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 June 30, 1998
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 Identification No.)
incorporation or organization)
585 West 500 South, Bountiful, Utah 84010 (Address of
principal executive offices)
(Zip Code)
(801) 298-3360
(Registrant' 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 August 14, 1998
Common Stock, $.02 par value 12,356,440
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
Assets 1998 1997
------------------- ------------------
Current assets:
<S> <C> <C>
Cash $ 448,190 $ 1,441,556
Short-term investments 3,967,351 -
Accounts receivable 340,504 34,328
Inventories 77,034 72,352
Amounts due from related parties 2,054 -
Prepaid expenses and other 152,818 56,891
Total current assets 4,987,951 1,605,127
Property and equipment, net 1,761,345 1,450,429
Patents and intellectual property, net 197,043 229,857
Deposit 26,000 -
------------------- ------------------
Total assets $ 6,972,339 3,285,413
=================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 93,987 469,948
Accrued liabilities 459,447 398,022
Amounts due to related parties - 127,195
------------------- ------------------
Total current liabilities 553,434 995,165
------------------- ------------------
Deferred royalty revenue 3,750,000 1,750,000
------------------- ------------------
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,
12,271,440 and 10,129,842 shares outstanding, respectively 245,429 202,597
Additional paid-in capital 14,620,073 12,113,346
Series C warrants to purchase common stock - 310,994
Series D warrants to purchase common stock 1,937,952 388,158
Common stock subscriptions receivable (204,700) (209,200)
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the development stage (13,889,649) (12,225,447)
------------------- ------------------
Total stockholders' equity 2,668,905 540,248
------------------- ------------------
Total liabilities and stockholders' equity $ 6,972,339 $ 3,285,413
=================== ==================
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See accompanying notes to condensed consolidated financial statements.
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from Inception to
Three Months Ended
-----------------------------------------
June 30, June 30, June 30,
1998 1997 1998
------------------ -------------------- --------------------
<S> <C> <C> <C>
Sales $ 269 $ 123,682 $ 746,972
Cost of sales 215 92,471 535,154
------------------ -------------------- --------------------
Gross margin on sales 54 31,211 211,818
------------------ -------------------- --------------------
Development fees 281,212 - 768,643
Cost of development fees 224,969 - 414,914
------------------ -------------------- --------------------
Gross margin on development fees 56,243 - 353,729
------------------ -------------------- --------------------
Operating expenses:
Selling, general and administrative 612,092 929,479 10,186,580
Research and development 432,714 293,227 4,218,309
Write-off of operating assets - 2,639 419,992
------------------ -------------------- --------------------
Total operating expenses 1,044,806 1,225,345 14,824,881
------------------ -------------------- --------------------
Loss from operations (988,509) (1,194,134) (14,259,334)
Interest income 65,556 4,506 349,077
Other income 243 177 48,777
------------------ -------------------- --------------------
Net loss (922,710) (1,189,451) (13,861,480)
Less preference stock dividends - - (28,169)
Net loss applicable to common shares $ (922,710) $ (1,189,451) $ (13,889,649)
=================== ==================== ===================
Net loss per common share (basic and diluted) $ (.08) $ (.13)
=================== ====================
Weighted average number of common shares
outstanding (basic and diluted) 12,271,440 9,260,767
=================== ====================
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See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from Inception to
Six Months Ended
-----------------------------------------
June 30, June 30, June 30,
1998 1997 1998
------------------ -------------------- --------------------
<S> <C> <C> <C>
Sales $ 8,946 $ 163,160 $ 746,972
Cost of sales 7,200 127,042 535,154
------------------ -------------------- --------------------
Gross margin on sales 1,746 36,118 211,818
------------------ -------------------- --------------------
Development fees 518,643 - 768,643
Cost of development fees 414,914 - 414,914
------------------ -------------------- --------------------
Gross margin on development fees 103,729 - 353,729
------------------ -------------------- --------------------
Operating expenses:
Selling, general and administrative 1,217,431 1,578,793 10,186,580
Research and development 666,677 592,511 4,218,309
Write-off of operating assets - 2,639 419,992
------------------ -------------------- --------------------
Total operating expenses 1,884,108 2,173,943 14,824,881
------------------ -------------------- --------------------
Loss from operations (1,778,633) (2,137,825) (14,259,334)
Interest income 110,133 6,600 349,077
Other income 4,298 7,677 48,777
------------------ -------------------- --------------------
Net loss (1,664,202) (2,123,548) (13,861,480)
Less preference stock dividends - - (28,169)
------------------ -------------------- --------------------
Net loss applicable to common shares $ (1,664,202) $ (2,123,548) $ (13,889,649)
================== ==================== ====================
Net loss per common share (basic and diluted) $ (.14) $ (.24)
=================== ====================
Weighted average number of common shares
outstanding (basic and diluted)
11,952,575 9,002,390
=================== ====================
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See accompanying notes to condensed consolidated financial statements.
