U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ___to___
Commission file number 0-25852
THE MED-DESIGN CORPORATION
Delaware 23-2771475
(State of Incorporation) (IRS Employer ID Number)
121 South Broad Street, Suite 310, Philadelphia, PA 19107
(215) 735-2700
Check whether issuer (1) filed all reports required to be filed by Section
13 or 15(d) for the Exchange Act during the past 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 ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock - 7,951,570 shares Common Stock, $.01 par value,
outstanding as of November 3, 1997.
<PAGE>
THE MED-DESIGN CORPORATION
FORM 10-QSB
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balanced Sheets as of September 30, 1997
(unaudited) and December 31, 1996 ............................. 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1996
and Cumulative During Development Stage (unaudited) ........... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 and Cumulative During Development
Stage (unaudited) ............................................. 5
Notes to Consolidated Financial Statements (unaudited) ........ 6
Item 2 - Management's Discussion and Analysis or Plan of Operation ..... 7-12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 13
Item 2 - Changes in Securities ......................................... 13
Item 3 - Defaults upon Senior Securities ............................... 13
Item 4 - Submission of Matters to a Vote of Security Holders ........... 13
Item 5 - Other Information ............................................. 13
Item 6 - Exhibits and Reports on Form 8-K .............................. 13
2
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 223,147 $ 1,648,639
Short-term investment 546,591 535,248
Available-for-sale securities 6,463,055 5,638,498
Prepaid expenses and other current assets 253,983 97,461
------------ ------------
Total current assets 7,486,776 7,919,846
Property, plant, and equipment, net of accumulated
depreciation and amortization of $350,849 and $183,510
at September 30, 1997 and December 31, 1996, respectively 1,183,822 1,240,557
Patents, net of accumulated amortization of $41,524 and $34,324
at September 30, 1997 and December 31, 1996, respectively 316,769 174,623
Other assets -- 14,136
------------ ------------
$ 8,987,367 $ 9,349,162
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,630,500 $ 6,446,500
Accounts payable 108,237 172,911
Accrued expenses 197,143 128,146
Current maturities of long-term debt and capital lease obligations 213,118 237,652
------------ ------------
Total current liabilities 5,148,998 6,985,209
------------ ------------
Long-term debt and capital lease obligations, less current maturities 148,081 300,366
------------ ------------
Total liabilities 5,297,079 7,285,575
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value, 20,000,000 shares authorized;
7,951,570 and 6,899,570 shares issued and outstanding
at September 30, 1997 and December 31, 1996, respectively 79,516 68,996
Additional paid-in capital 20,680,281 15,718,504
Deficit accumulated during the development stage (17,080,755) (13,747,408)
Unrealized gain on available-for-sale securities 11,246 23,495
------------ ------------
Total stockholders' equity 3,690,288 2,063,587
------------ ------------
$ 8,987,367 $ 9,349,162
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From Inception, Three Months Ended Nine Months Ended
December 13, 1993 September 30, September 30,
to September 30, ----------------------------- ----------------------------
1997 1997 1996 1997 1996
-------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating expense:
Marketing $ 531,921 $ 41,216 $ 55,629 $ 153,553 $ 170,023
General and administrative 6,644,467 555,862 602,240 1,989,216 1,933,480
Research and development 3,349,703 388,641 467,706 1,186,461 1,107,579
Purchased research and development 5,932,770 -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 16,458,861 985,719 1,125,575 3,329,230 3,211,082
------------ ------------ ------------ ------------ ------------
Loss from operations (16,458,861) (985,719) (1,125,575) (3,329,230) (3,211,082)
Interest expense (1,530,712) (107,255) (109,260) (322,574) (271,220)
Interest income 908,818 91,301 100,909 318,457 330,812
------------ ------------ ------------ ------------ ------------
Net loss ($17,080,755) ($ 1,001,673) ($ 1,133,926) ($ 3,333,347) ($ 3,151,490)
============ ============ ============ ============ ============
Net loss per common share ($ 0.13) ($ 0.17) ($ 0.42) ($ 0.46)
============ ============ ============ ============
Weighted average common
