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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __ to__
Commission file number 0-25852
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THE MED-DESIGN CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0404919
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(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2810 Bunsen Avenue, Ventura, CA 93003
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (805) 339-0375
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.
Yes |X| No |_|
On August 13, 2002, 12,349,646 shares of the registrant's common stock, $.01 par
value, were outstanding.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page Number
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and as of
December 31, 2001 ................................................................ 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 2002 and 2001.......................... 4
Consolidated Statements of Comprehensive Loss (unaudited) for the three
months and six months ended June 30, 2002 and 2001................................ 5
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2002 and 2001...................................................... 6
Notes to Consolidated Financial Statements (unaudited)............................ 7
Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operation.......................................................................... 8-9
Item 3- Quantitative and Quantitative Disclosure About Market Risk............................ 9
PART II - OTHER INFORMATION
Item 1- Legal Proceedings..................................................................... 10
Item 6- Exhibits and Reports on Form 8-K ..................................................... 10
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 377,236 $ 397,765
Available-for-sale securities 15,798,264 5,492,001
Prepaid expenses and other current assets 817,365 289,801
------------ ------------
Total current assets 16,992,865 6,179,567
Property, plant, and equipment, net of accumulated depreciation
of $890,243 and $1,052,903 at June 30, 2002 and
December 31, 2001, respectively 426,668 391,817
Patents, net of accumulated amortization of $587,856 and $486,608 at
June 30, 2002 and December 31, 2001, respectively 1,676,710 1,688,576
Other assets 23,626 --
------------ ------------
Total assets $ 19,119,869 $ 8,259,960
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 7,267 $ 12,720
Accounts payable 328,848 198,141
Accrued payroll and vacation 107,591 139,046
Other accrued expenses 42,034 22,408
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Total current liabilities 485,740 372,315
Capital lease obligations, less current maturities 2,830 4,086
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Total liabilities
488,570 376,401
------------ ------------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
No shares outstanding at June 30, 2002 and December 31, 2001 -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
12,366,046 and 10,963,386 shares issued and outstanding as of
June 30, 2002 and December 31, 2001, respectively 123,661 109,634
Additional paid-in capital 52,149,119 36,869,326
Accumulated deficit (33,103,890) (29,152,181)
Accumulated other comprehensive income (loss) (537,591) 56,780
------------ ------------
Total stockholders' equity 18,631,299 7,883,559
------------ ------------
Total liabilities and stockholders' equity $ 19,119,869 $ 8,259,960
============ ============
The accompanying notes are an integral part of these financial statements.
3
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------- -------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
Revenue $7,019 -- $13,714 $50,000
---------------- ---------------- --------------- ----------------
Operating expense:
General and administrative $1,928,218 $1,261,827 3,290,481 2,671,626
Research and development 416,553 262,249 763,031 586,200
---------------- ---------------- --------------- ----------------
Total operating expenses 2,344,771 1,524,076 4,053,512 3,257,826
Loss from operations (2,337,752) (1,524,076) (4,039,798) (3,207,826)
Interest expense (298) (146) (668) (463)
Investment income 63,101 40,405 88,757 129,077
---------------- ---------------- --------------- ----------------
Net loss ($2,274,949) ($1,483,817) ($3,951,709) ($3,079,212)
================ ================ =============== ================
Basic and diluted loss per common share:
Net loss applicable to common shares ($0.18) ($0.14) ($0.34) ($0.29)
Weighted average common shares 12,355,593 10,600,507 11,739,696 10,566,358
Options and warrants to purchase 2,121,673 shares of common stock as of
June 30, 2002 and 1,369,900 shares of common stock as of June 30, 2001 were not
included in computing diluted earnings per share as the effect was antidilutive.
