FORM 10-QSB
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, 2000
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 16, 2000
----- ---------------------------------
Common Stock, $.02 par value 12,381,440
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS June 30, December 31,
------ 2000 1999
------------------ -------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 791,238 $ 180,425
Accounts receivable 4,301 135,374
Prepaid expenses and other 17,747 36,869
Amounts due from related parties - 3,145
------------------ -------------------
Total current assets 813,286 355,813
------------------ -------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633 474,633
Office furnishings and fixtures 558,508 552,882
Assembly and manufacturing equipment 317,391 317,391
Leasehold improvements 134,869 132,326
Automated assembly equipment 71,300 71,300
------------------ -------------------
1,556,701 1,548,532
Less accumulated depreciation and amortization (974,772) (811,041)
------------------ -------------------
Net property and equipment 581,929 737,491
------------------ -------------------
OTHER ASSETS 33,512 35,568
------------------ -------------------
$ 1,428,727 $ 1,128,872
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABLITIES:
Accounts payable $ 109,947 $ 4,692
Accrued liabilities 122,700 120,983
Advances received on development fees 570 -
------------------ -------------------
Total current liabilities 233,217 125,675
------------------ -------------------
DEFERRED ROYALTY REVENUES 1,426,000 -
------------------ -------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 5,000,000 shares authorized,
no shares outstanding - -
Common stock, $.02 par value; 50,000,000 shares authorized,
12,381,440 and 12,356,440 shares outstanding, respectively 247,629 247,129
Additional paid-in capital 14,901,361 14,865,399
Series D warrants to purchase common stock 1,954,452 1,954,452
Deficit accumulated during the development stage (17,333,932) (16,063,783)
------------------ -------------------
Total stockholders' equity (deficit) (230,490) 1,003,197
------------------ -------------------
$ 1,428,727 $ 1,128,872
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<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,
2000 1999 2000
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Technology and license fees $ 74,000 $ 3,750,000 $ 3,824,000
Development fees and related services 70,913 226,133 2,653,062
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 144,913 3,976,133 7,225,290
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees and related services 48,500 184,283 1,910,659
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 48,500 184,283 2,446,661
------------------ ------------------- -------------------
Gross margin 96,413 3,791,850 4,778,629
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 669,010 862,091 15,752,268
Research and development 212,708 134,883 5,620,971
Write-off of operating assets - 6,268 1,280,557
------------------ ------------------- -------------------
Total operating expenses 881,718 1,003,242 22,653,796
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS (785,305) 2,788,608 (17,875,167)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 13,351 15,151 534,228
Interest expense - - (23,658)
Other income 4,831 1,132 58,834
------------------ ------------------- -------------------
Total other income, net 18,182 16,283 569,404
------------------ ------------------- -------------------
NET INCOME (LOSS) (767,123) 2,804,891 (17,305,763)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (767,123) $ 2,804,891 $ (17,333,932)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ (.06) $ .23
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,361,385 12,366,972
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<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,
2000 1999 2000
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Technology and license fees $ 74,001 $ 3,750,000 $ 3,824,000
Development fees and related services 273,181 779,309 2,653,062
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 347,182 4,529,309 7,225,290
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees 197,291 630,004 1,910,659
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 197,291 630,004 2,446,661
------------------ ------------------- -------------------
Gross margin 149,891 3,899,305 4,778,629
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 1,059,729 1,501,476 15,752,268
Research and development 379,866 388,825 5,620,971
Write-off of operating assets - 6,268 1,280,557
------------------ ------------------- -------------------
Total operating expenses 1,439,595 1,896,569 22,653,796