shares outstanding 7,951,570 6,863,429 7,849,347 6,808,771
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From Inception, Nine Months Ended September 30,
December 13, 1993 ----------------------------------
to September 30,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($17,080,755) ($3,333,347) ($3,151,490)
Adjustments to reconcile net loss to operating
cash flows (net of acquisition):
Depreciation and amortization 373,735 174,497 130,749
Issuance of common stock for services 418,800
Purchased research and development 5,932,770
Issuance of common stock for interest 29,985
Issuance of warrants for services 121,000 100,000
Amortization of original issued discount 650,000
(Gain) Loss on sale of available-for-sale (4,084)
securities
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (251,475) (156,522) (64,782)
Accounts payable 516 (64,674) (139,735)
Accrued expenses (93,350) 68,997 (131,591)
------------ ------------ ------------
Net cash used by operating activities (9,902,858) (3,211,049) (3,356,849)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,490,141) (110,604) (430,042)
Additions to patents (201,847) (149,304) (16,123)
Payments for purchase of option to acquire
Med-Design Incorporated (125,000)
Investments in available-for-sale securities, net (6,447,725) (836,806) (65,124)
Notes receivable funded (92,500)
Purchase of short-term investment (546,591) (11,343) (12,173)
------------ ------------ ------------
Net cash used by investing activities (8,903,804) (1,108,057) (523,462)
------------ ------------ ------------
Cash flows from financing activities:
Capital lease payments (24,428) (8,582) (6,928)
Proceeds from long-term borrowings 706,095 14,410 163,712
Repayment of long-term borrowings (356,771) (182,647) (106,956)
Proceeds from issuance of common stock, prior to
initial public offering 97,250
Proceeds from exercise of options 35,000 35,000
Proceeds from issuance of common stock in connection
with exercise of warrants 798,700 254,800 494,900
Proceeds from short-term borrowing 6,630,500 184,000 3,276,000
Repayment of short-term borrowing (2,000,000) (2,000,000)
Other -- 14,136
Repayment of acquisition note (1,000,000)
Proceeds of initial public offering, net of offering costs 9,525,966
Proceeds of private placement, net of offering costs 4,617,497 4,617,497
------------ ------------ ------------
Net cash provided by financing activities 19,029,809 2,893,614 3,855,728
------------ ------------ ------------
Increase (decrease) in cash 223,147 (1,425,492) (24,583)
Cash and cash equivalents, beginning of period 0 1,648,639 221,229
------------ ------------ ------------
Cash and cash equivalents, end of period $223,147 $223,147 $196,646
============ ============ ============
Cash paid during the period:
Interest $861,024 $335,486 $235,220
============ ============ ============
Noncash financing activities:
Issuance of common stock for rights under option
to acquire Med-Design, Inc. $100,000 -- --
Issuance of common stock in connection with
short-term borrowing $650,000 -- --
------------ ------------ ------------
Capital lease obligation incurred $36,303 -- --
------------ ------------ ------------
Change in unrealized gain (loss) on available-
for-sale securities $11,246 ($12,249) ($34,423)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
The financial information included herein is unaudited, except for the
balance sheet as of December 31, 1996; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of
results for the interim period.
The accompanying financial statements include The Med-Design
Corporation (hereinafter, including its subsidiaries as the context
requires, the "Company") and its wholly-owned subsidiaries, MDC Investment
Holdings, Inc. and MDC Research Ltd. All significant intercompany
transactions and accounts are eliminated.
The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996, which were
included as part of the Company's Annual Report on Form 10-KSB. Operating
results for the three and nine month periods ending September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
2. Weighted Average Shares of Common Stock Outstanding
The calculations of weighted average shares of common stock excludes
outstanding options and warrants, since these securities have an
anti-dilutive effect on per share data.
3. Stock Split
On January 31, 1996, the Board of Directors authorized a one-for-one
stock dividend that was distributed on February 26, 1996 to shareholders of
record as of February 12, 1996. The information contained in the
consolidated financial statements and the notes thereto have been adjusted
to reflect this stock dividend.
