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 March 31, 1997
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 May 12, 1997
------------------------------- -------------------------------
Common Stock, $.02 par value 9,257,342
<PAGE>
PART I _ FINANCIAL INFORMATION
Item 1. Financial Statements.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Balance Sheets
(Unaudited)
Assets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- ---------------
Current assets:
<S> <C> <C>
Cash $ 533,818 $ 252,694
Accounts receivable 3,058 1,159
Inventories 14,889 15,710
Prepaid expenses and other 71,126 96,813
Common stock subscriptions receivable 388,115 -
------------ ------------
Total current assets 1,011,006 366,376
Property and equipment, net 1,257,311 1,186,977
Other assets, net 279,079 295,486
------------ ------------
Total assets $ 2,547,396 $ 1,848,839
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 79,124 $ 100,686
Accrued liabilities 101,430 161,784
Amounts due to related parties 73,152 73,152
------------ ------------
Total current liabilities 253,706 335,622
------------ ------------
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,
9,257,342 and 8,656,653 shares
outstanding, respectively 185,147 173,133
Additional paid-in capital 10,932,490 9,540,928
Series C warrants to purchase
common stock 310,994 -
Common stock subscriptions receivable (209,200) (209,200)
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the
development stage (8,885,541) (7,951,444)
------------ ------------
Total stockholders' equity 2,293,690 1,513,217
------------ ------------
Total liabilities and stockholders'
equity $ 2,547,396 $ 1,848,839
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Period from
---------------------------- Inception to
March 31, March 31, March 31,
1997 1996 1997
------------- ------------ ---------------
<S> <C> <C> <C>
Sales $ 39,478 $ 16,621 $ 595,141
Cost of sales 34,571 19,756 420,668
------------ ---------- -----------
Gross margin 4,907 (3,135) 174,473
------------ ---------- -----------
Operating expenses:
Selling, general and administrative 649,314 463,749 6,307,241
Research and development 299,284 319,883 2,659,059
Write-off of operating assets -- -- 327,435
------------ ---------- -----------
Total operating expenses 948,598 783,632 9,293,735
------------ ---------- -----------
Loss from operations (943,691) (786,767) (9,119,262)
Interest income, net 2,094 50,257 222,802
Other income 7,500 25,000 39,088
---------- ---------- -----------
Net loss (934,097) (711,510) (8,857,372)
Less preference stock dividends - - (28,169)
---------- ---------- -----------
Net loss applicable to common shares $ (934,097) $ (711,510) $(8,885,541)
========== ========== ===========
Net loss per common share $ (.11) $ (.08)
========== ==========
Weighted average number of common
shares outstanding 8,741,105 8,566,653
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Months Ended Period from
----------------------- Inception to
March 31, March 31, March 31,
1997 1996 1997
---------- ---------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (934,097) $ (711,510) $ (8,857,372)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 53,384 22,602 360,766
Common stock issued for services - - 18,500
Noncash consulting expense - - 93,800
Loss on disposition of assets - - 328,726
Changes in operating assets and
liabilities:
Accounts receivable (1,899) 338,001 (3,058)
Related party receivable - 15,432 -
Inventories 821 (2,865) (14,889)
Prepaid expenses and other 25,687 (81,054) (71,126)
Accounts payable and accrued
liabilities (81,916) (91,013) 180,554
Amounts due to related parties - - 73,152
----------- ----------- ------------
Net cash used in operating
activities (938,020) (510,407) (7,890,947)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (107,311) (237,590) (1,769,736)
Purchase of patents and technology - (2,644) (356,146)
----------- ----------- ------------
Net cash used in investing
activities (107,311) (240,234) (2,125,882)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,326,455 - 8,699,515
Proceeds from stock subscriptions - 50,300 330,300
Proceeds from issuance of preferred stock - - 1,164,001
Proceeds from issuance of redeemable
preference stock - - 240,000
Payments on redeemable preference stock
and dividends - - (268,169)
Net borrowings on stockholder loans - - 385,000
----------- ----------- ------------
Net cash provided by financing
activities 1,326,455 50,300 10,550,647
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents 281,124 (700,341) 533,818
Cash and cash equivalents at beginning
of period 252,694 4,251,584 -
----------- ----------- ------------
Cash and cash equivalents at end
of period $ 533,818 $ 3,551,243 $ 533,818
=========== =========== ============
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Common stock issued for subscription
receivable $ 388,115 $ -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Consolidated 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 the
dates and for the periods presented herein have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. 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,
1996 Annual Report on Form 10-K. The results of operations for the three months
ended March 31, 1997, are not necessarily indicative of the operating results
that may result for the year ending December 31, 1997. The accounting policies
followed by the Company are set forth in Note 1 to the Company's consolidated
financial statements in its December 31, 1996 Annual Report on Form 10-K.