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS (1,289,704) 2,002,736 (17,875,167)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 14,078 42,124 534,228
Interest expense - - (23,658)
Other income 5,477 2,217 58,834
------------------ ------------------- -------------------
Total other income, net 19,555 44,341 569,404
------------------ ------------------- -------------------
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (1,270,149) $ 2,047,077 $ (17,333,932)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ (0.10) $ .17
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,358,913 12,367,380
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<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
Six Months Ended
------------------------------------- Period from
June 30, June 30, Inception to June
2000 1999 30, 2000
----------------- ---------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (1,270,149) $ 2,047,077 $ (17,305,763)
Adjustments to reconcile net income (loss) to net cash
Depreciation and amortization 165,788 136,425 1,506,358
Allowance for doubtful accounts receivable - - 125,800
Common stock issued for services and compensation 28,125 - 259,125
Noncash consulting expense 8,337 97,126 390,063
Loss on disposition of assets - 8,268 1,281,848
Changes in operating assets and liabilities:
Accounts receivable, net 131,073 182,016 (4,301)
Unbilled receivables on contracts - 142,414 -
Inventories - 2,520 -
Prepaid expenses and other 19,122 (6,751) (17,747)
Amounts due from related parties 3,145 14,740 -
Other assets - - (27,000)
Accounts payable 105,254 22,616 109,946
Accrued liabilities 1,717 (80,324) 122,700
Advances received on development fees 570 - 570
Deferred royalty revenues 1,426,000 (3,750,000) 1,426,000
----------------- ---------------- -------------------
Net cash provided by (used in) operating
activities 618,982 (1,183,873) (12,132,401)
----------------- ---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,169) (17,020) (2,927,017)
Purchase of short-term investments - - (356,146)
Proceeds from the sale of assets - - 6,517
----------------- ---------------- -------------------
Net cash used in investing activities (8,169) (17,020) (3,276,646)
----------------- ---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 12,487,801
Proceeds from issuance of common stock warrants - - 1,777,952
Proceeds from collection of stock subscriptions - 74,400 413,700
Proceeds from issuance of preferred stock - - 1,164,001
Proceeds from issuance of redeemable
Payments on redeemable preference stock
Net borrowings on stockholder loans - - 385,000
----------------- ---------------- -------------------
Net cash provided by financing activities - 74,400 16,200,285
----------------- ---------------- -------------------
NET INCREASE (DECREASE) IN CASH 610,813 (1,126,493) 791,238
----------------- ---------------- -------------------
CASH AT END OF THE PERIOD $ 791,238 $ 1,353,590 $ 791,238
================= ================ ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 accounting principles generally
accepted in the United States 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, 1999 Annual Report on Form 10-KSB/A. The results of operations for
the three and six months ended June 30, 2000, are not necessarily indicative of
the operating results that may result for the year ending December 31, 2000. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its December 31, 1999 Annual
Report on Form 10-KSB/A.
(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 the 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, 2000 that, if exercised, would result in the
issuance of an additional 6,469,620 shares of common stock.
(3) Reclassifications
Certain reclassifications have been made in the prior periods'
consolidated financial statements to conform to the current periods'
presentation.
(4) Employment Agreement
The Company entered into an employment arrangement effective June 12,
2000 with an individual to provide management, patent and product development
related services to the Company. This arrangement provides for, among other
normal employee benefits, a three-year term of employment at a beginning annual
compensation of $165,000 along with options to acquire 100,000 shares of common
stock at $1.125 per share.
(5) Issuance of Common Stock and Stock Options
In conjunction with the new employment arrangement discussed in Note 4,
the board of directors of the Company authorized the issuance of 25,000 shares
of restricted common stock to the officer. The issuance of these shares of
common stock was accounted for at fair market value as of June 12, 2000 for a
total value of $28,125. This amount was recorded as compensation expense in the
quarter ended June 30, 2000.