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ------------------------------------
2002 2001 2002 2001
------------------ ---------------- ---------------- ----------------
Net loss ($2,274,949) ($1,483,817) ($3,951,709) ($3,079,212)
Other comprehensive loss:
Unrealized holding losses on
securities (333,003) (9,809) (594,371) (2,217)
---------------- -------------- -------------- ---------------
Comprehensive loss ($2,607,952) ($1,493,626) ($4,546,080) ($3,081,429)
================ ============== ============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss ($3,951,709) ($3,079,212)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 266,776 154,945
Stock-based compensation 861,256 735,494
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (527,563) (81,537)
Accounts payable 103,707 (20,694)
Accrued expenses (11,829) (86,546)
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Net cash used in operating activities (3,232,362) (2,377,550)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (200,379) (18,749)
Additions to patents (89,382) (151,270)
Investment in available-for-sale securities (14,023,626) --
Sale of available-for-sale securities 3,099,366 1,251,660
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Net cash provided by (used in) investing activities (11,214,021) 1,081,641
---------- -----------
Cash flows from financing activities:
Capital lease payments (6,710) (7,896)
Warrants and stock options exercised 240,124 446,006
Proceeds from private placement-net of issuance
costs paid 14,192,440 --
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Net cash provided by financing activities 14,425,854 438,111
---------- -----------
Increase (decrease) in cash (20,529) (857,799)
Cash and cash equivalents, beginning of period 397,765 1,728,103
---------- -----------
Cash and cash equivalents, end of period $ 377,236 $ 870,304
---------- -----------
Noncash investing and financing activities:
Change in unrealized gain (loss) on available-for-sale
Securities ($ 333,003) ($ 2,217)
The accompanying notes are an integral part of these financial statements.
6
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include
The Med-Design Corporation (hereinafter, including its subsidiaries as the
context indicates, the "Company" or "Med-Design") and its wholly-owned
subsidiaries, MDC Investment Holdings, Inc. and MDC Research Ltd. All
significant intercompany transactions and accounts are eliminated. The
accompanying consolidated financial statements have been prepared on a basis
consistent with that used as of and for the year ended December 31, 2001 and, in
the opinion of management, reflect all adjustments (principally consisting of
normal recurring accruals) considered necessary to present fairly the financial
position of the Company as of June 30, 2002, the results of the Company's
operations for the three and six month period ended June 30, 2002 and cash flows
for the six month period ended June 30, 2002. The results of operations for the
three and six month period ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002. The
financial statements included herein have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the applicable requirements of Regulation S-X promulgated by the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The consolidated balance sheet at December 31, 2001 was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements, which were included as part of
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
2. Stock Based Compensation
In August, 2000 the Company entered into several equity arrangements
with officers of the Company involving grants of stock options and warrants to
purchase common stock. The Company recorded compensation expense in the amount
of $831,950 in connection with these transactions in the first six months of
2002 to reflect vesting of the grants.
3. Stockholders Equity
On March 25, 2002, Med-Design completed a private equity placement of
the Company's common stock. Med-Design sold 1,326,260 shares of its common stock
for $15,000,000. The net proceeds to the Company after the issuance cost were
$14,200,000.
In connection with the offering, on March 22, 2002, Med-Design provided
to the placement agent, for nominal consideration, a five-year warrant to
purchase 40,000 shares of Med-Design common stock at an exercise price of
$14.1375 per share valued at $319,604. The warrant vested upon issuance.
On March 15, 2002, Med-Design issued two warrants to purchase 18,000
shares of common stock each at an exercise price of $12.50 per share to two
consultants. The warrants vest in three years and expire on December 27, 2007.
Compensation expense of $29,306 was recorded during the first six months of
2002, based on the fair value of the warrant calculated using a Black-Scholes
valuation model in accordance with FAS 123.
7
4. Unrealized Holding Losses on Securities
On September 7, 2001, Med-Design entered into an Addendum to the
development and licensing agreement with Medamicus. Under the terms of the
Addendum, Med-Design received an initial payment of $2,000,000, $1,000,000 of
which was paid in 68,027 shares of Medamicus common stock and $1,000,000 which
was paid in cash on October 15, 2001. Med-Design still holds the majority of the
common stock received from Medamicus and shares subsequently purchased by
Med-Design which common stock has declined significantly in market value.
Medamicus stock accounts for approximately $541,926 in unrealized losses at June
30, 2002.
