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, 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)
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 14, 1998
----- ------------------------------
Common Stock, $.02 par value 12,271,440
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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)
March 31, December 31,
Assets 1998 1997
- ------ ------------------ ------------------
Current assets:
<S> <C> <C>
Cash $ 1,683,238 $ 1,441,556
Short-term investments 1,966,333 -
Accounts receivable 251,076 34,328
Inventories 77,505 72,352
Amounts due from related parties 1,795 -
Prepaid expenses and other 58,062 56,891
------------------ ------------------
Total current assets 4,038,009 1,605,127
Property and equipment, net 1,504,334 1,450,429
Patents and intellectual property, net 213,451 229,857
Security deposit 22,500 -
================== ==================
Total assets $ 5,778,294 $ 3,285,413
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 155,576 $ 469,948
Accrued liabilities 292,803 398,022
Amounts due to related parties - 127,195
------------------ ------------------
Total current liabilities 448,379 995,165
------------------ ------------------
Deferred royalty revenue 1,750,000 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 14,612,873 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 (209,200) (209,200)
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the development stage (12,966,939) (12,225,447)
------------------ ------------------
Total stockholders' equity 3,579,915 540,248
------------------ ------------------
Total liabilities and stockholders' equity $ 5,778,294 $ 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)
Three Months Ended Period from
----------------------------------------- Inception to
March 31, March 31, March 31,
1998 1997 1998
------------------ ------------------- -------------------
<S> <C> <C> <C>
Sales $ 8,677 $ 39,478 $ 746,703
Cost of sales 6,985 34,571 534,939
------------------ ------------------- -------------------
Gross margin on sales 1,692 4,907 211,764
------------------ ------------------- -------------------
Development fees 237,431 - 487,431
Cost of development fees 189,945 - 189,945
------------------ ------------------- -------------------
Gross margin on development fees 47,486 - 297,486
------------------ ------------------- -------------------
Operating expenses:
Selling, general and administrative 605,339 649,314 9,574,488
Research and development 233,963 299,284 3,785,595
Write-off of operating assets - - 419,992
------------------ ------------------- -------------------
------------------ ------------------- -------------------
Total operating expenses 839,302 948,598 13,780,075
------------------ ------------------- -------------------
Loss from operations (790,124) (943,691) (13,270,825)
Interest income 44,577 2,094 283,521
Other income 4,055 7,500 48,534
------------------ ------------------- -------------------
Net loss (741,492) (934,097) (12,938,770)
Less preference stock dividends - - (28,169)
------------------ ------------------- ===================
Net loss applicable to common shares $ (741,492) $ (934,097) $ (12,966,939)
===================
================== ===================
Net loss per common share (basic and diluted) $ (.06) $ (.11)
================== ===================
Weighted average number of common shares
outstanding (basic and diluted) 11,635,394 8,741,105
================== ===================
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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
Three Months Ended
----------------------------------- Period from
Inception to
March 31, March 31, March 31,
1998 1997 1998
---------------- --------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (741,492) $ (934,097) $ (12,938,770)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 59,752 53,384 587,411
Common stock issued for services - - 18,500
Noncash consulting expense - - 453,300
Loss on disposition of assets - - 421,283
Changes in operating assets and liabilities:
Short-term investments (1,966,333) - (1,966,333)
Accounts receivable (216,748) (1,899) (251,076)
Amounts due from related parties (1,795) - (1,795)
Inventories (5,153) 821 (77,505)
Prepaid expenses and other (1,171) 25,687 (58,062)
Security deposit (22,500) - (22,500)
Accounts payable and accrued liabilities (272,591) (81,916) 448,379
Amounts due to related parties (127,195) - -
Deferred royalty revenue - - 1,750,000
---------------- --------------- ---------------
Net cash used in operating activities (3,295,226) (938,020) (11,637,168)
---------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (97,251) (107,311) (2,270,332)
Purchase of patents and intellectual property - - (356,146)
---------------- --------------- ---------------
Net cash used in investing activities (97,251) (107,311) (2,626,478)
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,555,359 1,326,455 12,317,800
Proceeds from issuance of common stock warrants 1,078,800 - 1,777,952
Proceeds from stock subscriptions - - 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 3,634,159 1,326,455 15,946,884
---------------- --------------- ---------------
Net increase in cash 241,682 281,124 1,683,238
Cash at beginning of period 1,441,556 252,694 -
================ =============== ===============
Cash at end of period $ 1,683,238 $ 533,818 $ 1,683,238
================ =============== ===============
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See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended
-----------------------------------
Period from
March 31, March 31, Inception to
1998 1997 March 31, 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
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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 months
ended March 31, 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
that, if exercised, would result in the issuance of an additional 10,259,537
shares of common stock.
(3) Short-Term Investments
Short-term investments at March 31, 1998 consist of investments in
commercial paper having maturity dates from May 29, 1998 to August 31, 1998 with
discount rates ranging from 5.34% to 5.7%.
