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 September 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 November 10, 2000
----- -----------------------------------
Common Stock, $.02 par value 12,449,440
<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 September 30, December 31,
2000 1999
----------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 71,939 $ 180,425
Accounts receivable 45,412 135,374
Prepaid expenses and other 12,326 36,869
Amounts due from related parties 1,400 3,145
----------------- -------------------
Total current assets 131,077 355,813
----------------- -------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633 474,633
Office furnishings and fixtures 568,546 552,882
Assembly and manufacturing equipment 317,391 317,391
Leasehold improvements 134,869 132,326
Automated assembly equipment 71,300 71,300
----------------- -------------------
1,566,739 1,548,532
Less accumulated depreciation and amortization (1,033,800) (811,041)
----------------- -------------------
Net property and equipment 532,939 737,491
----------------- -------------------
OTHER ASSETS 32,558 35,568
----------------- -------------------
$ 696,574 $ 1,128,872
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 26,678 $ 4,692
Accrued liabilities 156,706 120,983
----------------- -------------------
Total current liabilities 183,384 125,675
----------------- -------------------
DEFERRED REVENUES 1,351,998 -
----------------- -------------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6) - -
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,
12,449,440 and 12,356,440 shares outstanding, respectively 248,989 247,129
Additional paid-in capital 15,211,640 14,865,399
Series D warrants to purchase common stock 1,954,452 1,954,452
Deficit accumulated during the development stage (18,253,889) (16,063,783)
----------------- -------------------
Total stockholders' equity (deficit) (838,808) 1,003,197
----------------- -------------------
$ 696,574 $ 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
September 30, September 30, September 30,
2000 1999 2000
------------------ ------------------- -------------------
<S> <C> <C> <C>
REVENUES:
Technology fees and licensing revenues $ 74,002 $ - $ 3,898,002
Development fees and related services 45,203 170,282 2,698,265
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 119,205 170,282 7,344,495
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees and related services 26,771 140,451 1,937,430
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 26,771 140,451 2,473,432
------------------ ------------------- -------------------
Gross margin 92,434 29,831 4,871,063
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 695,837 635,691 16,448,106
Research and development 326,472 173,604 5,947,443
Write-off of operating assets - - 1,280,557
------------------ ------------------- -------------------
Total operating expenses 1,022,309 809,295 23,676,106
------------------ ------------------- -------------------
LOSS FROM OPERATIONS (929,875) (779,464) (18,805,043)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 6,897 11,200 541,125
Interest expense - - (23,658)
Other income 3,022 533 61,856
------------------ ------------------- -------------------
Total other income, net 9,919 11,733 579,323
------------------ ------------------- -------------------
NET LOSS (919,956) (767,731) (18,225,720)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (919,956) $ (767,731) $ (18,253,889)
================== =================== ===================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.07) $ (.06)
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,404,956 12,356,440
================== ===================
</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)
Nine Months Ended Period from
----------------------------------------- Inception to
September 30, September 30, September 30,
2000 1999 2000
------------------ ------------------- -------------------
<S> <C> <C> <C>
REVENUES:
Technology fees and licensing revenues $ 148,002 $ 3,750,000 $ 3,898,002
Development fees and related services 318,384 949,591 2,698,265
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 466,386 4,699,591 7,344,495
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees and related services 224,062 770,455 1,937,430
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 224,062 770,455 2,473,432
------------------ ------------------- -------------------
Gross margin 242,324 3,929,136 4,871,063
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 1,755,566 2,137,167 16,448,106
Research and development 706,338 562,429 5,947,443
Write-off of operating assets - 6,268 1,280,557
------------------ ------------------- -------------------
Total operating expenses 2,461,904 2,705,864 23,676,106
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS (2,219,580) 1,223,272 (18,805,043)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 20,975 53,324 541,125
Interest expense - - (23,658)
Other income 8,499 2,750 61,856
------------------ ------------------- -------------------
Total other income, net 29,474 56,074 579,323
------------------ ------------------- -------------------
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
$ (2,190,106) $ 1,279,346 $ (18,253,889)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ (.18) $ .10
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,374,287 12,365,910
================== ===================