4. Recently Issued Pronouncement:
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This Statement is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. The Company is currently evaluating the
impact, if any, adoption of SFAS No. 128 will have on its financial
statements.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-QSB contains
forward-looking statements relating to such matters as anticipated business
performance, business prospects, technological developments, product
development, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, The Med-Design Corporation (the "Company") notes that these
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections of this Form 10-QSB
entitled "Management's Discussion or Plan of Operation - Business Overview,"
"Management's Discussion or Plan of Operation - Results of Operations,"
"Management's Discussion or Plan of Operation - Plan of Operation,"
"Management's Discussion or Plan of Operation - Liquidity and Capital
Resources." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents that the Company files from time to time with the Securities and
Exchange Commission and in public communications made by the Company.
Business Overview
The Company was incorporated in Delaware on November 14, 1994. On February
28, 1995, The Med-Design Corporation, a Pennsylvania corporation, incorporated
on December 13, 1993, was merged with and into the Company. The Company is a
development stage enterprise as defined by Financial Accounting Standards
("FAS") No. 7, "Accounting and Reporting by Development Stage Enterprise."
The Company designs and develops safety medical devices intended to reduce
the incidence of accidental needlesticks. The Company has three core products
under development: the Retractable Needle Hypodermic Syringe (the "Safety
Syringe"), the Retractable Needle Vacuum Tube Phlebotomy Set (the "Safety
Phlebotomy Set"), and the Retractable Needle Intravenous Catheter Insertion
Device (the "Safety Catheter"). These products are similar in appearance and
size to the standard devices in use. Such products incorporate the Company's
novel proprietary retraction technology that enables a health care professional,
with no substantial change in operating technique and using one hand, to
permanently retract the needle of the device into the body of the device that
can be safely discarded.
The Company also has several new safety products which are in the beginning
stages of development. These new product developments include the In-Line Y-Port
Injectable Access Needle, the Pre-filled Ampule Injector, the Self-Contained
Pre-Filled Syringe, the Pre-Filled Vial Injector, the Butterfly Blood Collection
Needle, and the Arterial Blood Gas Syringe (collectively, the "New Products").
These products also incorporate the Company's proprietary retraction technology
and are designed to reduce the incidence of accidental needlesticks. The Company
has developed various sizes and designs of these products to accommodate the
specific requirements of potential strategic allies for medical and dental
applications.
7
<PAGE>
Business Overview (Continued)
On March 14, 1995, the Company organized a wholly-owned subsidiary, MDC
Investment Holdings, Inc. ("MDC Holdings"), under the laws of the State of
Delaware. The Company entered into an Agreement of Merger on April 5, 1995 (the
"Merger Agreement") with MDC Holdings and Med-Design, Inc., a California
corporation ("MDI"); which owned patent and proprietary rights to certain safety
medical devices (including the Safety Syringe, Safety Phlebotomy Set and the
Safety Catheter) pursuant to which MDI merged with and into MDC Holdings, the
surviving corporation (the "Merger"), and the Company issued and delivered
1,219,742 shares of Common Stock to the MDI shareholders in exchange for their
shares of MDI common stock. In addition, the Company issued a non-interest
bearing promissory note in the principal amount of $1,000,000 (the "Note")
payable to the former MDI shareholders, which was collateralized by all of the
issued and outstanding shares of the common stock, $0.01 par value per share, of
MDC Holdings. In connection with the Merger, the Company issued and delivered
3,572 shares of Common Stock to certain creditors of MDI to satisfy $12,500 of
outstanding obligations of MDI and 24,000 shares of Common Stock to a former
noteholder of MDI to satisfy an obligation of MDI. The Note was fully paid from
a portion of the net proceeds of the Company's initial public offering of
3,450,000 shares of its Common Stock in June 1995 ("Initial Public Offering").
The Company's acquisition of MDI was accounted for in accordance with the
purchase method, under which the purchase price was allocated to the assets of
MDI based on the fair market value of such assets. The excess of the purchase
price over the fair market value of the net assets acquired was treated as
purchased research.
