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, 1998
( ) 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 77-0404919
(State of Incorporation) (IRS Employer ID Number)
2810 Bunsen Avenue, Ventura, CA 93003
(805)339-0375
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 of Common Stock, $.01 par value,
outstanding as of November 6, 1998.
<PAGE>
THE MED-DESIGN CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
PART 1 - FINANCIAL INFORMATION
<S> <C>
Item 1- Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and as of
December 31, 1997 ................................................................................3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 and Cumulative During
Development Stage (unaudited).....................................................................4
Consolidated Statements of Comprehensive Loss for the three and
nine months ended September 30, 1998 and 1997 and Cumulative During
Development Stage (unaudited).....................................................................5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998
and 1997 and Cumulative During Development Stage (unaudited)......................................6
Notes to Consolidated Financial Statements (unaudited) .............................................7-8
Item 2- Management's Discussion and Analysis of Plan of Operation .........................................9-13
PART II - OTHER INFORMATION
Item 1- Legal Proceedings ...................................................................................14
Item 2- Changes in Securities ...............................................................................14
Item 3- Defaults upon Senior Securities .....................................................................14
Item 4- Submission of Matters to a Vote of Security Holders .................................................14
Item 5- Other Information ...................................................................................14
Item 6- Exhibits and Reports on Form 8-K ....................................................................14
</TABLE>
2
<PAGE>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $138,437 $114,079
Short-term investment -- 546,591
Available-for-sale securities 643,430 5,617,284
Prepaid expenses and other current assets 219,556 152,547
----------- -----------
Total current assets 1,001,423 6,430,501
Property, plant, and equipment, net of accumulated
depreciation and amortization of $565,364 and $406,781
at September 30, 1998 and December 31, 1997, respectively 919,016 1,181,481
Patents, net of accumulated amortization of $71,054 and $44,164
at September 30, 1998 and December 31, 1997, respectively 776,810 681,048
Debt issue costs, net of amortization of $24,627 at September 30, 1998 537,207
----------- -----------
$3,234,456 $8,293,030
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $250,000 $4,630,500
Accounts payable 95,269 205,625
Accrued expenses 188,838 213,042
Current maturities of long-term debt and capital lease obligations 10,492 199,821
----------- -----------
Total current liabilities 544,599 5,248,988
----------- -----------
Long-term debt and capital lease obligations, less current maturities 1,583,166 154,674
----------- -----------
Total liabilities 2,127,765 5,403,662
----------- -----------
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 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 79,516 79,516
Additional paid-in capital 22,405,934 21,764,194
Deficit accumulated during the development stage (21,379,704) (18,967,241)
Accumulated other comprehensive income 945 12,899
----------- -----------
Total stockholders' equity 1,106,691 2,889,368
----------- -----------
$3,234,456 $8,293,030
=========== ===========
</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, ------------------------------------------------------------------
1998 1998 1997 1998 1997
----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating expense:
Marketing $ 648,930 $ 6,319 $ 41,216 $ 78,361 $ 153,553
General and administrative 9,624,718 478,822 555,862 1,558,898 1,989,216
Research and development 4,594,650 254,154 388,641 825,740 1,186,461
Purchased research and
development 5,932,770 -- -- -- --
------------ --------- ---------- ---------- -----------
Total operating expenses 20,801,068 739,295 985,719 2,462,999 3,329,230
------------ --------- ---------- ---------- -----------
Loss from operations (20,801,068) (739,295) (985,719) (2,462,999) (3,329,230)
Interest expense (1,826,488) (72,149) (107,255) (196,383) (322,574)
Investment income 1,247,852 35,169 91,301 246,919 318,457
------------ --------- ---------- ---------- -----------
Net loss ($21,379,704) ($776,275) ($1,001,673) ($2,412,463) ($3,333,347)
============ ========= ========== ========== ===========
Basic and diluted earnings
per share ($0.10) ($0.13) ($0.30) ($0.42)
========= ========== ========== ===========
Weighted average common
shares outstanding 7,951,570 7,951,570 7,951,570 7,849,347
========== =========== ========== ==========
</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)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From Inception, Three Months Ended Nine Months Ended
December 13, 1993 September 30, 1998 September 30, 1998
to September 30, ---------------------------- ----------------------------
1998 1998 1997 1998 1997
---------------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss ($21,379,704) ($776,275) ($1,001,673) ($2,412,463) ($3,333,347)
Other comprehensive loss:
Unrealized holding gains (losses)
on securities 945 (401) (2,046) (11,954) (12,249)
------------ --------- ----------- ------------ ------------