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
Six Months Ended Period from
------------------------------------
Inception to June 30,
June 30, June 30, 1998
1998 1997
----------------- ---------------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (1,664,202) $ (2,123,548) $ (13,861,480)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 122,633 107,593 650,291
Common stock issued for services - - 18,500
Noncash consulting expense 7,200 - 460,500
Loss on disposition of assets 3,535 2,789 424,818
Changes in operating assets and liabilities:
Accounts receivable (306,176) (52,730) (340,503)
Amounts due from related parties (2,054) - (2,054)
Inventories (4,682) 772 (77,034)
Prepaid expenses and other (95,927) (23,293) (152,818)
Deposits (26,000) - (26,000)
Accounts payable and accrued liabilities (167,536) 181,387 553,434
Amounts due to related parties (127,195) (73,152) -
Deferred royalty revenue 2,000,000 1,750,000 3,750,000
----------------- ---------------- ----------------
Net cash used in operating activities (260,404) (230,182) (8,602,346)
----------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (404,270) (258,028) (2,577,351)
Purchase of short-term investments (3,967,351) - (3,967,351)
Purchase of patents and intellectual property - - (356,146)
----------------- ---------------- ----------------
Net cash used in investing activities (4,371,621) (258,028) (6,900,848)
----------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock and
common stock warrants 3,634,159 1,723,345 14,095,752
Proceeds from stock subscriptions 4,500 - 334,800
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 3,638,659 1,723,345 15,951,384
----------------- ---------------- ----------------
Net (decrease) increase in cash (993,366) 1,235,135 448,190
Cash at beginning of period 1,441,556 252,694 -
Cash at end of period $ 448,190 $ 1,487,829 $ 448,190
================= ================ ================
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See accompanying notes to condensed consolidated financial statements.
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended Period from
--------------------------------------- Inception to
June 30, June 30, June 30,
1998 1997 1998
----------------- ---------------- ----------------
Supplemental Disclosures of Noncash Investing
and Financing Activities:
<S> <C> <C> <C>
In-kind dividends on redeemable preference stock $ - $ - $ 28,169
Common stock issued for subscription receivable - - 548,000
Common stock issued for services 37,500 - 37,500
Series "D" warrants issued for services 160,000 - 160,000
Conversion of stockholder debt to common stock - - 485,000
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See accompanying notes to condensed consolidated financial statements.
6
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Condensed 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,
1997 Annual Report on Form 10-K. The results of operations for the three and six
months ended June 30, 1998, are not necessarily indicative of the operating
results that may result for the year ending December 31, 1998. The accounting
policies followed by the Company are set forth in Note 1 to the Company's
consolidated financial statements in its December 31, 1997 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. Therefore, there
is no difference between basic and diluted net loss per common share for the
periods presented. The Company has common stock options and warrants outstanding
at June 30, 1998 that, if exercised, would result in the issuance of an
additional 10,254,537 shares of common stock.
(3) Short-Term Investments
Short-term investments at June 30, 1998 consist of investments in
commercial paper having maturity dates from July 27, 1998 to September 25, 1998
with discount rates ranging from 5.57% to 5.61%. The Company intends to hold
these investments until maturity.
(4) Quantum Imaging Corporation
In October 1995, the Company and Zerbec, Inc. ("Zerbec"), as joint
venturers, formed Quantum Imaging Corporation ("QIC") to develop, manufacture,
and market an improved filmless digitized imaging system. The Company and Zerbec
are equal owners of QIC. Pursuant to the terms of the joint venture agreement,
among other things, Zerbec has an option to acquire two-thirds of SHP's interest
in QIC for one dollar if certain funding objectives are not met (the "Zerbec
Option"). On April 3, 1998, the Company entered into an agreement with Zerbec
wherein the Company agreed to pay to Zerbec $110,000 for expenses incurred
through June 30, 1998 along with $10,000 per month until the earlier of the date
on which QIC receives $3 million in funding or until September 30, 1998. In
consideration for these payments, Zerbec relinquished the Zerbec Option if $3
million in funding is received by Quantum before September 30, 1998.
