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, 1999
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 August 11, 1999
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)
ASSETS June 30, December 31,
1999 1998
------------------ -------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,353,590 $ 2,480,083
Accounts receivable 312,468 494,484
Unbilled receivables on contracts - 142,414
Inventories - 2,520
Prepaid expenses and other 51,507 44,756
Amounts due from related parties 10,068 24,808
------------------ -------------------
Total current assets 1,727,633 3,189,065
------------------ -------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633 474,633
Office furnishings and fixtures 549,966 531,215
Assembly and manufacturing equipment 339,356 339,356
Leasehold improvements 132,326 132,326
Construction-in-progress 142,600 152,599
------------------ -------------------
1,638,881 1,630,129
Less accumulated depreciation and amortization (576,700) (442,331)
------------------ -------------------
Net property and equipment 1,062,181 1,187,798
------------------ -------------------
OTHER ASSETS 37,624 39,680
================== ===================
$ 2,827,438 $ 4,416,543
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 39,854 $ 17,238
Accrued liabilities 242,441 322,765
------------------ -------------------
Total current liabilities 282,295 340,003
------------------ -------------------
DEFERRED ROYALTY REVENUES - 3,750,000
------------------ -------------------
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 shares outstanding 247,129 247,129
Common stock subscriptions receivable (125,800) (200,200)
Additional paid-in capital 14,885,499 14,788,373
Series D warrants to purchase common stock 1,954,452 1,954,452
Deficit accumulated during the development stage (14,375,937) (16,423,014)
Deferred consulting expense (40,200) (40,200)
------------------ -------------------
Total stockholders' equity 2,545,143 326,540
------------------ -------------------
$ 2,827,438 $ 4,416,543
================== ===================
</TABLE>
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)
Three Months Ended Period from
----------------------------------------- Inception to
June 30, June 30, June 30,
1999 1998 1999
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Net product sales $ - $ 269 $ 748,228
Development fees 226,133 281,212 2,058,243
License fees 3,750,000 - 3,750,000
------------------ ------------------- -------------------
Total revenues 3,976,133 281,481 6,556,471
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of product sales - 215 536,002
Cost of development fees 184,283 224,969 1,453,150
------------------ ------------------- -------------------
Total cost of revenues 184,283 225,184 1,989,152
------------------ ------------------- -------------------
Gross margin 3,791,850 56,297 4,567,319
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 862,091 612,092 13,417,347
Research and development 134,883 432,714 4,849,505
Write-off of operating assets 6,268 - 1,181,063
------------------ ------------------- -------------------
Total operating expenses 1,003,242 1,044,806 19,447,915
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS 2,788,608 (988,509) (14,880,596)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 15,151 65,556 504,013
Interest expense - - (23,658)
Other income 1,132 243 52,473
------------------ ------------------- -------------------
Total other income, net 16,283 65,799 532,828
------------------ ------------------- -------------------
NET INCOME (LOSS) 2,804,891 (922,710) (14,347,768)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 2,804,891 $ (922,710) $ (14,375,937)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ .23 $ (.08)
================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,366,972 12,271,440
================== ===================
</TABLE>
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)
Six Months Ended Period from
----------------------------------------- Inception to
June 30, June 30, June 30,
1999 1998 1999
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Net product sales $ - $ 8,946 $ 748,228
Development fees 779,309 518,643 2,058,243
License fees 3,750,000 - 3,750,000
------------------ ------------------- -------------------
Total revenues 4,529,309 527,589 6,556,471
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of product sales - 7,200 536,002
Cost of development fees 630,004 414,914 1,453,150
------------------ ------------------- -------------------
Total cost of revenues 630,004 422,114 1,989,152
------------------ ------------------- -------------------
Gross margin 3,899,305 105,475 4,567,319
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 1,501,476 1,217,431 13,417,347
Research and development 388,825 666,677 4,849,505
Write-off of operating assets 6,268 - 1,181,063
------------------ ------------------- -------------------
Total operating expenses 1,896,569 1,884,108 19,447,915
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS 2,002,736 (1,778,633) (14,880,596)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 42,124 110,133 504,013
