusive of attorney's fees and costs, for funds it alleges are
owed on a purchase order. During discovery SHP learned that MT had few assets
available to cover SHP's damage claims. As a result, on or about September 23,
1996 SHP and MT entered into a mutual release and settlement agreement,
whereby cash payment in the amount of $28,787. The Company is not a party to any
other legal proceedings.
Item 2. Changes in Securities.
None.
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a)
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3(i).1 Restated Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit 3(i).1 of the Company's current report on Form
8-K, dated July 28, 1995)
3(i).2 Articles of Incorporation of Specialized Health Products, Inc.("SHP")
(Incorporated by reference to Exhibit 3(i).2 of the Company's Form
10-K, dated December 31, 1995)
3(i).3 Articles of Amendment of SHP (Incorporated by reference to Exhibit
3(i).3 of the Company's Form 10-K, dated December 31, 1995)
3(i).4 Plan and Articles of Merger of Russco Resources, Inc., into SHP
(Incorporated by reference to Exhibit 3(i).1 to the Company's current
report on Form 8-K, dated July 28, 1995)
3(ii).1 Bylaws of the Company (Incorporated by reference to Exhibit 3(ii).1
of the Company's Form 10-K, dated December 31, 1995)
3(ii).2 Bylaws of SHP (Incorporated by reference to Exhibit 3(ii).2 of the
Company's Form 10-K, dated December 31, 1995)
10.1 Agreement and Plan of Reorganization dated as of June 23, 1995, among
the Company, Russco Resources, Inc., Scott R. Jensen and Specialized
Health Products, Inc. (Incorporated by reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K, dated July 28, 1995)
10.2 Placement Agreement between the Company, SHP and U.S. Sachem Financial
Consultants, L.P., dated June 23, 1995 (Incorporated by reference to
Exhibit 10.2 of the Company's Form 10-K, dated December 31, 1995)
10.3 Form of Employment Agreement with Executive Officers (Incorporated
by reference to Exhibit 10.3 of the Company's Form 10-K, dated
December 31, 1995)
10.4 Form of Indemnity Agreement with Executive Officers and Directors
(Incorporated by reference to Exhibit 10.4 of the Company's Form
10-K, dated December 31, 1995)
10.5 Form of Confidentiality Agreement (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10-K, dated December 31, 1995)
<PAGE>
EXHIBIT NO. DESCCRIPTION OF EXHIBIT
10.6 Joint Venture Agreement between SHP and Zerbec, Inc., dated October
30, 1995 (Incorporated by reference to Exhibit 10.6 of the Company's
Form 10-K, dated December 31, 1995)
10.7 Distribution Agreement between SHP and Becton, Dickinson and Company
(Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K, dated August 26, 1996)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
One report, dated August 26, 1996, was filed during the quarter ended
September 30, 1996 reporting changes in the registrant's certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.:
Date: 11/13/96 By /s/ David A. Robinson
David A. Robinson
President, Chief Executive Officer,
Director
Date 11/13/96 By /s/ J. Clark Robinson
J. Clark Robinson
Chief Financial Officer, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,061,815
<SECURITIES> 0
<RECEIVABLES> 1,212
<ALLOWANCES> 0
<INVENTORY> 15,785
<CURRENT-ASSETS> 1,359,562
<PP&E> 1,344,009
<DEPRECIATION> 42,170
<TOTAL-ASSETS> 2,973,295
<CURRENT-LIABILITIES> 179,537
<BONDS> 0
0
0
<COMMON> 171,783
<OTHER-SE> 2,621,975
<TOTAL-LIABILITY-AND-EQUITY> 2,973,295
<SALES> 72,854
<TOTAL-REVENUES> 72,854
<CGS> 62,562
<TOTAL-COSTS> 2,873,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,728,922)
<INCOME-TAX> 0
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<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
