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U.S. 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, 2003
[ ] 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
THE MED-DESIGN CORPORATION
----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2771475
------------------------------- ---------------------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2810 Bunsen Avenue, Ventura, CA 93003
----------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 123-2 of the Exchange Act).
Yes [X] No [ ]
On August 12, 2003, 16,304,924 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, 2003 (unaudited) and as of
December 31, 2002 ............................................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 2003 and 2002......................... 4
Consolidated Statements of Comprehensive Loss (unaudited) for the three
months and six months ended June 30, 2003 and 2002............................... 5
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2003 and 2002..................................................... 6
Notes to Consolidated Financial Statements (unaudited)........................... 7-11
Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 12
Item 3- Quantitative and Qualitative Disclosures about Market Risk........................... 14
Item 4- Controls and Procedures.............................................................. 14
PART II - OTHER INFORMATION
Item 6- Exhibits and Reports on Form 8-K .................................................... 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
2003 December 31,
(Unaudited) 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 651,253 $ 1,917,130
Available-for-sale securities 10,412,600 12,248,170
Trade receivables 41,690 --
Prepaid expenses and other current assets 826,778 564,177
------------- -------------
Total current assets 11,932,321 14,729,477
Notes receivable - related party 269,835 250,000
Property, plant, and equipment, net of accumulated depreciation
of $1,231,158 and $1,158,603 at June 30, 2003 and
December 31, 2002, respectively 289,076 345,130
Patents, net of accumulated amortization of $749,121 and $659,144 at
June 30, 2003 and December 31, 2002, respectively 1,656,707 1,664,617
------------- -------------
Total assets $ 14,147,939 $ 16,989,224
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 2,728 $ 2,574
Accounts payable 141,810 290,775
Accrued compensation and benefits 113,157 467,086
Other accrued expenses 159,820 189,447
------------- -------------
Total current liabilities 417,515 949,882
Capital lease obligations, less current maturities 102 1,506
------------- -------------
Total liabilities 417,617 951,388
------------- -------------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
No shares outstanding at June 30, 2003 and December 31, 2002 -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
12,706,080 and 12,519,798 shares issued and outstanding as of
June 30, 2003 and December 31, 2002, respectively 127,061 125,198
Additional paid-in capital 54,312,014 53,083,149
Accumulated deficit (40,579,947) (37,233,242)
Accumulated other comprehensive (loss) income (128,806) 62,731
------------- -------------
Total stockholders' equity 13,730,322 16,037,836
------------- -------------
Total liabilities and stockholders' equity $ 14,147,939 $ 16,989,224
============= =============
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,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenue $ 42,145 $ 7,019 $ 81,236 $ 13,714
Costs and expenses:
Product 23,755 -- 23,755 --
General and administrative 1,430,458 1,928,218 2,964,225 3,290,481
Research and development 350,428 416,553 764,787 763,031
------------- ------------- ------------- -------------
Total operating expenses 1,804,641 2,344,771 3,752,767 4,053,512
Loss from operations (1,762,496) (2,337,752) (3,671,531) (4,039,798)
Interest expense (94) (298) (207) (668)
Investment income 172,154 63,101 325,033 88,757
------------- ------------- ------------- -------------
Net loss $ (1,590,436) $ (2,274,949) $ (3,346,705) $ (3,951,709)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Net loss $ (0.13) $ (0.18) $ (0.26) $ (0.34)
Weighted average common shares outstanding 12,697,718 12,355,593 12,657,084 11,739,696
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,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss $ (1,590,436) $ (2,274,949) $ (3,346,705) $ (3,951,709)
Other comprehensive loss:
Unrealized holding gains (losses)
on securities 231,629 (333,003) (191,537) (594,371)
------------- ------------- ------------- -------------
Comprehensive loss $ (1,358,807) $ (2,607,952) $ (3,538,242) $ (4,546,080)
============= ============= ============= =============
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,
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,346,705) $ (3,951,709)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 191,104 266,776
Gain on sale of available-for-sale securities (25,954) --
Stock-based compensation 910,369 861,256
Changes in operating assets and liabilities:
Trade receivables (41,690) --
Prepaid expenses and other current assets (262,601) (527,563)
Note receivable-related party (19,836) --
Accounts payable (148,965) 103,707
Accrued expenses (383,556) (11,829)
-------------- --------------