Interest expense - - (23,658)
Other income 2,217 4,298 52,473
------------------ ------------------- -------------------
Total other income, net 44,341 114,431 532,828
------------------ ------------------- -------------------
NET INCOME (LOSS) 2,047,077 (1,664,202) (14,347,768)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- ===================
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES
$ 2,047,077 $ (1,664,202) $ (14,375,937)
===================
================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ .17 $ (.14)
================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,367,380 11,952,575
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended
----------------------------------- Period from
Inception to
June 30, June 30, June 30,
1999 1998 1999
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 2,047,077 $ (1,664,202) $ (14,347,768)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 136,425 122,633 1,094,398
Common stock issued for services - - 231,000
Noncash consulting and consulting expense 97,126 7,200 361,626
Loss on disposition of assets 8,268 3,535 1,184,354
Changes in operating assets and liabilities:
Accounts receivable 182,016 (306,176) (312,468)
Unbilled receivables on contracts 142,414 - -
Inventories 2,520 (4,682) -
Prepaid expenses and other (6,751) (95,927) (51,507)
Amounts due from related parties 14,740 (2,054) (10,068)
Other assets - (26,000) (27,000)
Accounts payable 22,616 (167,536) 39,854
Accrued liabilities (80,324) - 242,441
Amounts due to related parties - (127,195) -
Deferred royalty revenues (3,750,000) 2,000,000 -
---------------- ---------------- --------------
Net cash used in operating activities (1,183,873) (260,404) (11,595,138)
---------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (17,020) (404,270) (2,899,928)
Purchase of short-term investments - (3,967,351) (356,146)
Purchase of patents and intellectual property - - 4,517
---------------- ---------------- --------------
Net cash used in investing activities (17,020) (4,371,621) (3,251,557)
---------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 2,555,359 12,487,801
Proceeds from issuance of common stock warrants - 1,078,800 1,777,952
Proceeds from collection of stock subscriptions 74,400 4,500 413,700
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 74,400 3,638,659 16,200,285
---------------- ---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,126,493) (993,366) 1,353,590
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,480,083 1,441,556 -
================ ================ ==============
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 1,353,590 $ 448,190 $ 1,353,590
================ ================ ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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 only 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. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's December 31,
1998 Annual Report on Form 10-K. The results of operations for the three and six
months ended June 30, 1999, are not necessarily indicative of the operating
results that may result for the year ending December 31, 1999. The accounting
policies followed by the Company are set forth in Note 1 to the Company's
consolidated financial statements in its December 31, 1998 Annual Report on Form
10-K.
(2) Basic and Diluted Net Income (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 of net loss per common share
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 periods presented in which the Company incurs net
losses. Basic and diluted net income per common share are equivalent for the
three and six months ended June 30, 1999 due to the minimal impact from
outstanding options and warrants. The Company has common stock options and
warrants outstanding at June 30, 1999 that, if exercised, would result in the
issuance of an additional 6,086,287 shares of common stock.
(3) Reclassifications
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform to the current period presentation.
(4) Cash Equivalents
Cash equivalents at June 30, 1999 include an investment in commercial
paper having a maturity date of August 6, 1999 with an interest rate of 5.00%.
The Company held this investment until maturity.
(5) Litigation Settlement
In April 1997, the Company entered into an agreement with Leerink Swann &
Company ("Leerink"), whereby Leerink agreed to assist the Company in raising
funds in a private placement of equity securities. Sufficient funding was
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleged that the Company refused to close on the placement. The Company
alleged that the closing did not occur because Leerink, as a condition precedent
to closing, made certain pre-closing demands that went beyond the terms of the
agreement and which demands Company management believes were not in the best
interests of the Company or its stockholders. In August 1997, Leerink filed suit
in the United States District Court for the District of Massachusetts alleging
breach of contract, misrepresentation and violation of M.G.L. c.93A, ss.11.