</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)
Net Increase (Decrease) in Cash
Nine Months Ended Period from
------------------------------------- Inception to
September 30, September 30, September 30,
2000 1999 2000
----------------- ---------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,190,106) $ 1,279,346 $ (18,225,720)
Adjustments to reconcile net income (loss) to net cash
Depreciation and amortization 225,769 205,295 1,566,339
Allowance for doubtful accounts receivable - - 125,800
Common stock issued for services and compensation 28,125 - 259,125
Noncash consulting compensation expense 253,581 97,126 635,307
Loss on disposition of assets - 8,268 1,281,848
Changes in operating assets and liabilities:
Accounts receivable 89,962 274,116 (45,412)
Unbilled receivables on contracts - 142,414 -
Inventories - 2,520 -
Prepaid expenses and other 24,543 4,614 (12,326)
Amounts due from related parties 1,745 12,949 (1,400)
Other assets - - (27,000)
Accounts payable 21,986 (8,515) 26,678
Accrued liabilities 95,099 (221,031) 216,082
Deferred revenues 1,351,998 (3,750,000) 1,351,998
----------------- ---------------- -------------------
Net cash used in operating activities (97,298) (1,952,898) (12,848,681)
----------------- ---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (18,208) (19,936) (2,937,056)
Purchase of short-term investments - - (356,146)
Proceeds from the sale of assets - - 6,517
----------------- ---------------- -------------------
Net cash used in investing activities (18,208) (19,936) (3,286,685)
----------------- ---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 7,020 - 12,494,821
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
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 7,020 74,400 16,207,305
----------------- ---------------- -------------------
NET INCREASE (DECREASE) IN CASH (108,486) (1,898,434) 71,939
----------------- ---------------- -------------------
CASH AT END OF THE PERIOD $ 71,939 $ 581,649 $ 71,939
================= ================ ===================
</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
consolidated 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 nine months ended September 30, 2000,
are not necessarily indicative of the operating results that may result for the
full fiscal 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 and in Notes
6 and 7 below.
(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 nine months ended September 30, 2000 due to the minimal impact from
outstanding options and warrants. The Company has common stock options and
warrants outstanding at September 30, 2000 that, if exercised, would result in
the issuance of an additional 6,307,120 shares of common stock.
(3) Common Stock Warrants
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.
(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
employee benefits, a three-year term of employment at a beginning annual
compensation of $165,000, and options to acquire 100,000 shares of common stock
at $1.125 per share.
The Company entered into an employment arrangement effective September
26, 2000, with an individual to provide management, technical services and
product development services to the Company. This arrangement provides for,
among other employee benefits, a three-year term of employment at a beginning
annual compensation of $165,000 and options to acquire 100,000 shares of common
stock at $1.5625 per share.
6
<PAGE>
(5) Issuance of Common Stock and Stock Options
In conjunction with the new employment arrangement effective June 12,
2000 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 consolidated financial statements for the quarter ended June 30, 2000.
In 1993, the Company entered into an agreement with an individual to
reimburse certain expenses incurred by that individual in connection with the
Company's acquisition of certain intellectual property and related assets.
Subsequently a dispute arose over such expenses and as of June 30, 2000, the
Company accrued $101,098 as a liability. Thereafter, the Company reached an
agreement with this individual whereby the Company would issue to the individual
50,000 shares of common stock as full and final settlement of the claims he may
have against the Company. On August 29, 2000, the Company issued 50,000 shares
of restricted common stock in full settlement of the claim. The stock closing
price on August 29, 2000 was $1.1875, resulting in total consideration of
$59,375. Accordingly, consulting expense was reduced by $41,723 in the quarter
ended September 30, 2000.
In July 2000, the Company granted stock options to acquire 50,000
shares of the Company's common stock at an exercise price of $1.625 per share to
the Company's chief financial officer.
In August 2000, stock options to acquire 18,000 shares of the Company's
common stock at $.39 per share were exercised by a former employee and director
of the Company.
In August 2000, options to purchase 1,074,310 shares of the Company's
common stock expired.
In August 2000, the Company granted to two of the non-executive members
of the Company's board of directors stock options to acquire a total of 8,000
shares of the Company's common stock at an exercise price of $1.00 per share. In
August 2000, the Company also granted fully vested stock options to acquire
50,000 shares of the Company's common stock at an exercise price of $1.00 per
share to a newly appointed director as compensation for service on the Company's
board.