Net cash used in operating activities (3,127,834) (3,232,362)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (45,073) (200,379)
Additions to patents (82,067) (89,382)
Investment in available-for-sale securities (4,476,900) (14,023,626)
Sale of available-for-sale securities 6,146,888 3,099,366
-------------- --------------
Net cash provided by (used in) investing activities 1,542,848 (11,214,021)
-------------- --------------
Cash flows from financing activities:
Capital lease payments (1,250) (6,710)
Warrants and stock options exercised 320,359 240,124
Proceeds from private placement-net of issuance costs paid -- 14,192,440
-------------- --------------
Net cash provided by financing activities 319,109 14,425,854
-------------- --------------
Decrease in cash (1,265,877) (20,529)
Cash and cash equivalents, beginning of period 1,917,130 397,765
-------------- --------------
Cash and cash equivalents, end of period $ 651,253 $ 377,236
============== ==============
Noncash investing and financing activities:
Change in unrealized gain (loss) on available-for-sale securities $ 191,537 $ 594,371
============== ==============
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, 2002 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, 2003 the results of the Company's
operations for the three and six month periods ended June 30, 2003 and cash
flows for the six month period ended June 30, 2003. The results of operations
for the three and six month periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003. The financial statements included herein have been prepared in accordance
with generally accepted accounting principles accepted in the United States 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 accepted in the United States for complete financial
statements. The consolidated balance sheet at June 30, 2003 was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles accepted in the United States. 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, 2002.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of The Med-Design Corporation and its wholly owned subsidiaries, MDC Investment
Holdings, Inc. and MDC Research Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified for comparability.
NEW ACCOUNTING STANDARDS
In July 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 150. This Statement establishes standards for how to
classify and measure certain financial instruments with characteristics of both
liabilities and equity. It requires the classification of a financial instrument
that is within its scope as a liability. This Statement is effective for
instruments entered into or modified after May 31, 2003. The adoption of this
pronouncement will not impact our financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - An Interpretation of Accounting
Research Bulletin (ARB) No. 51" ("FIN 46"). This interpretation clarifies how to
identify variable interest entities and how a company should assess its
interests in a variable interest entity to decide whether to consolidate the
entity. FIN 46 applies to variable interest entities created after January 31,
2003, in which a company obtains an interest after that date. Also, FIN 46
applies in the first fiscal quarter or interim period beginning after June 15,
2003, to variable interest entities in which a company holds a variable interest
that it acquired before February 1, 2003. We do not have any ownership in
variable interest entities; therefore FIN 46 does not affect our financial
statement presentation.
7
PRODUCT COST
Product Cost includes direct expenditures for material, packaging,
sterilization and freight. We also allocate some of our overhead (labor, use of
facilities and depreciation) to Product Cost.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and the
Financial Accounting Standards Board Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" (FIN 44) in accounting for
our stock plans. The Company has adopted the disclosure-only provisions of SFAS
No. 123 Accounting for Stock-Based Compensation.
The following table illustrates the effect on net loss and loss per
share if we had applied the fair value recognition provisions of SFAS No. 123:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss - as reported $ (1,590,436) $ (2,274,949) $ (3,346,705) $ (3,951,709)
Add: stock-based employee compensation
expense included in reported net loss 443,547 441,095 910,369 861,256
Deduct: total stock-based employee
compensation expense determined under
fair-value based method for all awards (1,039,843) (1,017,063) (1,978,165) (2,120,819)
------------- ------------- ------------- -------------
Net loss - pro forma $ (2,186,732) $ (2,850,917) $ (4,414,501) $ (5,211,272)
------------- ------------- ------------- -------------
Net loss per share:
Basic & diluted loss per share - as reported $ (0.13) $ (0.18) $ (0.26) $ (0.34)
Basic & diluted loss per share - pro forma $ (0.17) $ (0.23) $ (0.35) $ (0.44)
In August 2000 and March and November 2002, the Company entered into
several equity arrangements with officers and consultants of the Company
involving grants of stock options and warrants to purchase common stock. The
Company recorded compensation expense in the amount of $443,547 and $441,095 in
connection with these transactions in the second quarter and $910,369 and
$861,256 for the six months ended June 30, 2003 and 2002, respectively, to
reflect partial vesting of the grants.