(2) Net Loss Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Stock options, warrants and preferred shares prior to
conversion are not included in the calculation because their inclusion would be
antidilutive, thereby reducing the net loss per common share (see Note 5).
(3) Private Placement Offering
On March 31, 1997, the Company closed a private placement offering (the
"Private Placement") wherein the Company raised $1,539,570 through offering
Units to certain accredited investors at $45 per Unit. Each Unit consists of 15
shares of the Company's common stock and Series C warrants to purchase five
shares of the Company's common stock at a price of $3.00 per share. The Company
allocated $1,228,576 of the total net proceeds to the common stock issued and
$310,994 to the Series C Warrants issued. The Series C warrants are currently
exercisable and expire two years from the date of effectiveness of a
registration statement under the Securities Act of 1933 (the "Act") covering the
resale of the shares of common stock underlying the Series C warrants by the
holder, which period shall be extended day-for-day for any time that a
prospectus meeting the requirements of the Act is not available. The Company may
accelerate the expiration of the Series C warrants in the event that the average
market price of the Company's common stock for ten consecutive trading days
exceeds $6.00 per share. In the event that the Company accelerates the
expiration of the Series C warrants, the holders of the Series C warrants would
be permitted to exercise the Series C warrants during a period of not less than
20 days following notice of such event. Each investor was required to subscribe
for a minimum of 400 Units ($18,000). As a March 31, 1997, the Company had
received all of the proceeds from the Private Placement except for $388,115
which is classified in current assets as common stock subscriptions receivable.
Subsequent to March 31, 1997, the Company received the remaining $388,115.
(4) Distribution Letter of Intent
On March 27, 1997, the Company entered into a letter of intent with
Becton Dickinson and Company ("BD") which contemplates a license agreement
related to the development, manufacture, distribution and commercialization of a
product utilizing the Company's ExtreSafe(TM) technology. If a license agreement
is consummated, the Company anticipates that BD will distribute a product
utilizing the ExtreSafe(TM) technology on an exclusive basis. Under the terms of
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the letter of intent, BD would pay the Company $4 million in prepaid royalties
and development fees in two equal payments. The first payment would be made
within thirty days of execution of a license agreement and the second payment no
later than March 1998.
(5) Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). This statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for financial statements issued for
all periods ending after December 15, 1997. SFAS 128 simplifies the standards
for computing EPS in comparison to APB Opinion No. 15 and replaces the
presentations of Primary EPS and Fully Diluted EPS with a presentation of Basic
EPS and Diluted EPS. The Company's basic and diluted EPS under the rules of SFAS
128 would not have been different from reported EPS for the three months ended
March 31, 1997 and 1996.
(6) Subsequent Events
The Company filed a Form S-3 registration statement with the Securities
and Exchange Commission ("SEC") to register the resale of 12,489,106 shares of
common stock. The SEC declared the filing effective on May 6, 1997.
The Company has signed a placement agreement with Leerink Swann &
Company ("Leerink") wherein the Company is seeking to raise between $2 and $5
million in additional funds through a private placement of stock and warrants
(the "Offering"). Pursuant to an agreement with Leerink, the Company and the
Founders, all rights relating to the Earn-Out Shares (as defined in Item 2
hereto) will terminate in exchange for the issuance of 200,000 shares of the
Company's common stock and warrants exercisable for 1,800,000 shares of the
Company's common stock at $3.00 per share (collectively, the "Exchange
Securities"). This arrangement is subject to the completion of the Offering. If
either of these contingencies is not satisfied, then the Company's obligation to
issue the Earn-Out Shares will remain in force. The issuance of the Exchange
Securities or Earn-Out Shares, as the case may be, or the perception that the
issuance of such securities may occur, could adversely affect the prevailing
trading price of the Common Stock.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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 condensed consolidated
financial statements, related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1996. Wherever in this discussion the term "Company" is used, it should be
understood to refer to Specialized Health Products International, Inc. ("SHPI")
and Specialized Health Products, Inc., its subsidiary ("SHP"), on a consolidated
basis, except where the context clearly indicates otherwise. Prior to the July
1995 acquisition wherein SHP became a wholly owned subsidiary of SHPI, SHPI had
no operations.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As of March 31, 1997, the Company had
cumulative net losses totaling $8,885,541. To date, the Company's principal
focus has been the design, development, testing, and evaluation of its Safety
Cradle(R) sharps container, ExtreSafe(TM) Lancet Strip, ExtreSafe(TM) medical
needle withdrawal technology, intravenous flow gauge, blood collection device,
filmless digitized imaging technology, and other products, and the design and
development of molds and production processes relating to its Safety Cradle(R)
sharps containers.