5. Commitments and Contingencies
In August 2000, Med-Design's shareholders approved the issuance of a
warrant to purchase 50,000 shares of common stock at an exercise price of $6.26
per share and the issuance of 125,000 shares of common stock to John F. Kelley,
a director of the Company in connection with the performance of past consulting
services. The compensation arrangement was approved, subject to the conclusion
of negotiations with Mr. Kelley regarding the amount of compensation to be
provided by the Company for such past consulting services. To date, the Company
has been unable to reach an agreement with Mr. Kelley and is unable to predict
whether it will reach such an agreement.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
FORWARD-LOOKING STATEMENTS
The report contains forward-looking statements within the meaning of
the "safe harbor" provisions of The Private Securities Litigation Reform Act of
1995 that address, among other things, the generation of royalty revenues from
our licensees; sufficiency of available resources to fund operations; and the
anticipated launch dates of several of our licensed products. We generally
identify forward looking statements in this report using words like "believe,"
"anticipate," "will," "expect," "may," "could," "intend" or similar statements.
There are important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements including
lack of demand or low demand for our products or for safety products generally;
a determination of our licensees to focus their marketing efforts on products
other than those licensed from us; delays in introduction of products licensed
by us due to manufacturing difficulties or other factors; our inability to
license or enter into joint venture or similar arrangements regarding our other
products and other factors discussed in this report generally and in our Annual
Report on Form 10-K for the year ended December 31, 2001. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date of this report. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date of this report.
Recent Developments
In May 2002, Becton Dickinson and Company (BD) launched the IntegraTM
Syringe with Retracting Precision Glide. This is the first BD launch that is
royalty bearing to Med-Design.
Several other products we previously licensed to BD are expected to
launch in 2002. As a result of the launch of these products, we anticipate the
generation of royalty payments in 2002 under the BD license agreement.
Results of Operations
Results of Operations for the Three Month Period Ended June 30, 2002 and 2001
Revenue for the three months ended June 30, 2002 was $7,019. Med-Design
did not report revenue in the corresponding period in 2001. The majority of
revenue for the three months ended June 30, 2002 reflected a royalty payment
from Medamicus under our September 25, 2001 agreement with Medamicus.
General and administrative expenses for the three months ended June 30,
2002 were $1,928,218, an increase of $666,391 as compared to $1,261,827 in the
corresponding period in 2001. The increase is due primarily to an increase in
corporate expenses which include travel, consulting and relocation expenses
related to hiring a new executive of $274,000, stock based compensation of
$78,000 and legal expenses of $72,000.
Research and development expenses for the three months ended June 30,
2002 were $416,553, an increase of $154,304 as compared to $262,249 for the
corresponding period in 2001. The increase in research and development expenses
was due primarily to additional costs of an evaluation study and regulatory
application costs related to the Safety Dental Pre-filled Cartridge Injector.
Results of Operations for the Six Month Period Ended June 30, 2002 and 2001
Revenue for the six months ended June 30, 2002 was $13,714 a decrease
of $36,286 as compared to $50,000 in the corresponding period in 2001. The
majority of revenue reported in the six months ended June 30, 2002 was from a
royalty payment from Medamicus under our September 25, 2001 agreement with
Medamicus. Revenue in 2001 reflected a development fee payment from Medamicus.
General and administrative expenses for the six months ended June 30,
2002 were $3,290,481, an increase of $618,855 as compared to $2,671,626 in the
corresponding period in 2001. The increase is entirely attributable to the
increase in operating expenses in the second quarter of 2002.
9
Research and development expenses for the six months ended June 30,
2002 were $763,031, an increase of $176,831 as compared to $586,200 for the
corresponding period in 2001. The increase in research and development expenses
was due primarily to costs associated with an evaluation study and regulatory
application costs related to the Safety Dental Pre-filled Cartridge Injector.
Liquidity and Capital Resources
At June 30, 2002, cash, cash equivalents and available-for-sale
securities totaled $16,175,500, as compared to $5,889,766 at December 31, 2001,
an increase of $10,285,734 or approximately 175%. The increase was due to the
completion of a private equity placement of 1,326,260 shares of our common stock
on March 25, 2002 resulting in net proceeds of approximately $14,200,000.
Our Consolidated Statements of Comprehensive Loss reflect $594,371 in
Unrealized Holding Losses on Securities for the six months ended June 30, 2002.
A majority of these unrealized losses resulted from a significant decline in the
market price of Medamicus shares that we hold. See Item 3 of Part I of this Form
10-Q for additional information.