Effective June 19, 2000, the Company entered into an agreement with a
consulting firm located in the United Kingdom for the performance of certain
public relations activities. As compensation for these services, the consulting
firm was issued options to purchase 10,000 shares of the Company's common stock
at $1.125 per share. These options have been valued at $8,337 using the
Black-Scholes option pricing model and have been reflected as consulting expense
in the accompanying consolidated financial statements for the periods ended June
30, 2000. In addition, the consulting firm is to receive a total of $25,000 in
cash in three monthly installments with the first payment made in June 2000,
plus additional expenses estimated to total approximately $13,000.
7
<PAGE>
(6) Development and License Agreement
In November 1999, the Company and The Kendall Company, a division of
Tyco Healthcare Group LP ("Kendall") entered into a Development and License
Agreement (the "Kendall Agreement") relating to one application of the Company's
needle technology in the production of a line of safety medical needle products,
including six syringe products and five other safety needle products. The
effective date of the Kendall Agreement was subject to certain approvals that
were obtained on March 29, 2000. On April 12, 2000, the Company received a
$1,500,000 payment less $35,044 representing the Company's share of certain
patent filing costs. The Company will receive an additional $1,000,000 upon the
sale of commercial quantities of products (as defined in the agreement) or 30
months from the effective date of the agreement, whichever comes first, in
exchange for the Company assigning to Kendall the FlexLoc(R) and ReLoc(TM)
trademarks and two related patents. The assignment of the patent rights to
Kendall is subject to a preexisting license agreement and the retention by the
Company of an exclusive, royalty free worldwide license in a number of strategic
product areas. The Kendall Agreement also provides for the Company to receive
development fees and ongoing royalties, including a $500,000 advance royalty
payment upon the sale of commercial quantities of products. It is anticipated
that Kendall will manufacture all products that are subject to the Kendall
Agreement. In accordance with SAB No. 101 as issued by the Securities and
Exchange Commission, the technology payments provided for in the agreement will
be recognized as revenue over the estimated period for which the Company will
receive economic benefit. Revenue recognition for the $2,500,000 of technology
payments will be based on the relative fair values of the various products
covered by the Kendall Agreement on a straight-line basis over the estimated
economic lives of those products. The $1,500,000 payment received by the Company
on April 12, 2000, is non-refundable and the additional $1,000,000 is receivable
upon commercialization of the first product subject to the Kendall Agreement or
30 months from the effective date of the agreement, whichever comes first.
Accordingly, the Company is recognizing technology and licensing revenue at a
rate of $24,667 per month beginning in April 2000.
(7) Related-Party Transaction
In February 2000, the Company entered into an agreement with an entity
in the United Kingdom to provide various financial and related services to the
Company. The two principal individuals representing that Company are
stockholders and one is a former director of the Company. The agreement provides
for the method and form of compensation for services along with reimbursement of
approved and documented expenses within certain limits. To date, no expenses
have been incurred under this agreement.
In July 2000, the Company entered into an agreement with a stockholder
and former director of the Company to provide financial and related services to
the Company. The agreement provides for payments of $6,000 per month, plus
reasonable out-of-pocket expenses, which arrangement can be terminated on 30
days notice by either party. Prior to entering into this agreement the
individual provided services and incurred expenses. The Company agreed to pay
expenses incurred during the three and six months ended June 30, 2000, of
$11,000 and $12,000 respectively, for a total of $23,000, which has been
expensed in the accompanying June 30, 2000 Statements of Operations.
(8) Subsequent Events
The Company currently has 773,333 warrants (the "SHPI Warrants")
outstanding that were originally granted in exchange for cancellation of certain
royalty obligations which are exercisable for the same number of shares of the
Company at $2.00 per share. The SHPI Warrants expire on December 31, 2002. In
July 2000, the Company entered into arrangements with two of the SHPI Warrant
holders who are also employees of the Company whereby the expiration date of
500,000 of the SHPI Warrants was extended to June 30, 2004. The SHPI Warrant
extension was in consideration for the employees executing non-compete
agreements and entering into one year employment agreements.
In 1993, the Company entered into an agreement with an entity and
certain individuals to acquire certain intellectual property and related assets.