Financial Position
The Company had $533,818 in cash as of March 31, 1997. This represented
an increase of $281,124 from December 31, 1996. Working capital as of March 31,
1997, increased to $757,300 as compared to $30,754 at December 31, 1996. These
increases were largely due to the completion of a private placement of
securities by the Company that closed on March 31, 1997, as discussed below.
Three Months Ended March 31, 1997 and 1996
During the three months ended March 31, 1997, the Company had net sales
of $39,478, compared with $16,621 for the comparable period from the prior year.
Substantially all of the sales during these periods related to the Company's
sharps containers. The Company expects net sales in the second quarter of 1997
to be greater than net sales in the first quarter of 1997.
On August 26, 1996, the Company entered into an exclusive distribution
agreement (the "Distribution Agreement") with BD relating to the Company's
Safety Cradle(R) sharps container products. The Distribution Agreement grants BD
an exclusive world-wide right to market and distribute the Company's Safety
Cradle(R) sharps container products for an initial term of three years, which
term may be extended by BD annually thereafter subject to negotiation with
respect to price and other terms. The commencement of sales of Safety Cradle(R)
sharps container products was delayed because the Distribution Agreement
required that the Company receive a new 510(k) Notification relating to its
Safety Cradle(R) sharps container products, make certain modifications to the
containers, and that the Company's manufacturer meet certain BD standards before
sales could begin (collectively, the "BD Modifications"). The BD Modifications
were completed, BD introduced the Company's Safety Cradle(R) sharps container
products to its sales force in December 1996 and product sales began in March
1997.
The Distribution Agreement provides that container 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 product name in either
case. The selling price of the container products sold to BD under the
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Distribution Agreement can be adjusted under certain circumstances for changes
in raw material costs during the initial term of the Distribution Agreement. The
Company is not required to distribute any future, unrelated products through BD.
Entering into the Distribution Agreement created certain risks for the
Company. These include, among other things (i) reliance on BD for sales of the
products, and therefore reliance on BD's marketing ability, marketing plans,
credit-worthiness and selling efforts; (ii) to the extent the products are
marketed under BD's label, any 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 with respect to 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 container
sales, the Company's ability to effectively negotiate with BD concerning pricing
or other terms in connection with any possible extension of the Distribution
Agreement may be limited.
The ExtreSafe(TM) Lancet Strip is being assembled manually by the
Company until automated production equipment is put in place in the second half
of 1997. Due to the costs of manual assembly, the Company does not expect to
make a profit on sales of the ExtreSafe(TM) Lancet Strip until production is
transferred to the automated equipment. The automated production equipment is
expected to reduce the cost to manufacture the ExtreSafe(TM) Lancet Strip and
increase manufacturing capacity.
The Company has entered into a distribution agreement with National
Clinical Supply for the marketing and distribution of ExtreSafe(TM) Lancet
Strips. The arrangement is limited to blood banks and plasma collection centers
in the United States and to the Canadian Red Cross. The Company is seeking
additional parties to market and distribute its ExtreSafe(TM) Lancet Strips.
Unless and until the Company is able to enter into additional distribution
arrangements, the Company is attempting to market and sell the ExtreSafe(TM)
Lancet Strips with its own limited resources. There is no assurance that the
Company will enter into any other arrangements with respect to the marketing and
distribution of ExtreSafe(TM) Lancet Strips or that the Company's own marketing
and sales efforts will be effective.