Reference is made to Item 1 of Part II of this Form 10-Q for
information regarding our arbitration proceedings with BD. The results of these
arbitration proceedings may have a material effect on our license revenues in
future periods.
We have a revolving line of credit totaling $3,000,000. This facility
can be used to fund working capital needs and finance capital equipment
purchases. However, advances for capital equipment financing may not exceed
$600,000. Borrowings are collateralized by substantially all of our assets. Any
borrowings to meet working capital needs bear interest at LIBOR plus 2.25%,
while borrowings to finance capital equipment purchases bear interest at the
prime rate plus 2.5%. The facility expires on August 31, 2002. There is no
assurance that we will be successful in negotiating a continuation of the
availability of the line of credit on reasonable terms. There were no amounts
outstanding under the line of credit at June 30, 2002.
Management believes that we have sufficient funds to support its
planned operations for at least the next twelve months. The availability of
resources over a longer period of time will be dependent on our ability to enter
into licensing agreements and to receive royalty payments from our current and
future licensees and our ability to enter into, and profitably operate under,
joint venture or similar arrangements. If licensing revenues are insufficient to
support operations or we are unsuccessful in negotiating additional agreements,
we may be required to reduce the scope of, or cease, our operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There were no amounts outstanding under our revolving line of credit at
June 30, 2002. If we were to borrow under our credit facility, borrowings to
meet working capital needs would bear interest at LIBOR plus 2.25% and
borrowings to finance capital equipment purchases would bear interest at the
prime rate plus 2.5%. As a result, any such borrowings would be subject to the
fluctuations in the market which affect LIBOR or the prime rate, respectively.
We invest excess cash in marketable securities in accordance with
our investment guidelines as approved by the Board of Directors. These
investments are in highly liquid, low risk securities where our risk of loss is
at a minimum. Additionally, we have acquired shares of a publicly traded company
for which we are at risk of loss based on downward fluctuations in the quoted
market fair value of those shares. If the quoted fair value of this company's
shares were to fall by 10% and 20%, we would incur an unrealized loss of
$304,015 and $608,030 respectively. Such losses are ultimately recognized as
expense in the period in which the stock is sold.
10
Part II - OTHER FINANCIAL INFORMATION
Item 1. Legal Proceeding
Arbitration proceedings were instituted on July 19, 2002 involving The
Med-Design Corporation and Becton Dickinson and Company to determine which of
the different royalty rates provided for in the Licensing Agreement dated May
11, 2000 between Med-Design and Becton Dickinson is payable to Med-Design for
BD's IntegraTM Syringe with Retracting Precision Glide. The higher royalty rate
is approximately four times greater than the lower royalty rate.
On December 21, 2001, suit was filed in California Superior Court by
Michael J. Botich, a former executive officer of Med-Design. Mr. Botich alleged
that Med-Design breached an oral agreement to employ him as a part-time
consultant. In addition, Mr. Botich alleged that Med-Design violated public
policies set forth in certain provisions of the California Labor Code by
terminating the alleged employment agreement in order to avoid his exercise of
warrants and options to purchase Med-Design common stock. He also alleged that
he suffered emotional distress and that Med-Design subjected him to cruel and
unjust hardship by sending a public press release to shareholders advising,
allegedly falsely, that he resigned for medical reasons. Mr. Botich seeks
damages for breach of contract (the value of the warrant and stock options and
loss of earnings), emotional distress, punitive damages, attorney fees and
costs, and interest from April 2001 on lost wages and benefits. The Company
answered by generally denying all allegations and asserting certain affirmative
defenses and it intends to vigorously contest the action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
We filed a Form 8-K dated April 8, 2002 that included information
reported under Item 5 addressing our position with respect to the status of our
discussions with BD regarding the incorporation of our patented technology into
their safety syringe.
We filed a Form 8-K dated May 8, 2002 that included information
reported under Item 9 incorporating a presentation and script used in connection
with a conference call held by The Med-Design Corporation on May 8, 2002.
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Signatures
In accordance with 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, thereunto duly authorized.
The Med-Design Corporation
Date: August 14, 2002 /s/ James M. Donegan
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James M. Donegan
Chief Executive Officer
/s/ Lawrence D. Ellis
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Lawrence D. Ellis
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13