In September 2000, the Company granted stock options to acquire a total
of 846,810 shares of the Company's common stock at exercise prices of between
$1.25 and $2.00 per share. Options to acquire 469,810 shares were granted to
Company employees and directors, including the Company's president, who received
options to acquire 300,000 shares at an exercise price of $2.00 per share, a
non-executive director, who received options to acquire 20,000 shares at an
exercise price of $2.00 per share and the Company's newly hired vice president
and chief technical officer, who received options to acquire 100,000 shares at
an exercise price of $1.5625 per share. Options to acquire 320,000 shares were
granted to non-employees and 57,000 shares to an employee at exercise prices of
$1.25 and $2.00 per share, respectively. The options to non-employees have been
valued at $245,244 using the Black-Scholes option pricing model and have been
reflected as compensation expense in the accompanying consolidated financial
statements for the periods ended September 30, 2000.
(6) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for the Company's fiscal year beginning 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company recognize
all derivative instruments as either assets or liabilities in the condensed
consolidated balance sheet and measure those instruments at fair value. The
Company does not expect the adoption of SFAS 133, as amended, to have a material
impact on the Company's results of operations, financial position or liquidity.
7
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
subsequent issuance of SAB 101A and SAB 101B has deferred the effective date of
SAB 101 until the fourth quarter of 2000. The Company does not expect the
adoption of SAB 101 to have a material impact on the Company's results of
operations, financial position or liquidity.
(7) 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
safety 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. These
payments, totaling approximately $2,500,000, are 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 minimum royalty payments totaling $2,500,000
during the period commencing upon the sale of commercial quantities of products
and the third anniversary thereof Kendall has the right to cancel its unaccrued
obligations under the Kendall Agreement upon 15 days written notice and by
assigning the patents to the Company. It is anticipated that Kendall will
manufacture all products that are subject to the Kendall Agreement.
In accordance with SAB 101, "Revenue Recognition in Financial
Statements" 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 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, in compliance with SAB 101,
the Company is recognizing technology and licensing revenue at a rate of $24,667
per month which began in April 2000. The effect of treating revenue in this
manner has been to defer, as of September 30, 2000, revenue of $1,351,998. Were
the revenue not deferred stockholder equity would have been increased by that
amount.
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 condensed 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(R), 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's principal business is the design, development, testing
and evaluation, and marketing of its safety needle technologies and other safety
medical products, and the design and development of various molds and production
processes. These techologies allow a contaminadated needle to be protected
without exposure of the healthcare worker to the contaminated needle.
In accordance with U.S. generally accepted accounting policies, the
Company has expensed all past research and development costs and, as a
consequence, has incurred cumulative losses from operations since its inception.
With the exception of a patent with a net book value of $5,480, the Company's
balance sheet does not reflect any value attributable to its intellectual
property. To date, development expenditures have resulted in the ownership of in
excess of 80 patent and patent applications world-wide and the creation of 16
different and unique safety-needle technologies which have application in almost
all medical needles used today. The Company has already licensed 18 safety
needle products to three leading global medical device companies; Johnson &
Johnson Medical, Inc. ("JJM"), The Kendall Company, a division of Tyco
Healthcare Group LP ("Kendall") and Becton Dickinson and Company Infusion
Therapy Division ("BDIT"). These license agreements have generated in excess of
$3,890,000 by way of pre-production payments to the Company and are expected to
generate further revenues from the sale of patents, development fees, advanced
royalties and royalties based on product sales.
The Company plans to focus its activities on the further development
and licensing of additional products based upon the Company's intellectual
property portfolio and unique safety needle technologies. Such products are
expected to include syringes, prefilled syringes, IV catheters, catheter
introducers, Huber needles, plasma apheresis sets, dialysis sets, blood donor
sets, winged steel infusion, Seldinger needles, epidural and spinal needles,
lancets, as well as additional safety needle devices. Prototypes of the
phlebotomy devices, catherter inserters, lancets, Huber needles, Seldinger
needles, winged steel needles, syringes and prefilled syringes have been
completed. The Company plans to continue discussions and negotiations with third
parties to generate revenues through the licensing of products, joint venturing,
and partnering with original equipment manufacturers.
Three and Nine Months Ended September 30, 2000 and 1999
During the three and nine months ended September 30, 2000, the Company
had total revenues of $119,205 and $466,386, respectively. These revenues were
comprised primarily of $344 and $96,458 in development fees from JJM under the
Development and License Agreement with JJM (the "JJM Agreement") for the
respective periods and $44,532 and $280,110 in development fees and technology
and license revenue for the respective periods under the Kendall Agreement. See
"--License Agreements." This is compared to total revenues of $170,282 and
$4,699,591 for the comparable periods from the prior year. These prior year
revenues were comprised primarily of $170,282 and $949,591 in development fees
under the JJM Agreement during the respective periods and $0 and $3,750,000 in
license fees from the license agreement with BDIT (the "BDIT License Agreement")
during the respective periods. See "--License Agreements." The Company will look
to product sales and other development and strategic arrangements for future
revenues.