Research and development ("R&D") expenses were $299,284 for the three
months ended March 31, 1997, compared with $319,883 for the comparable period
from the prior year. The Company's R&D efforts in the three month period ended
March 31, 1997, focused on completing final development of the ExtreSafe(TM)
Lancet Strip, development relating to several products utilizing the
ExtreSafe(TM) medical needle withdrawal technology, and development work on a
filmless digitized imaging technology (which was performed by Quantum Imaging
Corporation, but which was funded by the Company). The Company's efforts in the
three months ended March 31, 1996, were focused on refining the design of
production molds for its Safety Cradle(R) sharps container products, on the
design and development of its ExtreSafe(TM) Lancet Strip, on initial development
of its ExtreSafe(TM) medical needle withdrawal technology and funding
development work on the filmless digitized imaging technology.
If the Company had had adequate funding, R&D expenditures during these
periods would have been greater than they actually were. Funding constraints
also set back the anticipated dates on which the Company's products under
development will be brought to market. In addition, R&D expenditures for the
three months ended March 31, 1997, were less than R&D expenditures for the three
months ended June 30, 1996, and September 30, 1996, and increased slightly over
the three months ended December 31, 1996, due to the Company's need to purchase
parts and supplies and use the services of certain third parties relating to the
development of the ExtreSafe(TM) Lancet Strip. Further reductions in R&D
expenditures are unlikely unless and until the Company cuts its staff. Down
sizing may have a material adverse effect on product development. Management
does not intend to down size unless liquidity concerns force the Company to do
so.
Selling, general and administrative expenses were $649,314 for the three
months ended March 31, 1997, compared with $463,749 for the comparable period
from the prior year. The increase has resulted mainly from increases in the
following expenditures. First, salaries and benefits increased primarily from
the hiring of additional product development, sales and marketing personnel to
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support sales and commercialization of the Company's products as well as from
the implementation of the Company's 401(k) profit sharing plan. Second, patent
related costs increased as a result of patent related activities, the major
portion of which is a direct result of costs associated with National Phase
international patent filings. Third, advertising expenses increased as a result
of increased advertising and promotional efforts.
Selling, general and administrative expenses during the three months ended
March 31, 1997, were less than amounts expended during the three months ended
September 30, 1996, and December 31, 1996. Further reductions in selling,
general and administrative expenses will be difficult without reducing the
number of employees or reducing the number of and scope of patent applications
in the United States and abroad. Reductions in the Company's work force or the
number of and scope of patent application filings may have a material adverse
effect on the sale and commercialization of the Company's products. Management
does not intend to down size or limit the number or scope of the Company's
patent filings unless liquidity concerns force the Company to do so.
Net interest income was $2,094 for the three months ended March 31,
1997, compared with $50,257 for the comparable period from the prior year. The
difference in net interest income between said periods relates mainly to
interest earned on funds on deposit. As funds on deposit have decreased so has
the net interest income. Unless the Company generates additional cash through
product sales or financings, net interest income during the remainder of 1997
will be substantially less than in 1996.
Liquidity and Capital Resources
The Company's need for funds has increased from period to period as the
Company has increased its research and development activities, expanded its
staff, and commenced the purchase and construction of molds and production
equipment. To date, the Company has financed its operations principally through
private placements of equity securities. From inception through March 31, 1997,
the Company had received net proceeds of approximately $10,600,000 through
financing activities. As of March 31, 1997, the Company's liabilities totaled
$253,706, all of which are current liabilities. The Company had working capital
as of March 31, 1997, of $757,300 and the Company used net cash in operating
activities of approximately $900,000 during the three months ended March 31,
1997.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the costs
to complete development and bring the ExtreSafe(TM) medical needle withdrawal
technology, intravenous flow gauge, blood collection device and other products
to commercial viability, and the level of sales of and marketing for the Safety
Cradle(R) sharps containers and ExtreSafe(TM) Lancet Strip.
The Company believes that its current cash reserves, the net proceeds
from this Offering, and funds generated from sales of Safety Cradle(R) sharps
containers and ExtreSafe(TM) Lancet Strips will be sufficient to support the
Company's operations and planned capital expenditures for the foreseeable future
if the Company slows the commercialization of products in development and sales
increase substantially. Management is planning, however, to raise additional
funds through a subsequent public or private offering so commercialization of
products under development is not further delayed. There is no assurance that
any such offering will be completed or that, if completed, the terms of such
offering will be favorable to the Company.