Subsequently a dispute arose over whether the total consideration had been paid
by the Company. The initial claim for additional consideration was $101,098. The
Company has reached an agreement in principle with this individual whereby the
Company will issue to the individual 50,000 shares of common stock as full and
final settlement of any claims he may have against the Company. Pending the
formal execution of the settlement agreement the Company has accrued the full
amount of the initial claim of $101,048 as of June 30, 2000.
8
<PAGE>
Item 2: Management's Discussion and Analysis or Plan of Operation.
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 or Plan of Operation for the year ended December 31, 1999. Wherever in
this discussion the term "Company" is used, it should be understood to refer to
Specialized Health Products International, Inc. and its wholly and majority
owned subsidiaries, Specialized Health Products, Inc., Specialized Cooperative
Corporation, Safety Syringe Corporation, Iontophoretics Corporation and
MedInservice.com, Inc., on a consolidated basis, except where the context
clearly indicates otherwise.
Overview
The Company has incurred cumulative losses from operations since its
inception. As of June 30, 2000, the Company had cumulative net losses applicable
to common stockholders totaling $17,333,932. The Company's principal business is
the design, development, testing and evaluation, and marketing of its Safety
Cradle(R) sharps containers, safety lancets, safety needle technologies, blood
collection devices, and other safety medical products, and the design and
development of various molds and production processes.
Financial Position
The Company had $791,238 in cash as of June 30, 2000. This represents
an increase of $610,813 from December 31, 1999. Working capital as of June 30,
2000, increased to $580,069 as compared to $230,138 at December 31, 1999. These
increases were largely due to the receipt of the $1,500,000 technology and
license fee payment from The Kendall Company, offset in part by 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 sources during the quarter ended June 30, 2000.
Three and Six Months Ended June 30, 2000 and 1999
During the three and six months ended June 30, 2000, the Company had
total revenues of $144,914 and $347,182, respectively. These revenues were
comprised primarily of $5,991 and $96,114 in development fees under the
Development and License Agreement (the "JJM Agreement") with Johnson & Johnson
Medical, Inc. ("JJM") for the respective periods and $138,457 and $235,578 in
development fees and technology and license revenue for the respective periods
under the Kendall Agreement, as discussed below. This is compared to total
revenues of $3,976,133 and $4,529,309 for the comparable periods from the prior
year. These prior year revenues were comprised primarily of $226,133 and
$779,309 in development fees under the JJM Agreement during respective periods
and $3,750,000 and $0 in license fees from the license agreement (the "License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
during the respective periods. The Company will look to product sales and other
development and strategic arrangements for future revenues.
In November 1999, the Company and The Kendall Company, a division of
Tyco Healthcare Group LP ("Kendall"), entered into a Development and License
Agreement (the "Kendall Agreement") relating to one application of the Company's
needle technology in the production of a line of safety medical needle products,
including six syringe products and five other safety needle products. The
effective date of the Kendall Agreement was subject to certain approvals that
were obtained on March 29, 2000. On April 12, 2000, the Company received a
$1,500,000 payment less $35,044 representing the Company's share of certain
patent filing costs. The Company will receive an additional $1,000,000 upon the
sale of commercial quantities of products (as defined in the Kendall Agreement)
or 30 months from the effective date of the Kendall Agreement, whichever comes
first, in exchange for the Company assigning to Kendall the FlexLoc(R) and
ReLoc(TM) trademarks and two related patents. The assignment of the patent
rights to Kendall is subject to a preexisting license agreement and the
retention by the Company of an exclusive, royalty free worldwide license in a
number of strategic product areas. The Kendall Agreement also provides for the
Company to receive development fees and ongoing royalties, including a $500,000
advance royalty payment upon the sale of commercial quantities of products. It
is anticipated that Kendall will manufacture all products that are subject to
the Kendall Agreement. In accordance with SAB No. 101 as issued by the
Securities and Exchange Commission, the technology payments provided for in the
agreement will be recognized as revenue over the estimated period for which the
Company will receive economic benefit. Revenue recognition for the $2,500,000
9
<PAGE>
of technology payments will be based on the relative fair values of the various
products covered by the Kendall Agreement on a straight-line basis over the
estimated economic lives of those products. The $1,500,000 payment received by
the Company on April 12, 2000 is non-refundable and the additional $1,000,000 is
receivable upon commercialization of the first product subject to the Kendall
Agreement or 30 months from the effective date of the Kendall Agreement,
whichever comes first. Accordingly, the Company is recognizing technology and
licensing revenue at a rate of $24,667 per month beginning in April 2000.