Leerink sought compensatory damages exceeding $230,000, warrants to purchase
113,251 shares of the Company's Common Stock, treble damages and reasonable
attorneys' fees and costs. In October 1997, the Company filed a counterclaim
alleging breach of contract and violation of M.G.L. c.93A, ss.11. The Company
sought in excess of $60,000 in money damages, treble damages, reasonable
attorneys' fees and costs. In July 1999, the parties entered into a Settlement
Agreement and General Release of Claims whereby the Company paid Leerink
$140,000 and all claims relating to the lawsuit were released and the lawsuit
was dismissed. The Company entered into the Settlement Agreement in order to
minimize the ongoing cost and expenses relating to the litigation as well as the
disruption to its business.
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(6) Amended Becton Dickinson Agreement
The Company previously entered into a license agreement (the "License
Agreement") with Becton Dickinson and Company Infusion Therapy Division
("BDIT"). Pursuant to the terms of the License Agreement, BDIT made payments of
$3,750,000 for advanced royalties for sales of product. In June 1999, BDIT and
the Company amended the License Agreement. The amendment provides that the
$3,750,000 previously paid by BDIT to the Company will not be credited against
future earned royalties and the Company will have no further obligation of any
kind to BDIT with respect to these payments. Additionally, the Company agreed to
defer BDIT's exclusivity related minimum royalty obligations from BDIT's fiscal
2002 to its fiscal 2004. Accordingly, the $3,750,000 of deferred royalty revenue
was recognized as revenue during the quarter ended June 30, 1999.
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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 and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998. 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 June 30, 1999, the Company had cumulative net losses applicable to common
shares totaling $14,276,291. To date, the Company's principal focus has been the
design, development, testing, and evaluation of its Safety Cradle(R) sharps
containers, safety lancets, safety needle technologies, intravenous flow gauge,
blood collection devices, and other safety medical products, and the design and
development of various molds and production processes.
Financial Position
The Company had $1,353,590 in cash and cash equivalents as of June 30,
1999. This represents a decrease of $1,126,493 from December 31, 1998. Working
capital as of June 30, 1999, decreased to $1,445,338 as compared to $2,849,062
at December 31, 1998. These decreases were largely due to ongoing selling,
general and administrative costs and research and development expenditures with
no product sales and minimal margins on development fees. There were no proceeds
from equity or other financing sources during the quarter ended June 30, 1999.
Three and Six Months Ended June 30, 1999 and 1998
During the three and six months ended June 30, 1999, the Company had
total revenues of $3,976,133 and $4,529,309, respectively, comprised of
development fees under the Development and License Agreement (the "JJM
Agreement") with Johnson & Johnson Medical, Inc. ("JJM") and license fees from
the license agreement (the "License Agreement") with Becton Dickinson and
Company Infusion Therapy Division ("BDIT"), which arrangements are discussed
below. This is compared to total revenues of $281,481 and $527,589 for the
comparable periods from the prior year, comprised primarily of development fees
under the JJM Agreement and minimal product sales. As discussed below, the
Company will look to several other products, development and strategic
arrangements for future revenues.
The JJM Agreement provides that the Company and JJM will seek to
commercialize two products using safety medical needle technology. The JJM
Agreement provides for monthly development payments by JJM, sharing of field
related patent costs, the possibility of 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 Company created products, the possibility of 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 JJM will perform substantially all of the manufacturing under the JJM
Agreement during 1999. The Company and JJM also reached arrangements whereby
they are pursuing development and commercialization of four additional products
under their joint cooperative program. The Company anticipates that sales of at
least one product under the JJM Agreement will begin in 1999. There is no
assurance that the Company will realize revenues under the JJM Agreement or that
any of these products will be launched as anticipated.
The Company has also entered into the License Agreement that relates to a
single application of the Company's ExtreSafe(R) safety needle technology (the
"Technology"). Pursuant to the terms of the License Agreement, BDIT made
payments of $4,000,000 to the Company. Of these total payments, $3,750,000 was
for advanced royalties for sales of product and $250,000 was for a product
development fee. In June 1999, BDIT and the Company amended the License
Agreement. The amendment provides that the $3,750,000 previously paid by BDIT to
the Company will not be credited against future earned royalties and the Company
will have no further obligation of any kind to BDIT with respect to these
payments. Additionally, the Company agreed to defer BDIT's exclusivity related
minimum royalty obligations from BDIT's fiscal 2002 to its fiscal 2004.
