FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes ____ No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 13, 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)
September 30, December 31,
Assets 1998 1997
------ -------------- ---------------
Current assets:
<S> <C> <C>
Cash $ 513,354 $ 1,441,556
Short-term investments 2,745,399 -
Accounts receivable 572,596 34,328
Inventories 52,371 72,352
Prepaid expenses and other 74,264 56,891
Amounts due from related parties 7,926 -
-------------- ---------------
Total current assets 3,965,910 1,605,127
Property and equipment, net 1,467,586 1,450,429
Equipment held for sale, net 347,086 -
Patents and intellectual property, net 180,636 229,857
Deposit 27,000 -
-------------- ---------------
Total assets $ 5,988,218 $ 3,285,413
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 43,584 $ 469,948
Accrued liabilities 254,964 398,022
Amounts due to related parties - 127,195
-------------- ---------------
Total current liabilities 298,548 995,165
-------------- ---------------
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,
12,356,440 and 10,129,842 shares outstanding, respectively 247,129 202,597
Additional paid-in capital 14,788,373 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 (200,200) (209,200)
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the development stage (14,793,384) (12,225,447)
-------------- ---------------
Total stockholders' equity 1,939,670 540,248
-------------- ---------------
Total liabilities and stockholders' equity $ 5,988,218 $ 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
Three Months Ended Inception to
September 30, September 30, September 30,
1998 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Sales $ 1,144 $ 13,963 $ 748,116
Cost of sales 915 9,199 536,069
------------- ------------- ---------------
Gross margin on sales 229 4,764 212,047
------------- ------------- ---------------
Development fees 249,882 250,000 1,018,525
Cost of development fees 199,906 - 614,820
------------- ------------- ---------------
Gross margin on development fees 49,976 250,000 403,705
------------- ------------- ---------------
Operating expenses:
Selling, general and administrative 804,533 879,922 10,976,113
Research and development 205,600 322,013 4,438,909
Write-off of operating assets - 89,918 419,992
------------- ------------- ---------------
Total operating expenses 1,010,133 1,291,853 15,835,014
------------- ------------- ---------------
Loss from operations (959,928) (1,037,089) (15,219,262)
Interest income, net 55,384 10,349 404,461
Other income, net 809 206 49,586
------------- ------------- ---------------
Net loss (903,735) (1,026,534) (14,765,215)
Less preference stock dividends - - (28,169)
------------- ------------- ---------------
Net loss applicable to common shares $ (903,735) $ (1,026,534) $ (14,793,384)
============= ============= ===============
Net loss per common share (basic and diluted) $ (.07) $ (.11)
============= =============
Weighted average number of common shares
outstanding (basic and diluted) 12,338,886 9,288,539
============= =============
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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
Nine Months Ended Inception to
September 30, September 30, September 30,
1998 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Sales $ 10,090 $ 177,123 $ 748,116
Cost of sales 8,115 136,241 536,069
------------- ------------- ---------------
Gross margin on sales 1,975 40,882 212,047
------------- ------------- ---------------
Development fees 768,525 250,000 1,018,525
Cost of development fees 614,820 - 614,820
------------- ------------- ---------------
Gross margin on development fees 153,705 250,000 403,705
------------- ------------- ---------------
Operating expenses:
Selling, general and administrative 2,021,964 2,458,715 10,976,113
Research and development 872,277 914,524 4,438,909
Write-off of operating assets - 92,557 419,992
------------- ------------- ---------------
Total operating expenses 2,894,241 3,465,796 15,835,014
------------- ------------- ---------------
Loss from operations (2,738,561) (3,174,914) (15,219,262)
Interest income, net 165,517 16,949 404,461
Other income, net 5,107 7,883 49,586
------------- ------------- ---------------
Net loss (2,567,937) (3,150,082) (14,765,215)
Less preference stock dividends - - (28,169)
Net loss applicable to common shares $ (2,567,937) $ (3,150,082) $ (14,793,384)
============ ============= ===============
Net loss per common share (basic and diluted) $ (.21) $ (.35)
============ =============
Weighted average number of common shares
outstanding (basic and diluted) 12,082,760 9,028,821
============ =============
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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
Nine Months Ended Period from
Inception to
September 30, September 30, September 30,
1998 1997 1998
-------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (2,567,937) $ (3,150,082) $ (14,765,215)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 202,299 165,287 729,958
Common stock issued for services - 212,500 18,500
Noncash consulting expense 7,200 - 460,500
Loss on disposition of assets 3,073 92,557 424,356
Changes in operating assets and liabilities:
Accounts receivable (538,268) (83,503) (572,596)
Inventories 19,981 (13,328) (52,371)
Prepaid expenses and other (17,373) (39,637) (74,264)