(5) New Facilities Lease
Effective June 1, 1998, the Company entered into a new five-year lease
agreement for facilities that will accommodate the Company's administration as
well as research and development and anticipated low volume manufacturing. The
agreement was entered into on April 1, 1998 and subsequently amended. The
agreement provides for the lease of 17,273 square feet of total space at a cost
of approximately $276,400 for the first year, which rate will increase at a rate
of four percent per year during the five-year term of the lease. Management has
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determined that the increase in the total space leased by the Company is
necessary to accommodate the expected growth of the Company, its employees and
activities.
(6) Technology Option To Purchase Agreement
In June 1998, the Company entered into an Option to Purchase Agreement
("Option Agreement") with the University of Texas System to purchase certain
patents and related technology, research and development for a total purchase
price of $2,400,000. The Option Agreement requires a $240,000 non-refundable
payment to be made within 30 days of the effective date of the Option Agreement
with the balance of $2,160,000 to be paid within 30 days of the exercise of the
purchase option. The Company has the exclusive right to exercise the option and
acquire the patents and related technology for a period of one year from the
date of the execution of the Option Agreement, or within 14 days of notification
of successful completion of an animal toxicity study. The $240,000 was paid in
July 1998 and has been recorded as an accrued liability and expensed as research
and development cost in the accompanying consolidated financial statements as of
June 30, 1998.
In connection with this Option Agreement, the Company entered into
consulting agreements with three individuals who were the principal inventors of
the technology. These consulting agreements provide for the individuals to
perform services for the Company in assisting in the successful development of
the related technology. The individuals are to provide a minimum of 50 hours of
services annually for which they will be compensated at a rate of $150 per hour.
Each individual also executed stock option agreements with the subsidiary
corporation, Iontophoretics ("IPC"), which is the entity entering into the
Option Agreement and the individual consulting agreements. The stock option
agreements provide for the individuals to purchase up to 40,000 shares of IPC
common stock at an exercise price of $.01 per share in 10,000 share increments
based on the achieving of certain milestone events in the future. The Company
has recorded $7,200 of consulting expense in the accompanying consolidated
financial statements for the period ended June 30, 1998 related to the granting
of these options.
(7) Subsequent Event
As of June 30, 1998, the Company had outstanding Series A Warrants
related to the potential issuance of 3,110,875 shares of common stock with an
exercise price of $3.00 per share. The Company also had outstanding Series B
Warrants related to the potential issuance of 1,290,375 shares of common stock
with an exercise price of $2.00 per share. In July 1998, certain Series B
Warrants were exercised resulting in the issuance of 85,000 shares of common
stock with proceeds to the Company of $170,000. The remaining Series A and B
Warrants have expired.
8
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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,
1997. Wherever in this discussion the term "Company" is used, it should be
understood to refer to Specialized Health Products International, Inc. ("SHPI")
and its wholly owned subsidiaries, Specialized Health Products, Inc. ("SHP"),
Specialized Cooperative Corporation ("SCC") and Iontophoretics Corporation
("IPC"), on a consolidated basis, except where the context clearly indicates
otherwise.
Overview
From its inception, the Company has incurred losses from operations. As
of June 30, 1998, the Company had cumulative net losses totaling $13,889,649. To
date, the Company's principal focus has been the design, development, testing,
and evaluation of its Safety Cradle(R) sharps containers, ExtreSafe(R) Lancet
Strip, ExtreSafe(R) medical needle technology, intravenous flow gauge, blood
collection device, and other products, and the design and development of its
molds and production processes relating to its Safety Cradle(R) sharps
containers and ExtreSafe(R) Lancet Strip.
Financial Position
The Company had $448,190 in cash as of June 30, 1998 in addition to
$3,967,351 in short-term interest bearing investments. This represented an
increase of $2,973,985 from December 31, 1997. Working capital as of June 30,
1998, increased to $4,434,517 as compared to $609,962 at December 31, 1997.