In December 1997, the Company entered into the JJM Agreement with JJM
to commercialize two applications of the safety needle technology. 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 2000. JJM
has informed the Company that it anticipates that two variations of one of these
products will begin being sold in late 2000. No development work is currently
being done for the other product that is the subject of the JJM Agreement. There
is no assurance that the Company will realize royalty revenues under the JJM
Agreement or that any of these products will be launched as anticipated. All
product introductions are scheduled and controlled by JJM.
The Company and JJM also entered into oral arrangements whereby they
were pursuing development and commercialization of four additional products. No
development work is currently being funded by JJM with respect to these products
and continued development and commercialization of these products is uncertain.
In May 1997, the Company entered into an agreement (the "BDIT License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
relating to a single application of the Company's ExtreSafe(R) safety needle
technology (the "Technology"). Pursuant to the terms of the BDIT License
Agreement, BDIT made payments of $4,000,000 to the Company. Of these total
payments, $3,750,000 was for advanced royalties and $250,000 was for a product
development fee. In June 1999, BDIT and the Company amended the BDIT License
Agreement. The amendment provided that the $3,750,000 previously paid by BDIT to
the Company would not be credited against future earned royalties and the
Company would have no further obligation of any kind to BDIT with respect to
these payments. Accordingly, the $3,750,000 of deferred royalty revenue was
recognized as revenue during 1999. BDIT has exclusivity related minimum royalty
obligations to the Company beginning in 2004. The Company will not be
manufacturing product in connection with the BDIT License Agreement.
BDIT previously told the Company at various times that it expected to
begin selling the product that is the subject of the BDIT License Agreement.
BDIT has indicated that it is unsure if or when product will be introduced and
sold in the market under the BDIT License Agreement. BDIT has not provided the
Company with current information regarding the market introduction of the
product.
The Company has an ongoing program for developing products using its 16
medical needle technologies and expects to develop additional safety medical
needle technologies. These technologies allow a contaminated needle to be
protected without exposure of the healthcare worker to the contaminated needle.
Products under development that incorporate these safety medical needle
technologies include phlebotomy devices, catheter inserters, IV infusion, winged
needle sets, dental, specialty, lancets and several different syringe and
prefilled syringe applications. Prototypes of the phlebotomy devices, catheter
inserters and syringes have been completed. The Company is developing other
medical safety devices.
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,
10
<PAGE>
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 $212,708 and $379,866
for the three and six months ended June 30, 2000, respectively, compared with
$134,883 and $388,825 for the comparable periods from the prior year. The
Company's R&D efforts during these periods focused on continuing development of
existing and new products utilizing the Company's medical safety needle
technologies.
Selling, general and administrative ("SG&A") expenses were $669,010 and
$1,059,729 for the three and six months ended June 30, 2000, compared with
$862,091 and $1,501,476 for the comparable periods from the prior year. The
decrease in the three and six month periods resulted mainly from (i) reductions
in the level of compensation being paid to officers of the Company, (ii)
downsizing which resulted in the termination of two administrative employees,
(iii) reduction in financial advisory fees and general consulting fees, (iv)
elimination of costs associated with the Leerink Swann litigation and (v)
subleasing approximately 25% of the Company's facilities. The Company
anticipates that SG&A expenses will increase during the remainder of 2000 as a
result of consulting and public relations arrangements.