9
<PAGE>
Research and development ("R&D") expenses were $326,472 and $706,338
for the three and nine months ended September 30, 2000, respectively, compared
with $173,604 and $562,429 for the comparable periods of the prior year. The
increase in the three and nine month periods resulted mainly from the Company
increasing R&D expenditures due, in part, to a reduction in Company R&D funding
by JJM. 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 $695,837 and
$1,755,566 for the three and nine months ended September 30, 2000, compared with
$635,691 and $2,137,167 for the comparable periods of the prior year. The
increase for the three month period ended September 30, 2000 primarily resulted
from compensation expense of $245,244 being recorded by the Company as a result
of issuing fully-vested options to non-employees. The decrease in the nine month
period resulted mainly from (i) reductions in the level of compensation being
paid to officers of the Company during such periods, (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 $9,919 and $29,474 for the three and nine
months ended September 30, 2000, compared with $11,733 and $56,074 for the
comparable periods of the prior year. As funds on deposit have 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, the sale of technology and patents,
advanced royalties, development fees, technology and license fees and proceeds
from the exercise of common stock options. The Company generated $16,207,305 in
net proceeds through financing activities from inception through September 30,
2000. The Company used net cash for operating activities of $97,298 for the nine
months ended September 30, 2000. As of September 30, 2000, the Company's current
liabilities totaled $183,384.
The Company had $71,939 in cash as of September 30, 2000. This
represents a decrease of $108,486 from December 31, 1999. Working capital as of
September 30, 2000 decreased to a deficit of ($52,307) as compared to $230,138
at December 31, 1999. 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 and related services.
The Company received $7,020 in proceeds from the exercise of common stock
options during the quarter ended September 30, 2000.
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 September 30, 2000, the Company had not committed any funds
for capital expenditures. The Company believes that existing funds, anticipated
cash flows from development fees and the proceeds from a financing arrangement
that is anticipated to be finalized shortly, will be sufficient to support
planned operations at least through the year end. The Company is currently in
the process of implementing a plan to provide the Company with adequate working
capital to fulfill its business plan. If the Company is unsuccessful in
completing its financing plan or negotiating further licensing and royalty
agreements, the Company may be required to reduce substantially or eliminate
certain areas of its product development activities, limit its operations
significantly or otherwise modify its business strategy.
As of November 10, 2000, the Company had 3,609,787 Series D Warrants
(the "Series D Warrants") and 773,333 other warrants (the "SHPI Warrants")
outstanding that 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
10
<PAGE>
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 be exercised.
The Company has granted stock options that are currently exercisable
for 1,924,000 shares of Common Stock at exercise prices ranging between $1.00
and $2.625 per share. The exercise of all of such stock options would result in
an equity infusion to the Company of $3,272,074. At November 10, 2000, 1,065,190
of the stock options are out of the money and there can be no assurance that any
of the stock options will be exercised.
License Agreements
In November 1999, the Company and Kendall, entered into 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. These
payments, totaling approximately $2,500,000, are 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 minimum royalty payments totaling $2,500,000 during
the period commencing upon the sale of commercial quantities of products and the
third anniversary thereof. Kendall has the right to cancel its unaccrued
obligations under the Kendall Agreement upon 15 days written notice and by
assigning the patents to the Company. It is anticipated that Kendall will
manufacture all products that are subject to the Kendall Agreement.
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. JJM had previously informed the Company that
it anticipated that two variations of one of these products would begin being
sold in late 2000. JJM is now indicating that, due in part to the relocation of
some of JJM's facilities from Texas to Ohio, sales of two variations of this
product will begin in the first quarter of 2001. All product introductions are
scheduled and controlled by JJM.
11
<PAGE>
The Company and JJM are also pursuing the development and
commercialization of four additional products. Development work is currently
being done by the Company and JJM with respect to these products.
In May 1997, the Company entered into the BDIT License Agreement with
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 has
indicated that it is unsure if or when product will be introduced and sold in
the market under the BDIT License Agreement.
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.
Such products are expected to include syringes, prefilled syringes, IV
catheters, catheter introducers, Huber needles, plasma apheresis sets, dialysis
sets, blood donor sets, winged steel infusion, Seldinger needles, epidural and
spinal needles and lancets as well as additional safety needle devices.