(4) Issuance of Securities
In January 1998, the Company completed a private placement wherein gross
proceeds of $5,220,000 were raised through an offering of units to accredited
investors for $2.00 per Unit. Each Unit consisted of one share of the Company's
common stock and one Series D Warrant to purchase one share of common stock at a
price of $2.00 per share.
In March 1997, the Company completed a private placement wherein proceeds
totaling $1,539,570 were received in exchange for the issuance of 513,190 shares
of common stock and Series C Warrants to purchase 171,064 shares of common stock
at $3.00 per share. In December 1997, in conjunction with the private placement
completed in January 1998, the board of directors of the Company authorized the
Company to offer the March 1997 private placement investors the opportunity to
exchange the securities purchased in that placement for the number of units the
investor could have purchased in the January 1998 private placement had the
investment been made under the January 1998 private placement terms rather than
the March 1997 terms. All of the March 1997 investors elected to convert to the
January 1998 private placement terms which conversion was completed in March
1998. As a result of this transaction, the Company issued an additional 256,598
shares of common stock, retired all of the Series C Warrants and issued Series D
Warrants to acquire 769,787 shares of common stock at $2.00 per share.
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Pursuant to the requirements of the January 1998 private placement, Dr.
Gale H. Thorne ("Dr. Thorne"), a director and vice-president of the Company,
released the Company from certain royalty obligations and the Company issued to
Dr. Thorne and his assigns other warrants to purchase 750,000 shares of the
Company's common stock. The Company also issued 25,000 shares of common stock
and 25,000 Series D Warrants to an unaffiliated financial advisor in connection
with the January 1998 private placement. An additional 175,000 Series D Warrants
were issued to an unaffiliated financial advisor as compensation for services
rendered. The Company also issued 50,000 warrants to an executive officer of a
subsidiary of the Company in connection with the execution of an employment
agreement.
(5) 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 March 31, 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.
The accompanying consolidated balance sheet as of March 31, 1998 includes an
accrual for the $110,000 of expenses which were subsequently paid in April 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.
(6) Subsequent Events
In June 1998, the lease related to the Company's principal offices will
expire. Accordingly, the Company has 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. The lease
provides for occupancy on June 1, 1998. Management has 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.
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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") and
Specialized Cooperative Corporation ("SCC"), on a consolidated basis, except
where the context clearly indicates otherwise.
Overview
From its inception, the Company has incurred losses from operations. As of
March 31, 1998, the Company had cumulative net losses totaling $12,938,770. 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 withdrawal 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 $1,683,238 in cash as of March 31, 1998 in addition to
$1,966,333 in short-term interest bearing investments. This represented an
increase of $2,208,015 from December 31, 1997. Working capital as of March 31,
1998, increased to $3,589,630 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 Months Ended March 31, 1998 and 1997
During the three months ended March 31, 1998, the Company had total
revenues of $246,108, comprised of $237,431 in development fees and $8,677 in
product sales; compared with revenues of $39,478 for the three months ended
March 31, 1997, comprised entirely of revenues from product sales.
All of the Company's development fee revenues during the three months ended
March 31, 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 withdrawal 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.
Substantially all of the Company's product sales for the three months ended
March 31, 1998 and 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. Consistent with this strategy, in August 1996,
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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.
The Distribution Agreement provides that products may be sold, at BDSDS'
option, either under the Company's name or under BDSDS' label. The products
will, however, be imprinted with the Company's name. The sales price of the
products to BDSDS under the 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 BDSDS.
Company management is disappointed with sales of the Safety Cradle(R)
sharps containers under the BDSDS Distribution Agreement and hopes to increase
sales by negotiating a more favorable agreement with 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 into 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.
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 $233,963 for the three
months ended March 31, 1998, compared with $299,284 for the comparable period
from the prior year. The Company's R&D efforts during the three month period
ended March 31, 1998, focused on development of several additional products
utilizing the ExtreSafe(R) medical needle withdrawal technology and continued
development work on a filmless digitized imaging technology (which was performed
by Quantum Imaging Corporation, but was funded by the Company). The Company's
R&D efforts in the three month period ended March 31, 1997, focused on
development of the ExtreSafe(R) Lancet Strip, development relating to several
products utilizing the ExtreSafe(R) medical needle withdrawal technology and
development work on the filmless digitized imaging technology performed by
Quantum Imaging Corporation.
R&D expenditures for the three months ended March 31, 1998, were less than
R&D expenditures for each of the three months ended June 30, 1997, September 30,
1997 and December 31, 1997, 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.
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Selling, general and administrative expenses were $605,339 for the three
months ended March 31, 1998, compared with $649,314 for the comparable period
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
March 31, 1998, were also less than amounts expended during each of the three
months ended June 30, 1997, September 30, 1997 and December 31, 1997. 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 $48,632 for the three months ended March 31,
1998, compared with $9,594 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, and advanced royalties and development fees. The Company has
generated $15,946,884 in net proceeds through financing activities from
inception through March 31, 1998. The Company used net cash in operating
activities of $3,295,226 during the three months ended March 31, 1998. As of
March 31, 1998, the Company's liabilities totaled $448,379, and it had
$1,750,000 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 withdrawal technology. The Company had working
capital as of March 31, 1998 of $3,589,630.