Comprehensive loss ($21,378,759) ($776,676) ($1,003,719) ($2,424,417) ($3,345,596)
============ ========= =========== =========== ===========
</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)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
From Inception, Nine Months Ended September 30,
December 13, 1993 ------------------------------------
to September 30, 1998 1998 1997
---------------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($21,379,704) ($2,412,463) ($3,333,347)
Adjustments to reconcile net loss to operating
cash flows (net of acquisition):
Depreciation and amortization 657,910 225,561 174,497
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 987,501 145,501 100,000
Repricing of stock options 62,080 -- --
Amortization of original issued discount 650,000 -- --
Amortization of debt issue costs 70,049 35,032 --
Loss on sale of available-for-sale securities (32,055) -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (217,048) (67,009) (156,522)
Accounts payable (12,452) (110,356) (64,674)
Accrued expenses (101,655) (24,204) 68,997
----------- ---------- ----------
Net cash used in operating activities (12,933,819) (2,207,938) (3,211,049)
----------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,494,732) -- (110,604)
Sale of property and equipment 63,795 63,795
Additions to patents (390,628) (122,653) (149,304)
Payments for purchase of option to acquire
Med-Design Incorporated (125,000) -- --
Investments in available-for-sale securities (7,081,934) (1,474,587) (836,806)
Sale of available-for-sale securities 6,436,487 6,436,487 --
Notes receivable funded (92,500) -- --
Purchase of short-term investment (546,591) -- (11,343)
Sale of short-term investment 546,591 546,591 --
----------- ---------- ---------
Net cash (used in) provided by investing activities (2,684,512) 5,449,633 (1,108,057)
----------- ---------- ---------
Cash flows from financing activities:
Capital lease payments (41,645) (14,291) (8,582)
Proceeds from long-term borrowings 706,095 -- 14,410
Repayment of long-term borrowings (706,095) (296,546) (182,647)
Proceeds from issuance of common stock, prior to
initial public offering 97,250 -- --
Proceeds from exercise of options 35,000 -- --
Proceeds from issuance of common stock in connection
with exercise of warrants 798,700 -- 254,800
Proceeds from short-term borrowing 6,880,500 250,000 184,000
Repayment of short-term borrowing (6,630,500) (4,630,500) (2,000,000)
Other -- -- 14,136
Proceeds of private placement, debenture bonds 1,550,000 1,550,000 --
Debt issue costs (76,000) (76,000) --
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 (used in) provided by financing activities 15,756,768 (3,217,337) 2,893,614
----------- ---------- ---------
Increase (decrease) in cash 138,437 24,358 (1,425,492)
Cash and cash equivalents, beginning of period -- 114,079 1,648,639
---------- ---------- ---------
Cash and cash equivalents, end of period $ 138,437 $ 138,437 $ 223,147
========== ========== =========
Cash paid during the period:
Interest $1,237,204 $ 184,125 $ 335,486
========== ========== =========
Noncash financing activities:
Issuance of common stock for rights under option
to acquire Med-Design, Inc. $ 100,000 -- --
---------- ---------- ---------
Issuance of warrants in partial payment of patents $ 300,833 -- --
---------- ---------- ---------
Issuance of common stock in connection with
short-term borrowing $ 650,000 -- --
---------- ---------- ---------
Debt Issue Costs $ 565,200 $ 565,200 --
---------- ---------- ---------
Capital lease obligation incurred $ 85,303 -- --
---------- ---------- ---------
Change in unrealized gain on available-for-sale securities $ 945 $ (11,954) $ (12,249)
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
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, 1997; 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.
("MDC Holdings") 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 Item 3-10B of Regulation SB. 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,
1997, which were included as part of the Company's Annual Report on Form 10-KSB.
Operating results for the three month period and nine month period ending
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
2. Weighted Average Shares of Common Stock Outstanding
The calculations of weighted average shares of common stock excludes
outstanding options, warrants and convertible debentures, since these securities
have an anti-dilutive effect on per share data.
3. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" effective January 1, 1998. The new
rules establish standards for the reporting of comprehensive income and its
components in the financial statements. Comprehensive income consists of net
income and other gains and losses affecting shareholders' equity that, under
generally accepted accounting principles, are excluded from net income. Such
items consist primarily of unrealized gains and losses on marketable equity
investments for the Company.
4. Debt
The Company issued convertible debentures on June 29, 1998 and July 22,
1998 in the amount of $1,000,000 and $550,000 respectively. The debentures bear
interest at 4% payable quarterly in cash or stock, mature in five years, are
convertible into 1,240,000 shares of common stock and are collateralized by a
first lien on all patents pending and issued.
The Company obtained a loan from a private investor in the amount of
$250,000 on May 29, 1998. The loan is callable at the option of the holder under
certain conditions, bears interest at prime, matures in one year, and includes
an agreement to issue the holder 33,000 shares of common stock.