2. STOCKHOLDERS EQUITY
On March 25, 2002, Med-Design completed a private equity placement of
its 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 payment of offering
expenses were approximately $14,200,000.
In connection with the private equity placement, Med-Design granted 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. The warrant vested upon issuance.
On March 15, 2002, Med-Design issued two warrants to purchase 18,000
shares of its common stock each at an exercise price of $12.50 per share to two
consultants. The warrants vest on March 15, 2005 and expire on December 27,
2007. Compensation expense of $25,122 and $25,121 was recorded in the second
quarter and $50,242 and $29,308 was recorded during the six month period ended
June 30, 2003 and 2002, respectively, based on the fair value of the warrants
calculated using a Black-Scholes valuation model in accordance with SFAS No.
123.
8
2. STOCKHOLDERS EQUITY, CONTINUED
On October 25, 2002 the Company issued a stock option to a consultant
for services to be rendered through October 10, 2003. Compensation expense of
$2,453, and $28,179 was recorded during the three and six month periods ended
June 30, 2003 based on the fair value of the warrant calculated using a
Black-Scholes valuation model in accordance with SFAS No. 123.
Warrants to purchase 100,000 shares of common stock at $2.58 per share
were exercised during the six-month period ended June 30, 2003.
3. UNREALIZED HOLDING LOSSES ON SECURITIES
On September 7, 2001, the Company 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 the form of 68,027 shares of Medamicus common stock and
$1,000,000 which was paid in cash on October 15, 2001. The Company continues to
hold the majority of the common stock received from Medamicus in addition to
shares subsequently purchased by Med-Design, which common stock has declined
significantly in market value. The Medamicus stock held by the Company accounts
for $208,585 in unrealized losses at June 30, 2003.
4. BASIC AND DILUTED LOSS PER SHARE:
Basic and diluted loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding during the
period. Options and warrants to purchase 2,538,417 shares of common stock as of
June 30, 2003 and 2,121,673 shares of common stock as of June 30, 2002 were not
included in computing diluted earnings per share as the effect was antidilutive.
5. COMMITMENTS AND CONTINGENCIES
In August 2000, the Company's stockholders approved an employment
contract for the Company's Chairman and CEO, which provided for the issuance of
an aggregate of 238,806 shares over four years beginning April 1, 2000, provided
he remains an officer, director or consultant of the Company. The fair value of
Med-Design common stock at the date of stockholder approval of this issuance of
common shares was $12.63 per share.
In November 1999, the Company approved the issuance, subject to
stockholder approval, which was received in August 2000, of 200,000 shares of
common stock to the then Chief Operating Officer. The common stock vested on
July 6, 2001, upon Med-Design's common stock having maintained a market price of
$22.00 or higher for thirty (30) consecutive days, at which time this agreement
was revised to provide that a third of the stock would be issued on August 6,
2001 and the remaining shares will vest in two equal tranches on August 6, 2002
and August 6, 2003.
In August 2000, Med-Design's stockholders 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,
at the time a director of the Company, in connection with the performance of
consulting services. The compensation arrangement was approved, subject to the
conclusion of negotiations of Mr. Kelley's contract. Negotiations have not yet
concluded, and the Company continues to discuss contract terms with Mr. Kelley.
6. RELATED PARTY TRANSACTIONS
For the six months ended June 30, 2003 and 2002, the Company paid
$13,459 and $14,258, respectively, for legal services to a firm, of which a
partner is a director, officer and stockholder of Med-Design.
9
6. RELATED PARTY TRANSACTIONS, CONTINUED
On March 15, 2002, Med-Design issued two warrants to purchase 18,000
shares of its common stock each at an exercise price of $12.50 per share to two
consultants. The warrants vest on March 15, 2005 and expire on December 27,
2007. Compensation expense of $25,122 and $25,121 was recorded in the three
months ended and $50,242 and $29,308 was recorded during the six months ended
June 30, 2003 and 2002, respectively, based on the fair value of the warrant
calculated using a Black-Scholes valuation model in accordance with SFAS No.