Interest and other income was $18,182 and $19,555 for the three and six
months ended June 30, 2000, compared with $16,283 and $44,341 for the comparable
periods from the prior year. The increases and decreases resulted primarily from
fluctuations in interest income earned on funds on deposit and short-term
interest bearing investments. As funds on deposit and short-term interest
bearing investments have increased or decreased so has the related interest
income.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, advanced royalties, development fees,
technology and license 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, 2000. The Company generated net cash
from operating activities of $618,982 for the six months ended June 30, 2000. As
of June 30, 2000, the Company's current liabilities totaled $233,217. The
Company had working capital as of June 30, 2000 of $580,069.
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 technologies and
other products to commercial viability, and the level of sales of the new safety
needle product. At June 30, 2000, the Company had not committed any funds for
capital expenditures. The Company believes that existing funds and anticipated
development fees will be sufficient to maintain operations into October 2000.
Discussions are currently taking place to secure additional funding. Any
inability to obtain additional funding will have a material adverse effect on
the Company, including possibly requiring the Company to significantly curtail
or cease its operations.
From time to time, the Company is presented with new opportunities to
design, develop, acquire or manufacture safety medical devices. In the event
such opportunities arise, management and the Board of Directors could determine
that the pursuit of such opportunities is in the best interest of the Company
and its stockholders and may decide to raise additional funding through the sale
of securities. The Company will also continue to pursue new arrangements with
strategic partners which could generate additional development or licensing
fees. There are no contractual arrangements in place that would provide for
additional funding and there can be no assurance that the Company will be able
to obtain additional funding, if appropriate, on commercially reasonable terms
or at all.
As of August 16, 2000, the Company had 3,609,787 Series D Warrants (the
"Series D Warrants") and 773,333 other warrants (the "SHPI Warrants")
outstanding which are exercisable for the same number of shares of Common Stock
of the Company at $2.00 per share. The Series D Warrants expire on the earlier
of (a) two years from the date of effectiveness of a registration statement
under the Securities Act of 1933 (the "Act") covering the sale of the shares of
Common Stock underlying such warrants, which period shall be extended
day-for-day for any time that a prospectus meeting the requirements of the Act
is not available, or (b) the redemption date if such warrants are redeemed
(subject to the right of the holder to exercise the warrants within 20 days of
notice of such redemption). The Company
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reached agreement in July 2000 to extend the expiration date of 500,000 of the
SHPI Warrants outstanding to June 30, 2004. This extension was given in
consideration for the employees executing non-compete agreements and entering
into one year employment agreements. The remaining 273,333 SHPI Warrants will
expire on their original date of December 31, 2002. The exercise of all the
warrants would result in an equity infusion to the Company of $8,766,240. As of
the date hereof, all of the warrants are out of the money and there can be no
assurance that any warrants will ever be exercised.
The Company has granted stock options that are currently exercisable
for 2,086,500 shares of Common Stock at exercise prices ranging between $.39 and
$2.625 per share. The exercise of all of such stock options would result in an
equity infusion to the Company of $4,191,764. All but 18,000 of the stock
options are out of the money and there can be no assurance that any of the stock
options will be exercised.
Inflation
The Company does not expect the impact of inflation on its operations
to be significant for the next twelve months.
Forward-Looking Statements
When used in this Form 10-QSB, 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 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
"Management's Discussion and Analysis or Plan of Operation" and specifically the
discussion under "Risk Factors" that is found in the Company's Annual Report on
Form 10-KSB/A for the year ended December 31, 1999, 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.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
In March and June 2000, the Company granted to the non-executive
members of the Company's Board of Directors stock options to acquire a total of
24,000 shares of the Company's common stock. These stock options were granted in
equal quarterly installments at exercise prices of $2.00 in March 2000, and
$1.125 in June 2000. The option grants were exempt from registration under
Section 4(2) of the Securities Act of 1933 and pursuant to Rule 506 as
promulgated under the Securities Act of 1933. The Company did not use an
underwriter in connection with the transactions.