Immediately following the consummation of the Merger, MDC Holdings
transferred all of the assets it acquired in the Merger, other than its patents
and other intellectual property, and all of its liabilities to MDC Research
Ltd., a California corporation and wholly-owned subsidiary of MDC Holdings.
As a result of the Merger, MDC Holdings became the sole owner of all the
intellectual property rights worldwide including patents, patent applications,
trademarks and trademark applications relating to the Safety Syringe, Safety
Phlebotomy Set and Safety Catheter.
In June 1995, the Company completed its Initial Public Offering of
3,450,000 shares of Common Stock, par value $0.01 per share. The net proceeds to
the Company were approximately $9,526,000.
On January 31, 1996, the Board of Directors authorized a one-for-one stock
dividend that was distributed on February 26, 1996 to shareholders of record as
of February 12, 1996. The information contained in the consolidated financial
statements and the notes thereto and in this report have been adjusted to
reflect this stock dividend.
On January 23, 1997, the Company completed a sale ("Placement") of
1,000,000 shares of Common Stock at a price of $5.00 per share pursuant to a
private placement of such securities to certain "accredited investors" (pursuant
to Regulation D of the Securities Act of 1933, as amended). The Company received
proceeds of approximately $4,617,000, net of expenses incurred in connection
with the Placement.
In connection with the Placement, for nominal consideration, the Company
agreed to sell warrants to Fine Equities, Inc., the Company's placement agent
with respect to the Placement (the "Placement Agent"), to purchase 100,000
shares of Common Stock ("Placement Agent Warrants"). The Placement Agent
Warrants are exercisable at a price of $5.50 a share of Common Stock for a
period of four years commencing January 22, 1998.
On August 6, 1997, the Company acquired two patents from John Kulli, M.D.
In connection with the acquisition of these patents, the Company paid Dr. Kulli
$75,000 and issued warrants to purchase 75,000 shares of its common stock at
$5.75 per share. These warrants are exercisable on or before August 6, 2002.
8
<PAGE>
Results of Operations
The Company has devoted substantially all of its research and development
efforts since its formation to the development related to safety needles and the
design and development of the equipment necessary to assemble the safety needle
device.
Research and development expenses amounted to $388,641 and $1,186,481 for
the three and nine month periods ending September 30, 1997, respectively.
Plan of Operation
Although the Company's plans may change as a result of its discussions with
third parties for the manufacture and/or distribution of its products, the
Company's current plan is to produce at least 50,000 units of the Safety
Catheter and 100,000 units of the Safety Phlebotomy Set in order to demonstrate
to potential third party manufacturers the economic feasibility of the
commercial production of its products. Thereafter, the Company will determine
whether it will mass manufacture the Safety Phlebotomy Set or the Safety
Catheter or any of its other products or components of its products for
commercial sale. Although the Company originally planned to manufacture and
distribute the Safety Phlebotomy Set and Safety Catheter directly, the Company
may ultimately contract with third parties for all or a portion of the needed
production of such products on a contract manufacturing basis, licensing
arrangement or other form of joint venture. To the extent the Company decides to
mass manufacture any of its products or components, the Company may need to
expand its current facilities and/or lease or purchase additional manufacturing
facilities and equipment.
The Company intends to continue its research and development on the Safety
Syringe, Safety Phlebotomy Set and Safety Catheter to enable the Company to
improve their manufacturability and to reduce manufacturing costs. The Company
also intends to continue its research and development of the New Products, which
are in various stages of development, design and prototyping. In addition, the
Company intends to devote resources to the research and development of
additional safety needle devices and products which incorporate the Company's
proprietary retraction technology for use in the healthcare industry.
The Federal Food, Drug and Cosmetic Act (the "FD&C Act") provides that,
unless exempted by regulation, medical devices may not be commercially
distributed in the United States unless they have been cleared by the United
States Food and Drug Administration ("FDA"). From June 1995 to September 30,
1997, the Company focused its efforts on the preparation of a 510(k) pre-market
notification for the Safety Catheter, Safety Phlebotomy Set and Safety Syringe.