7
<PAGE>
MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Debt Issue Costs
Debt issue costs consist of fees and other costs incurred in obtaining
debt and are being amortized on a straight line basis over the life of the debt.
6. Basic and Diluted Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- ----------------------------------
1998 1997 1998 1997
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Loss ($776,275) ($1,001,673) ($2,412,463) ($3,333,347)
========= =========== =========== ===========
Weighted average common shares
outstanding used to compute basic and
diluted net loss per common share 7,951,570 7,951,570 7,951,570 7,849,347
========= =========== =========== ===========
Basic and diluted net loss per share ($0.10) ($0.13) ($0.30) ($0.42)
========= =========== =========== ===========
</TABLE>
Options and warrants to purchase 1,364,000 shares of common stock as of
September 30, 1998 and 761,000 as of September 30, 1997, were not included in
computing diluted earnings per share as the effect was antidilutive.
Convertible debentures with an option to purchase 1,240,000 shares of common
stock and a promissory note issued in connection with a loan with a commitment
to issue 33,000 shares of common stock as of September 30, 1998, were not
included in computing diluted earning per share as the effect was antidilutive.
8
<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 and Analysis or Plan of Operation - Business
Overview," "Management's Discussion and Analysis or Plan of Operation - Results
of Operations," "Management's Discussion and Analysis or Plan of Operation -
Plan of Operation," "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources," "Management's Discussion and Analysis or Plan
of Operation - Year 2000 Issues." 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 various
stages of development. These new product developments include the Safety
Pre-Filled Vial Injector, Safety PICC Introducer Catheter Insertion Device,
Safety Guidewire Introducer, Safety Winged Set Blood Collection Needle, and
Safety Arterial Blood Gas Syringe. 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
alliances for medical and dental applications.
9
<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. (MDI), 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 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
$75,000 cash and issued warrants to purchase 75,000 shares of its Common Stock
at $5.75. These warrants are exercisable on or before August 6, 2002.
On February 23, 1998, the company signed an agreement with Graphic
Controls Corporation for the development and licensing of its proprietary Safety
Intravenous Catheter Insertion Device. The signing of this agreement and the
completion of a series of mutually agreed upon milestones would result in
payment to Med- Design totaling as much as $3.72 million with continuous
royalties for the life of the patents. Med-Design would receive $1.82 million of
the $3.72 million during the completion of milestones associated with the
development phase and $1.9 million in milestone payments associated with the
granting of an exclusive license for North America. The Company has not received
any payments under this agreement to date.
10
<PAGE>
Business Overview (continued)
On May 29, 1998, the Company obtained a loan from a private investor in
the amount of $250,000. The loan is due in one year with interest at prime rate
payable quarterly. The loan is callable upon change of control of the Company,
the signing of any significant licensing or joint venture agreement, or any
refinancing of the Company in excess of $500,000. As a condition of the loan the
Company also agreed to issue the lender 33,000 shares of common stock which is
earned pro rata over the period of one year as long as the full amount of the
loan remains outstanding.
From June 29, 1998 to July 22, 1998 the Company completed a $1,550,000
private placement of convertible debentures secured by the Company's
intellectual properties. The net proceeds to the Company was $1,474,000.
Year 2000 Issues
Many current installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. There are some companies' software and computer systems that may need to
be upgraded or replaced in order to correctly process dates beginning in 2000
and to comply with the "Year 2000" requirements. The Company has reviewed its
internal programs and has determined that there are no significant Year 2000
issues within the Company's systems or services. The Company, however utilizes
third party equipment and software that may not be Year 2000 compliant although
the Company believes that the third-party systems that are material to its
business are Year 2000 compliant based on representation made by these
suppliers. Failure of such third-party equipment or software to process properly
dates for the Year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, results of operation and financial
condition.
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 designs and development of the equipment necessary to assemble
the safety needle device.
Research and development expenses amounted to $825,740 and $1,186,461
for the nine month period ending September 30, 1998 and 1997, respectively.
Plan of Operation
The Company plans to focus primarily on the completion of all
milestones related to the agreement with Graphic Controls Corporation. This
includes the completion of engineering development and the production of a
limited number of Safety Catheters for proof of functionality, validation
testing, market acceptance and manufacturability. The engineering development
and proof of functionality, validation testing and manufacturability of the
Safety Catheter will also contribute to the development of the Safety PICC
Introducer Catheter Insertion Device, and to some degree to other of the
Company's safety products, because of the commonality of the retraction
technology features. The Company plans to complete all issues pertaining to the
filing and prosecution of the patents on the Safety Catheter, as well as refile
a 510(k) pre-market notification with the FDA.
The Company also plans to continue discussions and negotiations with
third parties regarding the licensing or joint venture of its other products.