If sales do not begin to increase sufficiently during the balance of
1997, the Company can and would expect to reduce operating costs and capital
expenditures by focusing primarily on its sharps container, lancet and other
products that are or soon will be ready to sell. The Company's failure, however,
to produce or sell sufficient quantities of Safety Cradle(R) sharps containers
or ExtreSafe(TM) Lancets, raise additional funds, or sufficiently reduce its
costs of operations and capital expenditures could materially and adversely
affect the Company's cash flows and financial condition. In addition, the
Company's business plans may change or unforeseen events may occur which require
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the Company to raise additional funds. Notwithstanding the foregoing, management
may expend cash at relatively high rates by maintaining or increasing spending
if management determines that additional funding is likely to be obtained. If
the anticipated funding is not obtained, such continued expenditures may
materially and adversely affect the Company's financial condition.
At March 31, 1997, the Company had 3,110,875 Series A Warrants and
1,290,375 Series B Warrants outstanding which are exercisable for shares of
Common Stock of the Company at $3.00 per share in the case of Series A Warrants
and $2.00 per share in the case of Series B Warrants. In the event that the
closing price of the Common Stock for any ten consecutive trading days exceeds
$6.00 per share, and subject to the availability of a current prospectus
covering the underlying stock, the Company may redeem the Series A and Series B
Warrants. Both Series A and Series B Warrants expire on the earlier of (a) two
years from the date of effectiveness of a registration statement under the Act
covering the sale of the shares of Common Stock underlying such warrants, which
period shall be extended day-for-day for any time that a prospectus meeting the
requirements of the Act is not available, or (b) the redemption date if such
warrants are redeemed (subject to the right of the holder to exercise the
warrants within 20 days of notice of such redemption). The exercise of all the
Series A and Series B Warrants would result in an equity infusion to the Company
of $11,913,375. The Company presently intends to redeem the warrants when and if
the necessary conditions are met. As of the date hereof, no warrants have been
exercised and there can be no assurance that any warrants will ever be
exercised.
On September 1, 1995, the Company adopted a non-qualified stock option
plan ("NQSOP") which authorized the Company to grant options to purchase up to
1,500,000 shares of Common Stock. All NQSOP options must be granted at exercise
prices at least equal to the fair market value of the Common Stock on the date
of grant. As of March 31, 1997, the Company had granted stock options to
purchase 1,491,000 shares of Common Stock under the NQSOP.
In addition to the options outstanding under the NQSOP, there are 40,500
options outstanding that were issued under SHP's non-qualified stock option plan
(the "SHP NQSOP"). These options became obligations of the Company pursuant to
the terms of the Acquisition.
The Company has provided certain of its officers and directors the
opportunity to receive up to an aggregate of 2,000,000 shares of Common Stock
(the "Earn-Out Shares"). Any issuance of Earn-Out Shares would be based upon the
Company's achieving certain levels of pre-tax consolidated net income, adjusted
to exclude any charge arising from the obligation to issue, or the issuance of,
the Earn-Out Shares and any income or charges associated with non-recurring or
extraordinary items as determined in accordance with generally accepted
accounting principles ("Adjusted PTNI").
The Company expects that any issuance of Earn-Out Shares would be deemed
to be compensation to the recipient and would result in a charge to earnings in
the year such Earn-Out Shares are earned. The charge to earnings would be in an
amount equal to the fair market value of the Earn-Out Shares at the time they
are earned. Any such charge to earnings could have a material adverse effect on
the earnings of the Company in the year or years in which such compensation
expense is recognized.
The charge to earnings associated with the issuance of Earn-Out Shares
could result in the Company incurring a net loss for the relevant year, even
though the Adjusted PTNI was at a level requiring the issuance of Earn-Out
Shares. Earn-Out Shares are issuable based on the results of a single year.
Therefore, the Adjusted PTNI in a particular year could trigger the issuance of
Earn-Out Shares even though cumulative Adjusted PTNI for the three designated
years, 1996, 1997 and 1998, or any combination of those years, was at such lower
level, or even a loss, that the Company would not be required to issue Earn-Out
Shares. There is no assurance that the Company in years subsequent to the year
or years in which Earn-Out Shares are issued will achieve the same level of
Adjusted PTNI or will be profitable. Management of the Company may have the
discretion to accelerate or defer certain transactions that could shift revenue
or charges between years or otherwise affect the Adjusted PTNI in any year or
years. The Company has agreed to file a registration statement under the Act
with respect to the Earn-Out Shares, if and when issued.