The Company filed the 510(k) pre-market notification for the Safety Catheter and
Safety Phlebotomy Set with the FDA on December 28, 1995. On February 13, 1996,
the FDA notified the Company that it may begin marketing the Safety Catheter. On
March 15, 1996, the FDA notified the Company that it was holding the pre-market
notification (510(k)) for the Safety Phlebotomy Set for 30 days pending receipt
of the additional information requested by the Office of Device Evaluations
("ODE"). Subsequently, the Company received the ODE's March 13, 1996 written
request for additional information. The Company responded to these notifications
by requesting a ninety day extension, which was granted on April 18, 1996. The
Company voluntarily withdrew the 510(k) pre-market notification because of
modifications and improvements made to the original design of the Safety
Phlebotomy Set. The Company filed a new 510(k) pre-market notification for the
modified Safety Phlebotomy Set with the FDA on August 12, 1997. The Company had
originally planned to complete and file a 510(k) pre-market notification for the
second generation Safety Catheter and/or several New Products with the FDA
during the fourth quarter 1997;, however, due to new design enhancements, the
Company intends to file the 510(k) during the first quarter of 1998.
9
<PAGE>
Plan of Operation (Continued)
The Company believes that the Safety Syringe, Safety Phlebotomy Set, and other
New Products will be classified as a Class II device, and that such products
will not require a pre-market approval ("PMA") application but will be eligible
for marketing clearance through the 510(k) notification procedure based upon its
substantial equivalent to a previously marketed device. If any of the Company's
products do not qualify for the 510(k) procedure, the Company will be required
to submit a PMA application with the FDA which is typically a more complex
submission, usually including results of clinical studies. By statute and
regulation, the FDA may take 180 days to review a PMA application, however, such
time may be extended. There can be no assurance that a PMA application will be
reviewed within 180 days or that a PMA application will be approved.
The facility in Ventura, California ("Ventura Facility") contains a
research and development laboratory equipped with assembly and test equipment
for concept modeling and product development and a machine shop equipped with
machine tools for fabrication of new product parts for concept modeling and
assembly and test fixtures. The Company also installed a 3,120 square foot Class
100,000 clean room at the Ventura Facility, which is currently being used for
the assembly of prototypes and products. The Company had originally planned to
install in the clean room a fully automated robotic assembly system to pilot
manufacture its products. The Company, however, elected not to install the fully
automated robotic assembly system at this time because it is currently
investigating opportunities with third parties in the United States and abroad
to manufacture the Safety Syringe, the Safety Phlebotomy Set and the Safety
Catheter and certain of its other products under development either on a
contract manufacturing basis, under licensing agreements or through other forms
of joint ventures. The Company has entered into several confidentiality
agreements with other companies for the purpose of exploring such opportunities.
The Company is also investigating opportunities with third parties to market and
distribute the Company's products. The Company believes that entering into
alliances and licensing arrangements with third parties would enable the Company
to increase the market penetration of its products more quickly than the Company
could achieve on its own. The Company has not to date entered into any such
arrangements and there can be no assurance the Company will be able to enter
into any such arrangements on acceptable terms.
Pending the outcome of such discussions with third parties, the Company
decided to install a semi-automated assembly system, which cost approximately
$300,000, at the Ventura Facility to pilot manufacture its products. The
semi-automated assembly system consists of a series of manual and semi-automatic
stations and it is capable of producing up to 3,000,000 units per year. The
assembly system is capable of producing one or more of the Company's products at
a time, and it can be converted at a reasonable cost with minimal delay to
manufacture a different product at such time as the Company may decide. During
the third quarter of 1997, the Company completed the installation of the
semi-automated assembly system, for one of its products, and it now has the
capabilities to manufacture products for sale. In addition to manufacturing its
products for sale, the Company also has the capability to demonstrate to third
party manufacturers the economic feasibility of the commercial production of its
products.
The Company is currently hand assembling the Safety Syringes, Safety
Phlebotomy Sets, Safety Catheters, and certain of the New Products in quantities
necessary to conduct any testing required by the FDA, for internal engineering
purposes, and for market research purposes. Although one or more of the
Company's products will be produced on the semi-automated assembly system, the
hand assembly process will continue for individual products until the Company
has the capability of manufacturing those products on its semi-automated
assembly system, or a third party is manufacturing such products.