Amounts due from related parties (7,926) (2,316) (7,926)
Deposit (27,000) (27,000)
Accounts payable and accrued liabilities (422,422) (2,894) 298,548
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 (1,475,568) (1,144,568) (9,817,510)
-------------- ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (523,611) (304,207) (2,696,692)
Purchase of short-term investments, net (2,745,399) - (2,745,399)
Purchase of patents and intellectual property - - (356,146)
Proceeds from insurance loss 3,217 - 3,217
Loan made to stockholder - (182,577) -
-------------- ------------- ---------------
Net cash used in investing activities (3,265,793) (486,784) (5,795,020)
-------------- ------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and
common stock warrants 3,804,159 1,723,345 14,265,752
Proceeds from stock subscriptions 9,000 - 339,300
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 3,813,159 1,723,345 16,125,884
-------------- ------------- ---------------
NET (DECREASE) INCREASE IN CASH (928,202) 91,993 513,354
CASH AT BEGINNING OF PERIOD 1,441,556 252,694 -
-------------- ------------- ---------------
CASH AT END OF PERIOD $ 513,354 $ 344,687 $ 513,354
============== ============= ===============
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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)
Nine Months Ended Period from
Inception to
September 30, September 30, September 30,
1998 1997 1998
------------- ------------- ---------------
Supplemental Disclosures of Noncash Investing and
Financing Activities:
<S> <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.
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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 3 1,
1997 Annual Report on Form 10-K. The results of operations for the three and
nine months ended September 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 I 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 September 30, 1998 that, if exercised, would result in the issuance of an
additional 5,898,287 shares of common stock.
(3) Short-Term Investments
Short-term investments at September 30, 1998 consist of investments in
commercial paper having maturity dates from October 19, 1998 to November 6, 1998
with interest rates ranging from 5.25% to 5.45%. The Company intends to hold
these investments until maturity.
(4) Quantum Imaging Corporation
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. SHP owns one-half of the
issued and outstanding stock of Quantum. In October 1998, Quantum entered into a
nonbinding Letter of Intent whereby U.S. Healthcare, LC has agreed to acquire
all of the outstanding Quantum stock for $7 million (the "Purchase Price").
$1,000,000 of the Purchase Price will be paid on or before December 31, 1998
with the remaining $6,000,000 expected to be paid in 1999 as certain milestones
are achieved. The Company expects to receive $3,400,000 of the Purchase Price.
The parties are currently in the process of drafting a comprehensive agreement
memorializing the parties' agreement (the "Final Agreement"). There can be no
assurance, however, that the Final Agreement will be completed, or that if
completed, that the parties will be successful in achieving the milestones. In
addition, if the Final Agreement is not reached, Zerbec has the right to acquire
two-thirds of the Company's interest in Quantum for nominal consideration as a
result of certain conditions set forth in the Quantum Joint Venture Agreement.
(5) Series A and Series B Warrants
As of July 1, 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. Thereafter in July 1998 the
remaining outstanding Series A and B Warrants expired.
7
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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. and its
wholly owned subsidiaries, Specialized Health Products, Inc., Specialized
Cooperative Corporation and Iontophoretics Corporation, on a consolidated basis,
except where the context clearly indicates otherwise.
Overview
From its inception, the Company has incurred losses from operations. As
of September 30, 1998, the Company had cumulative net losses totaling
$14,765,215. 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, ExtreSafe(R) safety needle technology, intravenous flow
gauge, blood collection device, and other safety medical products, and the
design and development of molds and production processes relating to its Safety
Cradle(R) sharps containers and ExtreSafe(R) Lancet Strip.
Financial Position
The Company had $513,354 in cash as of September 30, 1998 in addition
to $2,745,399 in short-term interest bearing investments. This represented an
increase of $1,817,197 from December 31, 1997. Working capital as of September
30, 1998, increased to $3,667,362 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 and receipt of the
deferred royalty revenue from Becton Dickinson.
Three and Nine Months Ended September 30, 1998 and 1997
During the three and nine months ended September 30, 1998, the Company
had total revenues of $251,026 and $778,615, respectively, comprised primarily
of development fees; compared with total revenues of $263,963 and $427,123 for
the comparable periods from the prior year which was comprised of development
fees and revenues from product sales.
All of the Company's development fee revenues during the three and nine
months ended September 30, 1998, were earned pursuant to a development and
license agreement (the "JJM Agreement") with Johnson & Johnson Medical, Inc.