Prototypes of the phlebotomy devices, catheter inserters, lancets, Huber
needles, Seldinger needles, winged steel needles, syringes and prefilled
syringes have been completed. The Company plans to continue discussions and
negotiations with third parties to generate revenues through the licensing of
products, joint venturing, and partnering with original equipment manufacturers.
License and distribution arrangements, such as those discussed above,
create certain risks for the Company, including (i) reliance for sales of
products on other parties, and therefore reliance on the other parties'
marketing ability, marketing plans and credit-worthiness; (ii) if the Company's
products are marketed under other parties' labels, goodwill associated with use
of the products may inure to the benefit of the other parties rather than the
Company; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or substantially all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements. Further, because such arrangements are generally expected to
provide the Company's marketing partners with certain elements of exclusivity
with respect to the products to be marketed by those partners, the Company's
success will be highly dependent on the results obtained by its partners. There
is no assurance that the Company will realize royalty revenue under the JJM,
BDIT or Kendall agreements, or that any of these products will be launched as
anticipated.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for the Company's fiscal year beginning 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company recognize
all derivative instruments as either assets or liabilities in the condensed
consolidated balance sheet and measure those instruments at fair value. The
Company does not expect the adoption of SFAS 133, as amended, to have a material
impact on the Company's results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
subsequent issuance of SAB 101A and SAB 101B has deferred the effective date of
SAB 101 until the fourth quarter of 2000. The Company does not expect the
adoption of SAB 101 to have a material impact on the Company's results of
operations, financial position or liquidity.
12
<PAGE>
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.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
In July 2000, the Company granted stock options to acquire 50,000
shares of the Company's common stock at an exercise price of $1.625 per share to
the Company's chief financial officer. The option grant 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.
In August 2000, stock options to acquire 18,000 shares of the Company's
common stock at $.39 per share were exercised by a former employee and director
of the Company. The option exercise 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.
In August 2000, options to purchase 1,074,310 shares of the Company's
common stock expired.
In August 2000, the Company granted to two of the non-executive members
of the Company's board of directors stock options to acquire a total of 8,000
shares of the Company's common stock at an exercise price of $1.00 per share.
These stock options were granted as part of the quarterly compensation to these
non-executive directors for service on the Company's board of directors. 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 August 2000, the Company granted stock options to acquire 50,000
shares of the Company's common stock at an exercise price of $1.00 per share to
a newly appointed director as compensation for service on the Company's board of
directors. The option grant 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.
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 reached an agreement with this individual whereby the Company would
issue to the individual 50,000 shares of common stock as full and final
settlement of claims he may have against the Company. Upon execution of the
settlement agreement in August 2000, the Company issued 50,000 shares of
restricted common stock in full settlement of the claim. 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.
In September 2000, the Company granted stock options to acquire a total
of 846,810 shares of the Company's common stock at exercise prices ranging
between $1.25 and $2.00 per share. Options to acquire 469,810 shares were
granted to Company employees and directors, including the Company's president,
who received options to acquire 300,000 shares at an exercise price of $2.00 per
share, a non-executive director, who received options to acquire 20,000 shares
at an exercise price of $2.00 per share and the newly hired vice president and
chief technical officer, who received options to acquire 100,000 shares at an
exercise price of $1.5625 per share. Options to acquire 320,000 shares were
granted to non-employees and 57,000 shares to an employee at exercise prices of
$1.25 and $2.00 per share, respectively. The options to non-employees have been
valued at $245,244 using the Black-Scholes option pricing model and have been
reflected as compensation expense in the accompanying consolidated financial
statements for the periods ended September 30, 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.
14
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
Item 5. Other Information.
In July 2000, the number of directors comprising the Company's board of
directors was increased from four to five. Dr. Roy Bichan was then appointed to
fill the newly created vacancy on the board of directors. Dr. Bichan has vast
international business experience and was appointed as a non-executive director.
In September 2000, the Company hired Dr. Don Solomon as vice president
and chief technical officer of the Company. Prior to his employment, Dr. Solomon
had been employed as the vice president, research and development for Johnson &
Johnson Medical.
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)
15
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
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 (Incorporated by reference to Exhibit 10.7 of the
Company's Quarterly Report on Form 10-QSB, dated June 30,
2000)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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: 11/17/00 By /s/ David A. Robinson
---------------------------------------
David A. Robinson
President, Chief Executive Officer, Chairman of
the Board
Date: 11/17/00 By /s/ Keith L. Merrell
---------------------------------------
Keith L. Merrell
Chief Financial Officer
16