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 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(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 January 1998, the Company completed a private placement (the "January
Private Placement") wherein it raised gross proceeds of $5,220,000 through an
offering of units to accredited investors for $2.00 per unit. Each unit
consisted of one share of Common Stock and one Series D Warrant. Pursuant to
requirements of the January Private Placement, the Company provided each March
1997 private placement investor with the opportunity to exchange the securities
purchased in the March 1997 placement for a number of units the investor could
have purchased in the January Private Placement had the investment been made
under the January Private Placement terms rather than the March 1997 terms. In
February 1998, all of the March 1997 investors elected to convert to the January
Private Placement terms. As a result of the conversion, all outstanding Series C
Warrants were canceled and the Company issued 256,598 additional shares of
Common Stock and 769,787 additional Series D Warrants. Pursuant to the
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requirements of the January Private Placement, Dr. Gale H. Thorne ("Dr. Thorne")
released the Company from certain future royalty obligations and the Company
issued to Dr. Thorne and his assigns 750,000 other warrants. The Company also
issued 25,000 shares of Common Stock and 25,000 Series D Warrants to a
unaffiliated financial advisor for services in connection with the January
Private Placement, 175,000 Series D Warrants to an unaffiliated financial
advisor for services not in connection with the January Private Placement and
50,000 warrants to an executive officer of a subsidiary of the Company in
connection with the execution of an employment agreement.
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
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
March 31, 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.
Inflation
The Company does not expect the impact of inflation on its operations to be
significant.
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
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'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.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
In January 1998, the Company completed a private placement (the "January
Private Placement") wherein it raised gross proceeds of $5,220,000 and
approximate net proceeds of $4,948,500 through an offering of units solely to
accredited investors without general solicitation for $2.00 per unit. The
securities were issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). Each unit consisted
of one share of Common Stock and one Series D Warrant. Each Series D Warrant is
exercisable for one share of the Company's common stock at an exercise price of
$2.00 for a period expiring two years from the date a registration statement
covering the sale of the shares of common stock underlying the Series D Warrants
becomes effective. The Company did not use an underwriter in connection with the
January Private Placement.
Pursuant to requirements of the January Private Placement, the Company
provided accredited investors in the Company's March 1997 private placement with
opportunity to exchange the securities purchased in the March 1997 placement for
a number of units the investor could have purchased in the January Private
Placement had the investment been made under the January Private Placement terms
rather than the March 1997 terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In February 1998, all of the March 1997 accredited investors elected to convert
to the January Private Placement terms in reliance on the registration exemption
found in Rule 506 of Regulation D and Sections 3(9) and 4(2) of the Securities
Act. As a result of the conversion, all outstanding Series C Warrants were
canceled and the Company issued 256,598 additional shares of Common Stock and
769,787 additional Series D Warrants.
Pursuant to the requirements of the January Private Placement, in January
1998, Dr. Gale H. Thorne, a director and vice-president of the Company, released
the Company from certain royalty obligations and the Company issued to Dr.
Thorne and his assigns warrants to purchase 750,000 of the Company's common
stock. In January 1998, the Company also issued 25,000 shares of Common Stock
and 25,000 Series D Warrants to an unaffiliated accredited financial advisor for
services in connection with the January Private Placement, 175,000 Series D
Warrants to an unaffiliated accredited financial advisor for services not in
connection with the January Private Placement and 50,000 warrants to an
executive officer of a subsidiary of the Company in connection with the
execution of an employment agreement. The securities referenced in this
paragraph were issued under Rule 506 of Regulation D and 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.
12
<PAGE>
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 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:
One report, dated December 22, 1997, was filed during the quarter
ended March 31, 1998 reporting the J&J Agreement.
<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.:
By /s/ David A. Robinson
Date: 5/14/98 --------------------------------
David A. Robinson
President, Chief Executive Officer,
Director
Date: 5/14/98 By /s/ Charles D. Roe
-----------------------------
Charles D. Roe
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,683,238
<SECURITIES> 1,966,333
<RECEIVABLES> 251,076
<ALLOWANCES> 0
<INVENTORY> 77,505
<CURRENT-ASSETS> 4,038,009
<PP&E> 1,855,680
<DEPRECIATION> 351,346
<TOTAL-ASSETS> 5,778,294
<CURRENT-LIABILITIES> 448,379
<BONDS> 0
0
0
<COMMON> 245,429
<OTHER-SE> 3,334,486
<TOTAL-LIABILITY-AND-EQUITY> 5,778,294
<SALES> 8,677
<TOTAL-REVENUES> 246,108
<CGS> 6,985
<TOTAL-COSTS> 1,030,939
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (741,492)
<INCOME-TAX> 0
<INCOME-CONTINUING> (741,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (741,492)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
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