Accordingly, the $3,750,000 of deferred royalty revenue was recognized as
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revenue during the quarter ended June 30, 1999. The Company will not be
manufacturing product in connection with the License Agreement.
BDIT previously told the Company that it expected to begin selling the
product that is the subject of the License Agreement at various times. BDIT has
now indicated that it is unsure if or when product will be introduced and sold
in the market under the License Agreement. There is no assurance that the
Company will realize additional revenues under the License Agreement or that
product will be introduced or sold in the market under the License Agreement.
Research and development ("R&D") expenses were $134,883 and $388,825
for the three and six months ended June 30, 1999, respectively, compared with
$432,714 and $666,677 for the comparable periods from the prior year. The
Company's R&D efforts during the three month period ended June 30, 1999, focused
on development of several additional products utilizing the Company's medical
safety needle technologies. The Company's R&D efforts during the three and six
month periods ended June 30, 1998, focused on development of several products
utilizing the Company's medical safety needle technologies and continued
development work on a filmless digitized imaging technology (which was performed
by Quantum Imaging Corporation, but was funded by the Company). The decreases in
R&D expenses resulted primarily from an reduction in the development activities
with respect to the filmless digitized imaging technology.
Selling, general and administrative expenses were $862,091 and
$1,501,476 for the three and six months ended June 30, 1999, compared with
$612,092 and $1,217,431 for the comparable periods from the prior year. The
increase resulted mainly from an increase in the costs associated with exploring
new product arrangements, an increase in the cost of the Company's leased
facilities and the costs associated with the settlement of the Leerink Swann
litigation.
Interest and other income was $16,283 and $44,341 for the three and six
months ended June 30, 1999, compared with $65,799 and $114,431 for the
comparable periods from the prior year. The decreases resulted primarily from
reductions in interest income 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 related interest income. Unless the
Company generates additional cash through product sales or financings, interest
income during the remainder of 1999 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, license and development fees and
proceeds from the exercise of common stock options. The Company generated
$16,200,285 in net proceeds through financing activities from inception through
June 30, 1999. The Company used net cash for operating activities of $1,183,873
for the six months ended June 30, 1999. As of June 30, 1999, the Company's
current liabilities totaled $282,295. The Company had working capital as of June
30, 1999 of $1,445,338. During the quarter ended June 30, 1999, $74,400 of the
subscriptions receivable were collected. The Company anticipates collecting the
remainder of the subscriptions receivable in the near future.
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 safety medical needle products,
intravenous flow gauge, blood collection devices and other products to
commercial viability, and the level of sales of and marketing costs for the
Safety Cradle(R) sharps containers, safety lancets and other products. At June
30, 1999, the Company had not committed any funds for capital expenditures. The
Company believes that existing funds, development fees from JJM under the JJM
Agreement, license revenues and funds generated from sales of products and
non-core technologies, will be sufficient to support the Company's operations
and planned capital expenditures through at least the end of 1999.
The Company estimates that it will need at least $3,000,000 in
additional funding in 2000 to execute its business plan. The Company anticipates
that it will generate such funding through license fees, royalties, net
development fees, product sales and from the sale of non-core technologies. If
these activities do not generate sufficient funding for 2000, the Company may
seek additional funding through the sale of its securities. The Company has no
contractual arrangements that guarantee that the Company will have adequate
funding during 2000 and there can be no assurance that additional funding will
be available on commercially reasonable terms or at all. Any inability to obtain
additional funding when needed will have a material adverse effect on the
Company, including possibly requiring the Company to significantly curtail or
cease its operations.