123.
On October 25, 2002 the Company issued a stock option to a consultant
for services to be rendered through October 10, 2003. Compensation expense of
$28,179 was recorded during the six months ended June 30, 2003 based on the fair
value of the warrant calculated using a Black-Scholes valuation model in
accordance with SFAS No. 123.
On April 15, 2002, pursuant to a Note and Pledge Agreement, the Company
loaned $250,000 to Michael W. Simpson, who at the time was the Company's Chief
Operating Officer, which Note is collateralized by 66,666 shares of the
Company's common stock to be issued to Mr. Simpson on August 6, 2003. The loan
was made to enable Mr. Simpson to pay his 2001 federal income taxes. The Note is
repayable on the earlier of (i) April 15, 2004, (ii) the date on which Mr.
Simpson ceases to be an employee, consultant or director of the Company, (iii)
the date on which the Company provides notice to Mr. Simpson that the closing
price of the common stock has been $30.00 or higher for 20 consecutive trading
days as reported on the Nasdaq National Market or (iv) the date on which Mr.
Simpson sells or transfers the pledged securities. The Note accrues interest at
16% per year until the issuance of the pledged securities to Mr. Simpson, at
which time the Note will accrue interest at the prime lending rate plus 1%.
Amounts due under the Note as of June 30, 2003, an aggregate of $269,836, of
which $250,000 is principal and $19,836 is accumulated interest, are included in
the line item "Notes receivable - related party" on the consolidated balance
sheets.
On April 25, 2003, the Company entered into an employment agreement
with Mr. Simpson, who resigned as director and officer of the Company as of
March 13, 2003. The term of the agreement is from March 20, 2003 through July
15, 2003. Under the agreement, Mr. Simpson was to receive total compensation of
$45,538 for the period of the agreement. Total compensation was increased on
June 10, 2003 by $14,230 for a total of $60,480. In addition, the agreement
provides for severance of $46,250, if the agreement was not extended on July 15,
2003. The agreement acknowledges Mr. Simpson's debt to the Company and provides
that the debt will be repaid when Mr. Simpson receives the final tranche of the
stock grant described above.
On July 14, 2003, the Company extended the agreement with Mr. Simpson
to August 15, 2003.
7. WARRANTS OUTSTANDING
As of June 30, 2003 and 2002, warrants to purchase a total of 500,000
and 700,000 shares of Med-Design's common stock, respectively, were outstanding
with various vesting and expiration periods.
On January 14, 1998, Med-Design issued a warrant to purchase 100,000
shares of common stock at an exercise price of $2.88 per share to a director of
the Company who was engaged to perform consulting services. The warrant was
exercisable upon issuance and was exercised on January 14, 2003.
8. SUBSEQUENT EVENTS
On August 1, 2003, the Company completed a private equity placement of
our common stock in which the Company sold an aggregate of 3,598,844 shares at a
price per share of $4.64. In addition, we sold to each purchaser in the private
placement warrants to purchase an aggregate of 1,199,608 shares of our common
stock at a price per share of $0.125. The exercise price of the warrant is 130%
of the purchase price of the common stock, or $.6.03 per share. The net proceeds
to us after giving effect to issuance cost were approximately $16,000,000.
10
8. SUBSEQUENT EVENTS, continued
The Company intends to use the net proceeds from the private placement
to enhance its manufacturing capabilities by either funding the acquisition of a
manufacturing company or by fulfilling its payment obligations under
manufacturing agreements that it may enter into in the future. The Company is
currently in the process of identifying 8. Subsequent Events, continued
potential acquisition candidates but can give no assurance that it will, in
fact, acquire a candidate or any other entity. The balance of the proceeds, if
any, will be used to fund research and development, to pay commitments under the
Company's outstanding contract manufacturing arrangements and for working
capital and other general corporate purposes. The allocation of the proceeds to
each of the uses described above will depend greatly on whether the Company
identifies potential acquisition targets and whether the Company is successful
in acquiring such targets.