10
<PAGE>
Plan of Operation (Continued)
The Company does not expect to manufacture any significant quantity of its
Safety Phlebotomy Set or any other of its products itself for commercial sale
nor to produce any significant revenue from product sales in 1997; however, the
Company may earn revenues in 1997 through a licensing or contract manufacturing
arrangement or other form of joint venture with a third party, but the Company
has not to date entered into any such arrangements and there can be no assurance
that the Company will be able to enter into such arrangements on acceptable
terms.
On April 23, 1997, the European Patent Office issued a decision to grant
the Company's European Patent Application for the Safety Syringe utilizing its
proprietary needle retraction technology. The European patent will extend
coverage for the Company's Safety Syringe to twelve countries in the European
Economic Community including: Austria, Belgium, Denmark, France, Germany,
Greece, Italy, Netherlands, Spain, Sweden, Switzerland, and the United Kingdom.
The Company will continue to seek additional patent protection for its products
in related European patent applications.
As of August 12, 1997, the Company employed 26 people on a full-time basis
and one person on a part-time basis. The Company anticipates increasing the
number of employees in the areas of product development, manufacturing, sales
and marketing. The number of employees that the Company will need to hire will
vary according to the progress made in the development of the Company's pilot
manufacturing plant and the extent to which the Company undertakes the
manufacture, marketing, and distribution of its products.
Liquidity and Capital Resources
At September 30, 1997, the Company had a line of credit with one commercial
bank ("Loan Agreement") for $6,750,000 and an equipment financing facility with
a second commercial bank ("Equipment Facility") for $546,000. The Company had
additional availability against its line of credit and equipment financing
facility of approximately $2,050,000 and $267,000, respectively, at September
30, 1997. The Loan Agreement provides that advances for equipment financing will
not exceed $600,000 of the $6,750,000. Under the terms of the Loan Agreement,
all borrowings must be fully collateralized by available-for-sale securities,
cash equivalents, equipment financed, and general intangibles of the Company.
The Loan Agreement expires May 30, 1998. Under the terms of the Equipment
Facility, all borrowings must be fully collateralized by a short-term investment
in the form of a certificate of deposit and by applicable equipment financed.
In 1995, the Company issued warrants to purchase 400,000 shares of Common
Stock, of which warrants to purchase 163,000 shares have been exercised as of
November 3, 1997. As of November 3, 1997, the Company has received an aggregate
of $798,700 upon the exercise of said warrants. If the balance of those warrants
are exercised, the Company would receive approximately an additional $1,307,000,
net of registration and other costs to be paid by the Company as required under
the terms of such warrants.
On January 23, 1997, the Company completed the Placement of 1,000,000
shares of Common Stock. In connection with the Placement, the Company also sold
to the Placement Agent, for nominal consideration, warrants to purchase 100,000
shares of Common Stock. These warrants are exercisable at a price of $5.50 per
share of Common Stock for a period of four years commencing January 22, 1998. If
all of these warrants were exercised, the Company would receive approximately
$550,000.
On March 19, 1997, the Company issued warrants to purchase 100,000 shares
of Common Stock at an exercise price of $7.50 per share to a director of the
Company, who was engaged to perform certain consulting services on behalf of the
Company. These warrants are exercisable on or before March 19, 2000. If these
warrants were exercised, the Company would receive approximately $750,000.
11
<PAGE>
Liquidity and Capital Resources (Continued)
On August 6, 1997, in connection with the acquisition of two patents, the
Company issued warrants to purchase 75,000 shares of Common Stock at an exercise
price of $5.75 per share to John Kulli, M.D. These warrants are exercisable on
or before August 6, 2002. If these warrants are exercised, the Company would
receive approximately $431,000.
