================================================================================
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 June 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 August 13, 1998.
THE MED-DESIGN CORPORATION
================================================================================
<PAGE>
FORM 10-QSB
<TABLE>
<CAPTION>
INDEX
Page Number
PART 1 - FINANCIAL INFORMATION
<S> <C>
Item 1- Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and as of
December 31, 1997 ...........................................................................3
Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1997 and Cumulative During Development Stage (unaudited)...................4
Consolidated Statements of Comprehensive Loss for the three and six months ended
June 30, 1998 and 1997 and Cumulative During Development Stage (unaudited)...................5
Consolidated Statements of Cash Flows for the six months ended June 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>
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
(a development stage company)
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 62,202 $ 114,079
Short-term investment -- 546,591
Available-for-sale securities 1,633,817 5,617,284
Prepaid expenses and other current assets 264,278 152,547
------------ ------------
Total current assets 1,960,297 6,430,501
Property, plant, and equipment, net of accumulated
depreciation and amortization of $506,240 and $406,781
at June 30, 1998 and December 31, 1997, respectively 978,140 1,181,481
Patents, net of accumulated amortization of $61,569 and $44,164
at June 30, 1998 and December 31, 1997, respectively 771,706 681,048
Debt issue costs, net of accumulated amortization of $6,704 350,000 --
------------ ------------
$ 4,060,143 $ 8,293,030
============ ============
LIABILITIES AND STOCKHOLDERS= EQUITY
Current liabilities:
Short-term borrowings $ 879,885 $ 4,630,500
Accounts payable 201,571 205,625
Accrued expenses 286,354 213,042
Current maturities of long-term debt and capital lease obligations 10,492 199,821
------------ ------------
Total current liabilities 1,378,302 5,248,988
------------ ------------
Long-term debt and capital lease obligations, less current maturities 1,036,510 154,674
------------ ------------
Total liabilities 2,414,812 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 June 30, 1998 and December 31, 1997, respectively 79,516 79,516
Additional paid-in capital 22,167,898 21,764,194
Deficit accumulated during the development stage (20,603,429) (18,967,241)
Accumulated other comprehensive income 1,346 12,899
------------ ------------
Total stockholders' equity 1,645,331 2,889,368
------------ ------------
$ 4,060,143 $ 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 Three Months Ended Six Months Ended
From Inception, June 30, June 30,
December 13, ---------------------------------------------------------
1993
to June 30, 1998 1998 1997 1998 1997
---------------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating expense:
Marketing $ 642,611 $ 39,265 $ 61,845 $ 72,042 $ 112,337
General and administrative 9,145,896 558,034 648,195 1,080,076 1,433,354
Research and development 4,340,496 286,934 432,128 571,586 797,820
Purchased research and
development
5,932,770 -- -- -- --
------------ --------- ------------ ------------ ------------
Total operating expenses 20,061,773 884,233 1,142,168 1,723,704 2,343,511
------------ --------- ------------ ------------ ------------
Loss from operations (20,061,773) (884,233) (1,142,168) (1,723,704) (2,343,511)
Interest expense (1,754,339) (60,949) (94,056) (124,234) (215,319)
Investment income 1,212,683 47,760 85,746 211,750 227,156
------------ --------- ------------ ------------ ------------
Net loss ($20,603,429) ($897,422) ($ 1,150,478) ($ 1,636,188) ($ 2,331,674)
============ ========= ============ ============ ============
Basic and diluted earnings
per share ($ 0.11) ($ 0.14) ($ 0.21) ($ 0.30)
========= ============ ============ ============
Weighted average common
shares outstanding 7,951,570 7,936,636 7,951,570 7,797,388
========= ============ ============ ============
</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 Six Months Ended
December 13, June 30 June 30
1993 to June ---------------------------- ----------------------------
30, 1998 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss ($20,603,429) ($ 897,422) ($ 1,150,478) ($ 1,636,188) ($ 2,331,674)
Other comprehensive loss:
Unrealized holding gains
(losses) on securities 1,346 (1,766) 18,376 (11,553) (10,203)
------------ ------------ ------------ ------------ ------------
Comprehensive loss ($20,602,083) ($ 899,188) ($ 1,132,102) ($ 1,647,741) ($ 2,341,877)
============ ============ ============ ============ ============
</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, Six Months Ended June 30,
December 13, --------------------------------
1993
to June 30, 1998 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net Loss ($20,603,429) ($1,636,188) ($2,331,674)
Adjustments to reconcile net loss to operating
cash flows (net of acquisition):