The Company may redeem the warrants at a price of $.001 per share in
the event that the closing price per share on the Nasdaq National Market for any
20 trading days within a 30-day trading period is equal to or greater than 300%
of the purchase price. The Company provided the placement agent a five-year
warrant to purchase 233,920 shares of our common stock at an exercise price of
$6.03 per share.
11
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, 2002. 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 June 2003, Med-Design launched its first gross margin product, the
1Shot Safety Dental Syringe. The 1Shot Safety Dental Syringe is a one-handed,
single use, disposable safety syringe injector used for the delivery of dental
anesthetics. It employs a unique retracting design inherent in all Med-Design
safety products.
RESULTS OF OPERATIONS
Results of Operations for the Three-Month Periods Ended June 30, 2003 and 2002
Revenue for the three months ended June 30, 2003 was $42,145, an
increase of $35,126 as compared to revenue of $7,019 for the corresponding
period in 2002. Revenue for the three months ended June 30, 2003 reflected the
sales of the 1Shot Safety Dental Syringe to the product's distributor as well as
royalty payments under our licensing agreements. The majority of revenue for the
three months ended June 30, 2002 reflected royalty payments from Medamicus under
our agreement with Medamicus. Revenue for sales of the 1Shot Safety Dental
Syringe was $22,408 for the three months ended June 30, 2003. We did not have
revenue from product sales for the corresponding period in 2002.
Product costs which consist of direct and indirect costs related to the
sale of the 1Shot Safety Dental Syringe were $23,755 for the three months ended
June 30, 2003. Product costs for the current quarter reflect low volume
production and are substantially higher on a per unit basis than we anticipate
will be the case when the product is in full automated production. There were no
costs related to product sales for the corresponding period in 2002.
General and administrative expenses were $1,430,458, a decrease of
$497,760 as compared to general and administrative expenses of $1,928,218 for
the corresponding period in 2002. The decrease in general and administrative
expenses was primarily due to a reduction of expenditures for employee
compensation, legal and professional costs.
Research and development expenses for the three months ended June 30,
2003 were $350,428, a decrease of $66,125 as compared to research and
development expenses of $416,553 in 2002. The decrease in research and
development expenses was due primarily to reduction in expenditures for
personnel.
Results of Operations for the Six-Month Periods Ended June 30, 2003 and 2002
Revenue for the six months ended June 30, 2003 was $81,236, an increase
of $67,522 as compared to revenue of $13,714 for the corresponding period in
2002. Revenue for the six months ended June 30, 2003 reflected the sales of the
1Shot Safety Dental Syringe to a distributor as well as royalty payments under
our licensing agreements. The majority of
12
revenue for the six months ended June 30, 2002 reflected royalty payments from
Medamicus under our agreement with Medamicus.
General and administrative expenses were $2,964,226, a decrease of
$326,255 as compared to general and administrative expenses of $3,290,481 for
the corresponding period in 2002. The decrease in general and administrative
expenses was primarily due a reduction of expenditures for employee
compensation, contract services, legal and professional costs.
Research and development expenses for the six months ended June 30,
2003 were $764,786, an increase of $1,755 as compared to research and
development expenses of $763,031 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, cash, cash equivalents and available-for-sale
securities totaled $11,063,853 as compared to $14,165,300 at December 31, 2002,
a decrease of $3,101,448 or approximately 21.9%. This decrease is primarily due
to cash used in operations.
For the six months ended June 30, 2003, our net cash used in operating
activities was $3,127,834, principally reflecting our net loss of $3,346,705.
Our cash position was also adversely affected by a $383,556 decrease in accrued
expenses relating to the operations of the business as described in the results
of operations. Net cash provided by investing activities was primarily due to
the sale of available-for-sale securities for working capital purposes. Net cash
provided by financing activities consisted primarily of the proceeds from the
exercise of stock options and warrants.
On August 1, 2003, we completed a private equity placement of our
common stock in which we sold an aggregate of 3,598,844 shares at a price per
share of $4.64. In addition, we sold to each purchaser in the private placement
warrants to purchase an aggregate of 1,199,608 shares of our common stock at a
price per share of $0.125. The exercise price of the warrant is 130% of the
purchase price of the common stock, or $.6.03 per share. The net proceeds to us
after giving effect to issuance cost were approximately $16,000,000.