These increases were largely due to the completion of a private placement of
securities by the Company that closed in January 1998, as discussed below.
Three and Six Months Ended June 30, 1998 and 1997
During the three and six months ended June 30, 1998, the Company had
total revenues of $281,481 and $527,589, respectively, comprised primarily of
development fees; compared with revenues of $123,682 and $163,160 for the
comparable periods from the prior year, comprised entirely of revenues from
product sales.
All of the Company's development fee revenues during the three months ended June
30, 1998, were received pursuant to a development and license agreement (the
"J&J Agreement") with Johnson & Johnson Medical, Inc. ("J&J"). The J&J Agreement
provides that the Company and J&J will seek to commercialize two products using
the ExtreSafe(R) medical needle technology. The J&J Agreement provides for
monthly development fee payments by J&J, sharing of field related patent costs,
payments for initial periods of low volume manufacturing, an ongoing royalty
stream and a J&J investment in molds, assembly equipment and other capital costs
related to commercialization of each product. The J&J Agreement also provides
for an ongoing joint cooperative program between the Company and J&J which
derives future funding directly from sales of certain products, including joint
cooperative program products, low volume manufacturing revenue for the Company
and an ongoing royalty stream for additional safety products which are jointly
approved for development. The Company anticipates that revenues from development
fees under the J&J Agreement will not decrease during the remainder of 1998 and
sales are expected to begin under the J&J Agreement in early 1999. There is no
assurance, however, that development fees will not decrease or that there will
be sales under the J&J Agreement.
Substantially all of the Company's product sales for the three months
ended June 30, 1998 were derived from the sale of the ExtreSafe(R) Lancet Strip
while substantially all of the Company's product sales for the three months
ended June 30, 1997 were generated from sales of the Company's Safety Cradle(R)
sharps containers. The Company employs a limited number of sales people and
seeks to market and sell its products through third-party distributors and/or
licensees.
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Consistent with this strategy, in August 1996, the Company entered into
a distribution agreement (the "BDSDS Distribution Agreement") with Becton
Dickinson and Company Sharps Disposal Systems ("BDSDS") whereby BDSDS is
marketing and distributing the Company's Safety Cradle(R) sharps containers.
BDSDS began selling the Safety Cradle(R) sharps containers under the
BDSDS Distribution Agreement in the first quarter of 1997. During 1997, however,
BDSDS did not order the minimum required amount of product under the terms of
the BDSDS Distribution Agreement and, therefore, BDSDS' exclusive distribution
rights became nonexclusive. In addition, the Company gave notice of termination
of the BDSDS Distribution Agreement, as it is authorized to do in the case of
BDSDS' failure to purchase the minimum amount of product required by the BDSDS
Distribution Agreement. The parties subsequently agreed to extend the
termination date and exclusivity provision of the BDSDS Distribution Agreement
until May 26, 1998 to give BDSDS the opportunity to purchase the minimum
products specified in the BDSDS Distribution Agreement. BDSDS did not meet the
terms of the extension of the agreement. As a result, the BDSDS Distribution
Agreement was terminated and the Company is pursuing various alternatives with
BDSDS and others with respect to the use and distribution of the Company's
Safety Cradle(R) sharps containers.
Company management is disappointed with sales of the Safety Cradle(R)
sharps containers under the BDSDS or one or more other distributors and/or
licensees with the proper focus and strategy to accelerate sales of the
Company's sharps containers in to the home healthcare market. There is no
assurance, however, that a favorable distribution and/or license agreement will
be negotiated between the Company and BDSDS or any other party or that sales
will improve.
In September 1997, the Company entered into an agreement (the "Alliance
Agreement") with Alliance Medical which provides for the Company to manufacture
and Alliance Medical to market and sell the ExtreSafe(R) Lancet Strip on an
exclusive basis in hospitals, alternate site (e.g., homecare, plasma centers and
blood banks) and consumer markets in the United States. Effective March 1, 1998,
the Alliance Agreement was converted to a non-exclusive agreement with no sales
minimums so that the Company can pursue additional sources of distribution.
To date there have been no material sales of ExtreSafe(R) Lancet Strips.