In January 2000, the Company granted employees stock options to acquire
a total of 299,000 shares of the Company's common stock at exercise prices of
$2.00 per share. In June 2000, the Company granted stock options to acquire
100,000 shares of common stock to an employee of the Company at an exercise
price of $1.125 per share. The options expire five years from the date of grant.
The option grants were exempt from registration under Section 4(2) of the
Securities Act of 1933 and pursuant to Rule 506 as promulgated under the
Securities Act of 1933. The Company did not use an underwriter in connection
with the transactions.
In June 2000, the Company granted to an employee 25,000 shares of
common stock as part of a new employment arrangement. The stock issuance was
exempt from registration under Section 4(2) of the Securities Act of 1933 and
pursuant to Rule 506 as promulgated under the Securities Act of 1933. The
Company did not use an underwriter in connection with the transaction.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securityholders.
The Company held its annual meeting of stockholders on June 22, 2000,
at which meeting certain members of the Company's Board of Directors (the
"Board") were elected and the Specialized Health Products International, Inc.
2000 Stock Option Plan was considered for approval. The Company's Board is
comprised of three classes. One class of directors is elected at each annual
meeting of stockholders for a three-year term. Each year a different class of
directors is elected on a rotating basis. The term of Dr. Gale H. Thorne expired
in 2000. The term of David A. Robinson expires in 2001 and the terms of David T.
Rovee and Robert R. Walker expire in 2002.
Dr. Gale H. Thorne was nominated by the Board for election to the class
whose term expires at the 2003 annual meeting of stockholders. The stockholders
then elected Dr. Gale H. Thorne by a vote of 7,398,323 for and 67,387 withheld
authority. The stockholders also voted to approve the Specialized Health
Products International, Inc. 2000 Stock Option Plan by a vote of 7,251,823 for,
175,887 against and 38,000 abstained.
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Item 5. Other Information.
The Company currently has 773,333 warrants (the "SHPI Warrants")
outstanding that were originally granted in exchange for cancellation of certain
royalty obligations which are exercisable for the same number of shares of the
Company at $2.00 per share. The SHPI Warrants expire on December 31, 2002. In
July 2000, the Company entered into arrangements with two of the SHPI Warrant
holders who are also employees of the Company whereby the expiration date of
500,000 of the SHPI Warrants was extended to June 30, 2004. The SHPI Warrant
extension was in consideration for the employees executing non-compete
agreements and entering into one year employment agreements.
In June 2000, the Company hired Paul Evans as Vice President and
General Counsel of the Company. Prior to his employment, Mr. Evans had been
serving as the Company's patent counsel. In July 2000, Dr. Gail Thorne resigned
as a member of the Company's Board of Directors and is working for the Company
on a part-time basis as a consultant. Mr. Evans was appointed to the Company's
Board of Directors to fill the vacancy created by Dr. Thorne's resignation.
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)
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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)
10.6 Development and License Agreement, effective date of March 29,
2000, by and among Safety Syringe Corporation, a wholly owned
subsidiary of the Company and The Kendall Company
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K, dated March 29, 2000)
10.7 Specialized Health Products International, Inc. 2000 Stock
Option Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On May 2, 2000, the Company filed a Current Report on Form 8-K, dated
March 29, 2000, disclosing under Item 5 information relating to the Kendall
Agreement.
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: 8/16/00 By /s/ David A. Robinson
-----------------------------------------
David A. Robinson
President, Chief Executive Officer, Director
Date: 8/16/00 By /s/ Keith L. Merrell
-----------------------------------------
Keith L. Merrell
Chief Financial Officer
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