("JJM"). The JJM Agreement provides that the Company and JJM will seek to
commercialize two products using the ExtreSafe(R) safety needle technology. The
JJM Agreement provides for monthly development fee payments by JJM, sharing of
field related patent costs, payments for initial periods of low volume
manufacturing, an ongoing royalty stream and a JJM investment in molds, assembly
equipment and other capital costs related to commercialization of each product.
The JJM Agreement also provides for an ongoing joint cooperative program between
the Company and JJM 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 and JJM also
reached arrangements whereby they are seeking to commercialize four additional
products under their joint cooperative arrangement. The Company anticipates that
revenues from development fees under the JJM Agreement will not decrease during
the remainder of 1998 and sales are expected to begin under the JJM Agreement in
early 1999. There is no assurance, however, that development fees will not
decrease or that there will be sales under the JJM Agreement.
All of the Company's development fee revenues during the three and nine
months ended September 30, 1997, were received pursuant to an agreement (the
"License Agreement") with Becton Dickinson and Company Infusion Therapy Division
("BDIT") relating to a single application of the Company's ExtreSafe(R) safety
needle
8
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technology (the "Technology"). Pursuant to the terms of the License Agreement,
BDIT made payments of $1,750,000, $250,000 and $2,000,000 to the Company in June
1997, September 1997 and April 1998, respectively. Of these total payments,
$3,750,000 are advanced royalties for sales occurring before the year 2002 and
$250,000 represented product development fee. The Company does not expect to
generate any future development fee revenues under the License Agreement.
Substantially all of the Company's product sales for the three and nine
months ended September 30, 1998 were derived from the sale of the ExtreSafe(R)
Lancet Strip while substantially all of the Company's product sales for the
comparable periods from the prior year 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. Because of certain market conditions,
the Company is no longer producing or selling the ExtreSafe(R) Lancet Strip.
Rather, it is developing two single ExtreSafe(R) Lancet products. Accordingly,
certain of the Company's ExtreSafe(R) Lancet Strip manufacturing assets are
currently being held for sale. Although the Company has identified a potential
buyer for the assets and expects to realize the book value of those assets
through their sale, there can be no assurance that such sale will be completed
or that if completed, the sale will be on terms favorable to the Company. In
addition, the assignment agreement associated with the ExtreSafe(R) Lancet Strip
has terminated along with any associated rights and obligations.
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) the risk that any
goodwill associated with use of the Company's products that are marketed under
another parties' labels 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) the possibility
that 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 $205,600 and $872,277
for the three and nine months ended September 30, 1998, respectively, compared
with $322,013 and $914,524 for the comparable periods from the prior year. The
Company's R&D efforts during the three and nine months ended September 30, 1998,
focused on development of several additional products utilizing the ExtreSafe(R)
safety needle technology, the ExtreSafe(R) Lancet technology and continued
development work on a filmless digitized imaging technology (which was performed
by Quantum, but was funded by the Company). The Company's R&D efforts during the
three and nine months ended September 30, 1997, focused on completing
development of the ExtreSafe(R) Lancet Strip, development relating to several
products utilizing the ExtreSafe(R) safety needle technology and development
work on the filmless digitized imaging technology (which was performed by
Quantum, but was funded by the Company).
Selling, general and administrative expenses were $804,533 and
$2,021,964 for the three and nine months ended September 30, 1998, respectively,
compared with $879,922 and $2,458,715 for the comparable periods from the prior
year. The decrease resulted mainly from reductions in professional and
consulting fees.
Interest and other income was $56,193 and $170,624 for the three and
nine months ended September 30, 1998, respectively, compared with $10,555 and
$24,832 for the comparable periods from the prior year. The increase in interest
income is attributable to interest earned on higher levels of Rinds on deposit
and short-term interest bearing investments. As funds on deposit and interest
bearing short-term investments have increased, 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 used for operating
activities.
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Liquidity and Capital Resources
The Company has financed its operations principally through private
placements of equity securities, proceeds from the exercise of common stock
options and warrants, advanced royalties and development fees. The Company has
generated $16,125,884 in net proceeds through financing activities from
inception through September 30, 1998. The Company used net cash in operating
activities of $1,475,568 during the nine months ended September 30, 1998. As of
September 30, 1998, the Company's current liabilities totaled $298,548, and it
had $3,750,000 in deferred royalty revenue relating to the BDIT License
Agreement. The Company had working capital as of September 30, 1998 of
$3,667,362.