License and distribution arrangements, such as those discussed above,
create certain risks for the Company, including (i) reliance for sales of
products on other parties, and therefore reliance on the other parties'
marketing ability, marketing plans and credit-worthiness; (ii) if the Company's
products are marketed under other parties' labels, goodwill associated with use
of the products may inure to the benefit of the other parties rather than the
Company; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or substantially all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements. Further, because such arrangements are generally expected to
provide the Company's marketing partners with certain elements of exclusivity
with respect to the products to be marketed by those partners, the Company's
success will be highly dependent on the results obtained by its partners.
Research and development ("R&D") expenses were $432,714 and $666,677
for the three and six months ended June 30, 1998, respectively, compared with
$293,227 and $592,511 for the comparable periods from the prior year. The
Company's R&D efforts during the three and six months ended June 30, 1998,
focused on development of several additional products utilizing the ExtreSafe(R)
medical needle technology, continued development work on a filmless digitized
imaging technology (which was performed by Quantum Imaging Corporation, but was
funded by the Company) and costs associated with a patent and technology
purchase option agreement entered into between the Company and the University of
Texas System. The Company's R&D efforts in the three and six months ended June
30, 1997, focused on development of the ExtreSafe(R) Lancet Strip, development
relating to several products utilizing the ExtreSafe(R) medical needle
technology and development work on the filmless digitized imaging technology
performed by Quantum Imaging Corporation.
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Exclusive of the costs associated with the new patent and technology
purchase option agreement, R&D expenditures for the three months ended June 30,
1998, were less than R&D expenditures for each of the three months ended,
September 30, 1997, December 31, 1997 and March 31, 1998, due mainly to receipt
of development fees under the J&J Agreement. Should capital resources become
limited, further reductions in R&D expenditures are unlikely unless and until
the Company reduces its staff. Downsizing may have a material adverse effect on
product development. Management does not intend to downsize. With the increased
R&D associated with the J&J Agreement, the Company may hire additional employees
and consultants.
Selling, general and administrative expenses were $612,092 and
$1,217,431 for the three and six months ended June 30, 1998, respectively,
compared with $929,479 and $1,578,793 for the comparable periods from the prior
year. The decrease resulted mainly from reductions in professional and
consulting fees.
Selling, general and administrative expenses during the three months
ended June 30, 1998, were also less than amounts expended during each of the
three months ended, September 30, 1997 and December 31, 1997 and comparable to
the related expenses for the quarter ended March 31, 1998. Should capital
resources become limited, 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 downsize or limit the number or scope of the Company's patent filings
unless liquidity concerns force the Company to do so. With an increase in the
Company's R&D and related activities, associated principally with the J&J
Agreement, the Company may experience an increase in associated selling, general
and administrative costs.
Interest and other income was $65,799 and $110,133for the three and six
months ended June 30, 1998, respectively, compared with $4,683 and $6,600 for
the comparable period from the prior year. The difference in interest income
between said periods relates mainly to interest earned on funds on deposit and
short-term interest bearing investments. As funds on deposit and interest
bearing short-term investments have decreased so has the interest income. Unless
the Company generates additional cash through product sales or financings,
interest income during the remainder of 1998 will decrease as funds on deposit
and interest bearing short-term investments are reduced.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, proceeds from the exercise of common
stock options, advanced royalties and development fees. The Company has
generated $15,951,384 in net proceeds through financing activities from
inception through June 30, 1998. The Company used net cash in operating
activities of $260,404 during the six months ended June 30, 1998. As of June 30,
1998, the Company's liabilities totaled $553,434, and it ha $3,750,000 in
deferred royalty revenue relating to royalties the Company received from Becton
Dickinson and Company Infusion Therapy Division pursuant to a license agreement
relating to a single application of the Company's ExtreSafe(R) safety needle
technology. The Company had working capital as of June 30, 1998 of $4,434,517.
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(R) medical needle 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(R) Lancet Strip. The Company believes that
existing funds, license fees, development fees, and funds generated from sales,
will be sufficient to support the Company's operations and planned capital
expenditures through 1998. The Company may, however, raise additional funds
through a public or private offering if, in the opinion of management, the
Company is in need of additional funding. 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.
In 1995, 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
11
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technology to Quantum and will provide ongoing support for the development and
commercialization of the technology. The joint venture also gave Zerbec the
right to acquire two-thirds of the Company's interest in Quantum if certain
funding objectives were not achieved (the "Zerbec Option").