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In June 1998, the Company entered into an Option to Purchase Agreement
(the "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. In accordance with the Option Agreement, a $240,000
non-refundable payment was made in July 1998 with the balance of $2,160,000 to
be paid within 30 days of the exercise of the purchase option. The Company
retained 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 animal toxicity studies. The Company received notice of successful completion
of the toxicity studies in February 1999 and subsequently entered into three
amendments to the Option Agreement resulting in extensions of the exercise
period through August 23, 1999 in exchange for payments totaling $140,000. The
Company has been reimbursed for a portion of these fees from a third party who
is interested in acquiring the technology from the Company upon exercise of the
option. The Company is not in a position to exercise the option and the third
party is not prepared to complete the acquisition at this time. Although
negotiations are continuing with respect to the exercise of the option, there
can be no assurance that an extension will be granted or, if granted, that it
will be on a commercially reasonable basis.
Nasdaq Small-Cap Market Quotation
The Company's common stock is currently traded on the Nasdaq SmallCap
Market System. On April 1, 1999, management of the Company appeared before a
Nasdaq Listing Qualifications Panel (the "Panel"). This hearing resulted from
the Company's failure to comply with the net tangible assets/market
capitalization/net income and bid price requirements. Under such requirements a
company is required to have (i) $2 million in net tangible assets, a market
capitalization of $35 million or annual net income of $500,000 and (ii) a
minimum bid price of at least $1 per share to be listed on the SmallCap Market.
On June 21, 1999, the Company was advised that the Panel determined to
continue the listing of the Common Stock on the SmallCap Market subject to
certain conditions. These conditions included the requirement that on or before
August 16, 1999 the Company make a public filing with the Securities and
Exchange Commission and Nasdaq evidencing a specified level of net tangible
assets and a closing bid price of at least $1.00 per share. While the Company is
attempting to bring itself into compliance, there is no assurance that the
Company will have the required level of net tangible assets or minimum closing
bid price by such date. In the event of delisting or suspension, 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.
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 computer networks, personal computer based development
and measurement equipment, and personal microprocessors that have the potential
for operational problems if they lack the ability to handle the transition to
the Year 2000. The Company has been aggressively proactive in pursuing solutions
for the Year 2000 problem. The Company has acquired new accounting software that
the vendor has represented is Year 2000 compliant and has initiated
communications with its suppliers, dealers, distributors and other third parties
in order to assess and reduce the risk that the Company's operations could be
adversely affected by the failure of these third parties to adequately address
the Year 2000 issue.
The Company's principal computer systems (including the embedded microprocessor
systems) have been purchased since December 31, 1996, and the vendors supplying
such systems have generally represented that such systems are Year 2000
compliant. The software utilized by the Company is generally standard "off the
shelf" software, typically available from a number of vendors. The Company is
verifying with its software vendors that the services and products provided are,
or will be, Year 2000 compliant. Subject to such verification, the Company
believes that its computer systems and software is Year 2000 compliant in all
material respects. The Company estimates that the cost to
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redevelop, replace or repair its technology that is not Year 2000 compliant will
not be material. The Company is not using any independent verification or
validation procedures. There can be no assurance, however, that its systems or
programs are or will be Year 2000 compliant and that the failure of those
systems would not have a material adverse impact on the Company's business and
operations.
In connection with its business activities, the Company interacts with
suppliers, customers, and financial service organizations who use computer
systems. The Company is verifying with those parties their state of Year 2000
readiness. Based on its assessment activity to date, the Company believes that a
majority of the suppliers, customers and financial service organizations with
whom it interacts are making acceptable progress toward Year 2000 readiness. The
Company currently believes that the most reasonable likely worst case scenario
is that there will be some localized disruptions of supplier, customer and/or
financial services that will affect the Company and its suppliers, and
distribution channels for a short time rather than systemic or long-term
problems affecting its business operations as a whole. In view of the foregoing,
the Company does not currently anticipate that it will experience a significant
disruption to its business as a result of the Year 2000 issue. However, there is
still uncertainty about the broader scope of the Year 2000 issue as it may
affect the Company and third parties that are critical to the Company's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could pose significant impediments to the Company's ability to
carry on its normal operations in the area or areas so affected. 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.