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Pursuant to an agreement with Leerink Swann & Company ("Leerink"), the
Company and the Founders, all rights relating to the Earn-Out Shares will
terminate in exchange for the issuance of 200,000 shares of Common Stock and
1,800,000 Series D Warrants (collectively, the "Exchange Securities"). This
arrangement is subject to the completion of the Offering. If either of these
contingencies is not satisfied, then the Company's obligation to issue the
Earn-Out Shares will remain in force. The issuance of the Exchange Securities or
Earn-Out Shares, as the case may be, or the perception that the issuance of such
securities may occur, could adversely affect the prevailing trading price of the
Common Stock.
The Company and Zerbec, Inc. ("Zerbec"), as joint venturers, formed
Quantum Imaging Corporation (Quantum") to develop, manufacture, and market an
improved filmless digitized imaging system. Pursuant to the terms of the joint
venture agreement, Zerbec assigned patented filmless digitized imaging
technology to Quantum and will provide ongoing support for the development and
commercialization of the technology. SHP has agreed to provide Quantum with
$15,000 in funding through April 1997 and $10,000 in May 1997, which funds shall
be used to support Quantum's research and development activities. Also, SHP is
obligated to pay Quantum up to an additional $15,000 per month for general and
administrative expenses through June 1, 1997.
For Quantum to achieve its objectives, the Company estimates that
between $3,000,000 and $6,000,000 in new funding will be required primarily for
further development. It is anticipated that an equity interest of at least
one-third of the total outstanding shares of Quantum will be sold to fund
development through initial production of filmless digitized imaging systems. If
at least $3,000,000 in funding is not raised by June 1, 1997, then Zerbec has
the right to acquire two-thirds of SHP's interest in Quantum for one dollar (the
"Zerbec Option"). SHP is attempting to negotiate an agreement with Zerbec
whereby SHP can acquire Zerbec's interest in Quantum (the "Zerbec Acquisition")
or obtain an extension of the date on which the Zerbec Option vests. There can
be no assurance that SHP will be able to negotiate, on terms acceptable to SHP,
an agreement relating to the Zerbec Acquisition or an extension of the date on
which the Zerbec Option vests. As a result, the Company's ownership interest may
decrease as a result the Company's inability to provide $3,000,000 in funding,
negotiate an agreement with Zerbec and/or from dilution related to outside
financing.
On January 10, 1997, David A. Robinson exercised stock options to
acquire 87,500 shares of Common Stock for $175,000.
On March 27, 1997, the Company entered into a letter of intent with
BD with respect to a license agreement covering the development, manufacture,
distribution and commercialization of a product utilizing the Company's
ExtreSafe(TM) technology. If a license agreement is consummated, the Company
anticipates that BD will distribute a product utilizing the ExtreSafe(TM)
technology on an exclusive basis. Under the terms of the letter of intent, BD
would pay the Company $4 million in two equal payments which payments relate
only to the single product that is the subject of the letter of intent. The $4
million comprises $3.5 million of nonrefundable prepaid royalties (which would
be credited against future royalties, if any, due to the Company from BD) and
$500,000 of development fees. The first payment would be made within 30 days of
execution of a license agreement and the second payment no later than March
1998.
On March 31, 1997, the Company completed a private placement wherein it
raised $1,539,570 through an offering of units to certain accredited investors
for $45 per unit. Each unit consisted of 15 shares of Common Stock and Series C
Warrants to purchase five shares of Common Stock at $3.00 per share. The Company
has agreed to file a registration statement covering the sale of the Common
Stock and Common Stock underlying the Series C Warrants. The Series C Warrants
are exercisable at any time prior to expiration or redemption. The Series C
Warrants expire two years from the date of effectiveness of a registration
statement under the Act covering the sale by the holder of the Common Stock
underlying the Series C Warrants. This period shall be extended day-for-day for
11
<PAGE>
any time that a prospectus meeting the requirements of the Act is not available.
The Company may redeem the Series C Warrants prior to expiration in the event
that the average market price of the Common Stock for 10 consecutive trading
days exceeds $6.00 per share. In the event that the Company redeems the Series C
Warrants, the holders thereof would be permitted to exercise the Series C
Warrants during a period of not less than 20 days following notice of such
redemption.