The Company plans to support these discussions and negotiations with available
funds, including the building of necessary prototypes.
11
<PAGE>
Plan of Operation (continued)
The 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 a significant number of confidentiality agreements with other
companies for the purpose of exploring such opportunities. The Company is also
investigating opportunities with third parties to manufacture, market and
distribute the Company's products. The Company anticipates 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 entered into such arrangements with
Graphic Controls Corporation as has been previously mentioned.
As a result of discussions which it has had with third parties, the
Company has installed a semi-automated assembly system at the Ventura Facility
to pilot manufacture its products. The objective of the Company in installing
the assembly system is to demonstrate to potential third party manufacturers the
economic feasibility of the commercial production of its products. The
semi-automated assembly system, which consists of a series of manual and
semi-automatic stations, is capable of producing up to 3,000,000 units per year.
The assembly system will produce one or more of the Company's products at a
time, and has the capability of being converted at a reasonable cost with
minimal delay to manufacture a different product at such time as the Company may
decide. The Company completed the system during the third quarter of 1997.
The Company anticipates earning revenues in 1998 from either its
licensing and development agreement with Graphic Controls Corporation in
accordance with meeting agreed upon milestones, or an agreement with other
strategic partners to license other products.
As of November 6, 1998, the Company employed 17 people on a full-time
basis and one person on a part-time basis. The Company does not anticipate
increasing the number of employees in the areas of product development,
manufacturing, sales and marketing. The Company will however reassess its
personnel requirements as business activity dictates.
Liquidity and Capital Resources
On May 14, 1998, the Company renewed its ("Loan Agreement") with its
principal lending institution for $6,750,000, including an Equipment Facility.
In August 1998 the lending institution changed its policy and initiated a fee
for the unused amount of a loan facility. The Company appropriately reduced its
facility significantly to $3,000,000. The Company had no obligations under its
line of credit and equipment financing facility at September 30, 1998. The Loan
Agreement provides that advances for equipment financing will not exceed
$600,000 of the $3,000,000. 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, 1999.
On May 29, 1998, the Company obtained a loan from a private investor in
the amount of $250,000. The loan is due in one year with interest at prime rate
payable quarterly. The loan is callable upon change of control of the Company,
the signing of any significant licensing or joint venture agreement, or any
refinancing of the Company in excess of $500,000. As a condition of the loan the
Company also agreed to issue the lender 33,000 shares of common stock which is
earned pro rata over the period of one year as long as the full amount of the
loan remains outstanding.
12
<PAGE>
Liquidity and Capital Resources (continued)
From June 29, 1998 to July 22, 1998 the Company completed a $1,550,000
private placement of convertible debentures secured by the Company's
intellectual properties. The net proceeds to the Company was $1,474,000.
Absent either satisfaction of the Graphic Control milestones, a new
strategic alliance, or completion of a new funding initiative, the Company will
not have sufficient funds to support its planned operations and capital
expenditures. No assurance can be given that a new strategic alliance will be
successfully concluded, or the Graphic Controls milestones will be met on a
timely basis, or that additional financing will be available or that, if
available, it will be available on terms favorable to the Company or its
shareholders.
In the event none of the foregoing events are achieved by the first
quarter of fiscal year 1999, the Company will be required to reduce
substantially, or eliminate, certain areas of its product development
activities, limit its operations significantly, or otherwise modify it 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, pilot
manufacturing capability, the costs associated with protecting its patents and
other proprietary rights.
There are no other material commitments at this time.
13
<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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27* Financial Data Schedule.
28 Promissory Note dated May 15, 1998 between the Company and Pasquale Vallone.
29 Placement Agent Agreement dated April 30, 1998 between the Company and Pennsylvania
Merchant Group.
30 Form of Subscription Agreement dated June 12, 1998 between the Company and each of the
purchasers of the $1,550,000 in convertible debentures.
(b) No reports on Form 8-K have been filed during the quarter ended September 30, 1998.
</TABLE>
- ------------
* Electronic filing only.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned, thereunto duly authorized.
The Med-Design Corporation
Date: November 6, 1998
/s/ James M. Donegan
------------------------------
James M. Donegan
Chief Executive Officer
/s/ Lawrence D. Ellis
-------------------------------
Lawrence D. Ellis
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 138,437
<SECURITIES> 643,430
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,001,432
<PP&E> 1,484,380
<DEPRECIATION> 565,364
<TOTAL-ASSETS> 3,234,456
<CURRENT-LIABILITIES> 544,599
<BONDS> 1,550,000
0
0
<COMMON> 79,516
<OTHER-SE> 954,541
<TOTAL-LIABILITY-AND-EQUITY> 3,234,456
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,462,999
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (196,383)
<INCOME-PRETAX> (2,412,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,412,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,412,463)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