We intend to use the net proceeds from the private placement to enhance
our manufacturing capabilities by either funding the acquisition of a
manufacturing company or by fulfilling our payment obligations under
manufacturing agreements that we may enter into in the future. We are currently
in the process of identifying potential acquisition candidates but can give no
assurance that we will, in fact, acquire a candidate or any other entity. The
balance of the proceeds, if any, will be used to fund research and development,
to pay commitments under our outstanding contract manufacturing arrangements and
for working capital and other general corporate purposes. The allocation of the
proceeds to each of the uses described above will depend greatly on whether we
identify potential acquisition targets and whether we are successful in
acquiring such targets.
We may redeem the warrants at a price of $.001 per share in the event
that the closing price per share on the Nasdaq National Market for any 20
trading days within a 30-day trading period is equal to or greater than 300% of
the purchase price. We also provided the placement agent a five-year warrant to
purchase 268,000 shares of our common stock at an exercise price of $6.03 per
share.
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, 2003 and we intend to
seek renewal of the facility. There is no assurance that we will be successful
in negotiating an extension of the line of credit on reasonable terms. There
were no amounts outstanding under the line of credit at June 30, 2003.
We believe that we have sufficient funds to support our 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
13
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, 2003. 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 a portion of excess cash in marketable securities in
accordance with our investment guidelines as approved by our 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 additional
unrealized loss of $190,708 and $381,416, respectively. Such losses are
ultimately recognized as expense in the period in which the stock is sold or in
the current period if the decline in market value is deemed to be
other-than-temporary. At June 30, 2003, the Company has an unrealized loss of
$208,585 with respect to these shares.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of
the end of the period covered by this report are functioning effectively to
provide reasonable assurance that the information required to be disclosed by
the Company in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
31.1 Certification of the Chief Executive Officer Required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer Required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
31.1 Certification of the Chief Executive Officer Required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer Required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
(b) Reports on Form 8-K
None.
15
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 thereunto duly authorized.
The Med-Design Corporation
Date: August 14, 2003 JAMES M. DONEGAN
------------------------------------------
James M. Donegan
Chief Executive Officer
LAWRENCE D. ELLIS
------------------------------------------
Lawrence D. Ellis
Chief Financial Officer
Principal Financial and Accounting Officer
16
Exhibit 31.1
THE MED-DESIGN CORPORATION
CERTIFICATIONS
I, James M. Donegan, certify that:
1. I have reviewed this interim report on Form 10-Q of The
Med-Design Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 JAMES M. DONEGAN
-----------------
James M. Donegan, Chief Executive Officer
17
Exhibit 31.2
THE MED-DESIGN CORPORATION
CERTIFICATIONS
I, Lawrence D. Ellis, certify that:
1. I have reviewed this interim report on Form 10-Q of The
Med-Design Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 LAWRENCE D. ELLIS
--------------------------
Lawrence D. Ellis, Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer Required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer Required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer Required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
32.2 Certification of the Chief Financial Officer Required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
19
Exhibit 32.1
THE MED-DESIGN CORPORATION
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
RELATING TO A PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS
I, James M. Donegan, Chief Executive Officer of The Med-Design
Corporation, a Delaware corporation (the "Company"), hereby certify that, to my
knowledge:
(1) The Company's periodic report on Form 10-Q for the period
ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
* * *
JAMES M. DONEGAN
- -----------------------
James M. Donegan
Chief Executive Officer
Date: August 14, 2003
20
Exhibit 32.2
THE MED-DESIGN CORPORATION
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
RELATING TO A PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS
I, Lawrence D. Ellis, Chief Financial Officer of The Med-Design
Corporation, a Delaware corporation (the "Company"), hereby certify that, to my
knowledge:
(1) The Company's periodic report on Form 10-Q for the period
ended June 30, 2003 (the "Form 10-Q") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
* * *
LAWRENCE D. ELLIS
- -----------------------
Lawrence D. Ellis
Chief Financial Officer
Date: August 14, 2003
21