The Company has signed a placement agreement with Leerink wherein the
Company is seeking to raise between $2 and $5 million in additional funds
through a private placement of preferred stock and warrants (the "Offering").
Pursuant to an agreement with Leerink, the Board of Directors and the Founders,
all rights relating to the Earn-Out Shares will terminate in exchange for the
issuance of 200,000 shares of the Company's common stock and warrants
exercisable for 1,800,000 shares of the Company's common stock at $3.00 per
share (collectively, the "Exchange Securities"). This arrangement is subject to
the completion of the Offering. If either of these contingencies is not
satisfied, then the Company's obligation to issue the Earn-Out Shares will
remain in force. The issuance of the Exchange Securities or Earn-Out Shares, as
the case may be, or the perception that the issuance of such securities may
occur, could adversely affect the prevailing trading price of the Common Stock.
Inflation
The Company does not expect the impact of inflation on its operations to
be significant.
Forward-Looking Statements
When used in this Memorandum, in filings by the Company with the SEC, in
the Company's press releases or other public or stockholder communications, or
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "would be," "will allow," "intends to," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various 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 or otherwise may not commence as anticipated due to delays by
BD or otherwise. If and when product sales commence, sales may not reach the
levels anticipated. As a result, the Company's actual results for future periods
could differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
PART II _ OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On March 31, 1997, the Company completed a private placement wherein it
raised $1,539,570 through an offering of units to certain accredited investors
for $45 per unit. Each unit consisted of 15 shares of Common Stock and Series C
Warrants to purchase five shares of Common Stock at $3.00 per share. The Company
has agreed to file a registration statement covering the sale of the Common
12
<PAGE>
Stock and Common Stock underlying the Series C Warrants. The Series C Warrants
are exercisable at any time prior to expiration or redemption. The Series C
Warrants expire two years from the date of effectiveness of a registration
statement under the Act covering the sale by the holder of the Common Stock
underlying the Series C Warrants. This period shall be extended day-for-day for
any time that a prospectus meeting the requirements of the Act is not available.
The Company may redeem the Series C Warrants prior to expiration in the event
that the average market price of the Common Stock for 10 consecutive trading
days exceeds $6.00 per share. In the event that the Company redeems the Series C
Warrants, the holders thereof would be permitted to exercise the Series C
Warrants during a period of not less than 20 days following notice of such
redemption.
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 Certificate of Amendment of Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3(i).2 of the Company's
annual report on Form 10-K, dated December 31, 1996)
3(i).3 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).4 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(ii).1 Amended and Restated Bylaws of the Company (Incorporated by reference
to Exhibit 3(ii).1 of the Company's annual report on Form 10-K, dated
December 31, 1996)
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)
4.1 Form of Series A Warrant Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-K, dated
December 31, 1995).
4.2 Form of Series B Warrant Certificate (Incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K, dated
December 31, 1995).
13
<PAGE>
4.3 Form of Series C Warrant Certificate (Incorporated by reference to
Exhibit 4.3 of the Company's Amendment No. 1 to its Form S-3/A
Registration Statement, dated April 18, 1997)
10.1 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)
10.2 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)
10.3 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)
10.4 Form of Confidentiality Agreement (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10-K, dated December 31, 1995)
10.5 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)
10.6 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:
None.
14
<PAGE>
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: 5/14/97 By /s/ David A. Robinson
--------------------------
David A. Robinson
President, Chief Executive Officer,
Director
Date: 5/14/97 By /s/ J. Clark Robinson
--------------------------
J. Clark Robinson
Chief Financial Officer, Director
15
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 533,818
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<RECEIVABLES> 3,058
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<INVENTORY> 14,889
<CURRENT-ASSETS> 1,011,006
<PP&E> 1,459,313
<DEPRECIATION> 202,002
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<CURRENT-LIABILITIES> 253,706
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<COMMON> 185,147
<OTHER-SE> 2,108,543
<TOTAL-LIABILITY-AND-EQUITY> 2,547,396
<SALES> 39,478
<TOTAL-REVENUES> 39,478
<CGS> 34,571
<TOTAL-COSTS> 948,598
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<INCOME-PRETAX> (934,097)
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