In 1995, the Company and Zerbec, Inc., as joint venturers, formed
Quantum to develop, manufacture, and market an improved filmless digitized
imaging system. SHP owns one-half of the issued and outstanding stock of
Quantum. In October 1998, Quantum entered into a non-binding Letter of Intent
whereby U.S. Healthcare, LC has agreed to acquire all of the outstanding Quantum
stock for $7 million (the "Purchase Price"). $1,000,000 of the Purchase Price
will be paid on or before December 31, 1998 with the remaining $6,000,000
expected to be paid in 1999 as certain milestones are achieved. The Company
expects to receive $3,400,000 of the Purchase Price. The parties are currently
in the process of drafting a comprehensive agreement memorializing the parties'
agreement (the "Final Agreement"). There can be no assurance, however, that the
Final Agreement will be completed, or that if completed, that the parties will
be successful in achieving the milestones. In addition, if the Final Agreement
is not reached, Zerbec has the right to acquire two-thirds of the Company's
interest in Quantum for nominal consideration as a result of certain conditions
set forth in the Quantum Joint Venture Agreement.
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) safety needle products,
intravenous flow gauge, blood collection devices, ExtreSafe(R) Lancets and other
products to commercial viability, and the level of sales of and marketing for
the Safety Cradle(R) sharps containers. The Company believes that existing
funds, license fees, development fees, proceeds from the sale of Quantum and
other technologies and funds generated from product royalties and sales, will be
sufficient to support the Company's operations and planned capital expenditures
for the foreseeable future. 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.
Nasdaq Small-Cap Market Quotation
The Company's common stock is currently traded on the Nasdaq Small-Cap
Market System. In order to continue to qualify its stock for quotation on the
Nasdaq Small-Cap Market, the Company must have, among other things, $2 million
in net tangible assets, a market capitalization of $35 million or annual net
income of $500,000. The Company is also required to have a minimum of two
independent directors and an audit committee, a majority of which are
independent directors, and a minimum bid price of at least $1.
As of September 30, 1998, the Company had net tangible assets of
$1,759,034. As a result, the Company does not meet the Nasdaq Small-Cap Market
listing requirements. The Company believes that the funds generated from the
Quantum sale, development arrangements and other planned funding activities will
bring the Company into compliance with the net tangible asset requirements by
December 31, 1998. However, there can be no assurance that such additional
planned funding will be adequate or completed. In addition, the Company's
closing bid price on November 13, 1998 was $1.3125 and there can be no assurance
that the Company's bid price will remain above $1. The Company's failure to
comply with the listing requirements could result in delisting. In the event of
delisting, trading, if any, in the Company's securities would be expected to be
conducted in the over-the-counter market in what is commonly referred to as the
"Electronic Bulletin Board." As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of the Company's
securities. The loss of continued price quotations as provided by the Nasdaq
System could also cause a decline in the price of the Common Stock, a loss of
news coverage of the Company and difficulty in obtaining subsequent financing.
10
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Inflation
The Company does not expect the impact of inflation on its operations
to be significant for the next twelve months.
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 also
dependent 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. There are other conditions and activities associated
with the Company's operations which may be effected by year 2000 issues. The
Company is in the process of evaluating and working with the associated service
providers to become year 2000 compliant in those areas. The Company estimates
that the cost to redevelop, replace or repair functions and activities
potentially effected by year 2000 issues 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
and other systems and activities which may be effected by year 2000 issues. 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, if any, to make in the event the Company or
parties with whom the Company does business experience year 2000 problems.
Because of the uncertainties associated with the potential global impact of year
2000 issues, the Company is unable to ascertain the extent of their potential
impact on the Company.
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.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
No material change since the date of the Company's Annual Report on
Form 10-K.
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 July 1998, Series A Warrants to purchase 3,110,875 shares of the
Company's common stock at an exercise price of $3.00 per share and Series B
Warrants to purchase 1,205,375 shares of the Company's common stock expired. The
Company has no Series A or Series B Warrants outstanding.
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 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).
12
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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 3 1, 1995)
10.5 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)
10.6 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:
None.
13
<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: 11/13/98 By /s/ David A. Robinson
---------------------------------------------
David A. Robinson
President, Chief Executive Officer, Director
Date: 11/13/98 By /s/ Charles D. Roe
---------------------------------------------
Charles D. Roe
Chief Financial Officer
14
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 513,354
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<RECEIVABLES> 572,596
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<INVENTORY> 52,371
<CURRENT-ASSETS> 3,965,910
<PP&E> 2,269,677
<DEPRECIATION> 455,005
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<CURRENT-LIABILITIES> 298,548
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<COMMON> 247,129
<OTHER-SE> 1,692,541
<TOTAL-LIABILITY-AND-EQUITY> 5,988,218
<SALES> 10,090
<TOTAL-REVENUES> 778,615
<CGS> 8,115
<TOTAL-COSTS> 622,935
<OTHER-EXPENSES> 2,894,241
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (2,567,937)
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