Quantum was unsuccessful in meeting the funding objectives. On April 3,
1998, however, the Company and Zerbec entered into an agreement whereby the
Company agreed to pay Zerbec $110,000 for expenses Zerbec had incurred through
June 30, 1998 on Quantum's behalf along with $10,000 per month until the earlier
of the date on which Quantum receives $3 million in funding or until September
30, 1998. In consideration for these payments, Zerbec will relinquish the Zerbec
Option if $3 million in funding is received by Quantum before September 30,
1998. There can be no assurance that Quantum will be successful in timely
raising the $3 million in funding or that the Company's ownership interest in
Quantum will not decrease as a result of the exercise of the Zerbec Option
and/or from dilution related to outside financing.
In July 1998, Series B Warrants were exercised resulting in the
issuance of 85,000 shares of common stock of the Company with total proceeds of
$170,000. The remaining Series B and all of the Series A Warrants expired in
July 1998.
Inflation
The Company does not expect the impact of inflation on its operations
to be significant.
Year 2000
The Company uses computers principally for product design, product
prototyping and administrative functions such as communications, word
processing, accounting and management and financial reporting. The Company's
principal computer systems have been purchased since December 31, 1995. The
software utilized by the Company is generally standard "off the shelf" software,
typically available from a number of vendors. While the Company believes it is
taking all appropriate steps to assure year 2000 compliance, it is dependent
substantially on vendor compliance. The Company intends to modify or replace
those systems that are not year 2000 compliant. The Company is verifying with
its system and software vendors that the services and products provided are, or
will be, year 2000 compliant. The Company estimates that the cost to redevelop,
replace or repair its technology will not be material. There can be no
assurance, however, that such systems and/or programs are or will be year 2000
compliant and that the failure of such would not have a material adverse impact
on the Company's business and operations.
In addition to its own computer systems, in connection with its
business activities, the Company interacts with suppliers, customers, creditors
and financial service organizations domestically and globally who use computer
systems. It is impossible for the Company to monitor all such systems, and there
can be no assurance that the failure of such systems would not have a material
adverse impact on the Company's business and operations. The Company is
currently evaluating what contingency plans, i any, to make in the event the
Company or parties with whom the Company does business experience year 2000
problems.
Forward-Looking Statements
When used in this Form 10-Q, in other 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
12
<PAGE>
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, changes in the regulation of safety health
care products, 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 and other
revenues may not commence as anticipated due to delays or otherwise. If and when
product sales commence, sales may not reach the levels anticipated. As a result,
the Company' 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.
Not Applicable.
Item 2. Changes in Securities.
In July 1998, Series B Warrant holders exercised warrants to acquire
85,000 shares of the Company's common stock for total proceeds of $170,000. The
common stock was issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). In addition, in May
1998 the Company issued to an employee stock options to acquire 10,000 shares of
the Company's common stock at $1.8125 per share. The exercise price was the
market price of the underlying common stock on the date of grant. The options
were issued pursuant to Section 4(2) of the Securities Act.
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)
13
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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 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 Second 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, 1997)..
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).
4.3 Form of Series D Warrant Certificate (Incorporated by reference
to Exhibit 4.3 of the Company's Annual Report on Form 10-K,
dated December 31, 1997).
4.4 Form of SHPI Warrant Certificate (Incorporated by reference to
Exhibit 4.4 of the Company's Annual Report on Form 10-K, dated
December 31, 1997).
10.1 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)
10.2 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)
10.3 Form of Confidentiality Agreement (Incorporated by reference to
Exhibit 10.5 of the Company's Form 10-K, dated December 31,
1995)
10.4 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)
10.5 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/A, dated August 26, 1996)
10.6 License 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 June 4, 1997)
10.7 Distribution and License Agreement between SHP and Johnson and
Johnson Medical, Inc. (Incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K/A, dated December
22, 1997)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
An amended report was filed during the quarter ended June 30, 1998
relating to the J&J Agreement.
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: 8/14/98 By /s/ David A. Robinson
--------------------------------------------
David A. Robinson
President, Chief Executive Officer, Director
Date: 8/14/98 By /s/ Charles D. Roe
--------------------------------------------
Charles D. Roe
Chief Financial Officer
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