The statements made herein about the costs expected to be associated
with the Year 2000 compliance and the results that the Company expects to
achieve, constitute forward-looking information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to which the
Company will be able to successfully and adequately provide for contingencies
that may arise, as well as the broader scope of the Year 2000 issue as it may
affect third parties that are not controlled by the Company. Accordingly, the
costs and results of the Company's Year 2000 program and the extent of any
impact on the Company's operations could vary materially from those stated
herein.
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 from the Company's
licensing partners 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.
Please refer to the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and specifically the discussion under "Other Factors"
that is found in the Company's Annual Report on Form 10-K for the period ended
December 31, 1998, for more details.
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.
In April 1997, the Company entered into an agreement with Leerink
Swann & Company ("Leerink"), whereby Leerink agreed to assist the Company in
raising funds in a private placement of equity securities. Sufficient funding
was deposited into escrow to hold an initial closing, but the closing did not
occur. Leerink alleges that the Company refused to close on the placement. The
Company alleges that the closing did not occur because Leerink, as a condition
precedent to closing, made certain pre-closing demands that went beyond the
terms of the agreement and which demands Company management believes were not in
the best interests of the Company or its stockholders. In August 1997, Leerink
filed suit in the United States District Court for the District of Massachusetts
alleging breach of contract, misrepresentation and violation of M.G.L. c.93A,
ss.11. Leerink sought compensatory damages exceeding $230,000, warrants to
purchase 113,251 shares of the Company's Common Stock, treble damages and
reasonable attorneys' fees and costs. In October 1997, the Company filed a
counterclaim alleging breach of contract and violation of M.G.L. c.93A, ss.11.
The Company sought in excess of $60,000 in money damages, treble damages,
reasonable attorneys' fees and costs. In July 1999, the parties entered into a
Settlement Agreement and General Release of Claims whereby the Company paid
Leerink $140,000 and all claims relating to the lawsuit were released and the
lawsuit was dismissed. The Company entered into the Settlement Agreement in
order to minimize the ongoing cost and expenses relating to the litigation as
well as the disruption to its business.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
Item 5. Other Information.
In October 1995, the Company entered into a joint venture with Zerbec,
Inc. ("Zerbec"), whereby Quantum Imaging Corporation ("QIC") was organized to
develop, manufacture, distribute and market products and technologies using a
patented, solid state, filmless digitized imaging technology. The Company
currently owns approximately 17 percent of the outstanding common stock of QIC.
The filmless digitized imaging technology involves a method of directly
producing an electrical signal from an image recorded on an x-ray plate. The
signal is instantly digitized and stored on a CD-ROM and the same x-ray plate is
then available for subsequent procedures. The filmless digitized imaging
technology eliminates film as the x-ray image recording medium and enables x-ray
images to be translated to a CD-ROM format to simplify their storage, retrieval
and handling. The Company believes that QIC's filmless digitized imaging
technology can improve the way in which x-ray images are obtained, interpreted
and stored, while also providing clearer images having higher resolutions that
are more easily interpreted than x-ray films. Furthermore, the Company believes
that this technology could be applicable for use in x-ray facilities in mobile
medical emergency units. To date, this application is not in use due in part to
the necessity of carrying chemical handling equipment required for film
processing.
QIC does not have the funding to continue to develop the technology. It has
been seeking funding from several parties, but it does not have any funding
commitments. There can be no assurance that QIC will secure adequate funding to
continue development, or that if obtained, that such funding will be on
commercially reasonable terms.
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 D Warrant Certificate (Incorporated by
reference to Exhibit 4.3 of the Company's Annual Report
on Form 10-K, dated December 31, 1997).
4.2 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 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)
10.5 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 June 7, 1999, was filed during the quarter
ended June 30, 1999 reporting the amendment to the License Agreement.
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: 8/11/99 By /s/ David A. Robinson
---------------------------------------------
David A. Robinson
President, Chief Executive Officer, Director
Date: 8/11/99 By /s/ Charles D. Roe
---------------------------------------------
Charles D. Roe
Chief Financial Officer
14
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