The Company believes that it will have sufficient funds to support its
planned operations and capital expenditures through March 31, 1998, but
thereafter, the Company believes that it will need to raise additional funds
through public or private financing to support its planned operations and
capital expenditures. In addition to those monies that would be received upon
the exercise of the warrants issued in 1995 and 1997, and discussed above, the
Company believes that it will require additional capital before it reaches
profitability and positive cash flow, if at all. No assurance can be given that
the outstanding warrants will be fully exercised or that additional financing
will be available or that, if available, it will be available on terms favorable
to the Company or its stockholders. If adequate funds are not available to
satisfy short-term or long-term capital requirements, 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. The Company's capital requirements will depend on many
factors, including but not limited, to the progress of its research and
development programs, the development of regulatory submissions and approvals,
manufacturing capability, the costs associated with protecting its patents and
other proprietary rights, the rate of which the Company is able to manufacture
and introduce its products, and the levels of promotion and advertising required
to launch and market such products.
There are no other material commitments at this time.
12
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) List of Exhibits filed pursuant to Item 601 of Regulation S-B. The
following exhibits are filed with this Report on Form 10-QSB.
Exhibit
Number Description
------ -----------
10.1 Letter Extension to Loan Agreement dated July 26, 1995 and Amendments
through November 14, 1996 (Fourth Amendment), among CoreStates Bank,
N.A. (successor by merger to Meridian Bank), MDC Holdings, The
Med-Design Corporation, and MDC Research Ltd.
27* Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1997.
13
<PAGE>
* Electronic filing only.
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: November 3, 1997
/s/ James M. Donegan
--------------------------------
James M. Donegan
Chief Executive Officer
/s/ Patrick E. Rodgers
--------------------------------
Patrick E. Rodgers
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
EXHIBIT 10.1
Corestates Bank, N.A.
FC 1-1-3-42
1345 Chestnut Street
P.O. Box 7618
Philadelphia, PA 19101-7618
215-973-7320
Fax 215-973-5387
CoreStates
Bank
John H. Van Dusen
Vice President
Metropolitan Middle Market
June 24, 1997
Mr. Patrick E. Rodgers
Executive Vice President
The Med-Design Corporation
121 South Broad Street
Suite 310
Philadelphia, PA 19107
Dear Pat:
We are pleased to inform you that CoreStates Bank, N.A. successor by merger to
Meridian Bank (hereafter referred to as "Bank") has reaffirmed the $6,750,000
non-committed secured discretionary credit facility to Med-Design Corporation,
MDC Investment Holdings, Inc. and MDC Research, Ltd. (hereafter referred to as
ABorrower@) under the existing terms and subject to the conditions set forth in
the Business Loan Agreement dated July 26, 1995 and various Amendments (four)
through November 14, 1996 except as modified below:
1. Term: The credit facility will be available until May 30, 1998 at which time
continuation of the line will be considered by the Bank on the basis of the
Borrower=s financial statements for the year ended December 31, 1997 and other
information available to Bank, or which Bank may reasonably request.
2. Borrowing Base: All advances under the line of credit will be limited to 90%
of the acceptable short term pledged securities held and maintained at
CoreStates Bank, N.A./Delaware Trust Management, Inc. in account #1681001087 up
to a maximum of $6,750,000 (debt includes the working capital loan and two
equipment loans).
All other terms, conditions, collateral, sureties, covenants and reporting
requirements remain unchanged.
<PAGE>
We appreciate the opportunity of making this commitment available to you. If the
terms and conditions outlined herein are acceptable to you, please execute the
acknowledgment on the original of this letter, returning it to the undersigned
in the envelope provided. A copy is enclosed for your records. Should you have
any questions regarding this letter, or if the Bank can be of further service,
please feel free to contact the undersigned at (215) 973-7320.
Sincerely,
/s/ John H. Van Dusen
- ---------------------------------
John H. Van Dusen
Vice President
ACKNOWLEDGMENT:
We hereby acknowledge, accept and agree to the terms and conditions as set forth
herein 30th day of June, 1997.
Borrowers:
Med-Design Corporation
MDC Research Holdings, Inc.
MDC Research, Ltd.
By: /s/ Patrick E. Rodgers
-------------------------------
Patrick E. Rodgers
Attested By: /s/ Holly Hensley
-------------------------------
Holly Hensley
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