Depreciation and amortization 589,300 156,951 116,098
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 939,000 97,000 100,000
Repricing of stock options 62,080 -- --
Amortization of original issued discount 650,000 -- --
Amortization of debt issue costs 6,704 6,704 --
Loss on sale of available-for-sale securities 2,962 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (261,770) (111,731) (182,867)
Accounts payable 93,850 (4,054) 129,583
Accrued expenses (4,139) 73,312 (67,681)
----------- ------------ -------------
Net cash used in operating activities (12,143,887) (1,418,006) (2,236,541)
----------- ------------ -------------
Cash flows from investing activities
Purchased of property and equipment (1,494,732) -- (92,264)
Sale of property and equipment 63,795 63,795
Additions to patents (376,038) (108,063) (41,040)
Payments for purchase of option to acquire
Med-Design Incorporated (125,000) -- --
Investments in available-for-sale securities (6,557,347) (950,000) (2,069,768)
Sale of available-for-sale securities 4,921,914 4,921,914 --
Notes receivable funded (92,500) -- --
Purchase of short-term investment (546,591) -- (12,630)
Sale of short-term investment 546,591 546,591 --
----------- ------------ -------------
Net cash (used in) provided by investing activities (3,659,908) 4,474,237 (2,215,702)
----------- ------------ -------------
Cash flows from financing activities:
Capital lease payments (38,247) (10,893) (5,644)
Proceeds from long-term borrowings 706,095 -- --
Repayment of long-term borrowings (706,149) (296,600) (123,788)
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 (6,000,615) (4,000,615) (2,000,000)
Debt issue costs (50,000) (50,000)
Other -- -- 14,136
Proceeds of private placement, debenture bonds 1,000,000 1,000,000 --
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 15,865,997 (3,108,108) 2,941,001
----------- ------------ -------------
Increase(decrease) in cash 62,202 (51,877) (1,511,242)
Cash and cash equivalents, beginning of period -- 114,079 1,648,639
----------- ------------ -------------
Cash and cash equivalents, end of period $62,202 62,202 $137,397
----------- ------------ -------------
----------- ------------ -------------
Cash paid during the period:
Interest $1,037,027 $115,342 $235,372
----------- ------------ -------------
----------- ------------ -------------
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 -- --
----------- ------------ -------------
Capital lease obligation incurred $85,303 -- --
----------- ------------ -------------
Change in unrealized gain on available-
for-sale securities ($11,553) ($11,553) ($10,203)
----------- ------------ -------------
The accompanying notes are an integral part of these financial statements
</TABLE>
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 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,
1997, which were included as part of the Company's Annual Report on Form 10-KSB.
Operating results for the three month period and six month period ending June
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 of 4% payable quarterly in cash or stock, mature in five years, are
convertible into 1,240,000 shares of common stock and are secured 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 Six months ended
June 30, June 30,
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Loss (897,422) (1,150,478) (1,636,188) (2,331,674)
========= =========== =========== ===========
Weighted average common shares
outstanding used to compute basic and
diluted net loss per common share 7,951,570 7,936,636 7,951,570 7,797,388
========= =========== =========== ===========
Basic and diluted net loss per share (0.11) (0.14) (0.21) (0.30)
========= =========== =========== ===========
</TABLE>
Options and warrants to purchase 1,204,000 shares of common stock as of June 30,
1998 and 761,000 as of June 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 June 30, 1998, were not included in
computing diluted earning per share as the effect was dilutive.
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." 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.
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
9
<PAGE>
Business Overview (continued)
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.
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
10
<PAGE>
Business Overview (continued)
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.
On June 29, 1998, the Company completed a private placement of $1,000,000
of a previously Board approved $1,500,000 offering of Convertible Debentures.
Net proceeds to the Company was $950,000. The Debentures are convertible into
800,000 shares common stock, bear interest of 4% per annum, and mature in five
years.
On July 22, 1998, the Company completed a private placement of $550,000
which completed the Board approved offering with an additional $50,000. Net
proceeds to the Company were $524,000. The Debentures have the same terms as
previously stated and are convertible into 440,000 shares of common stock.
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 $571,586 and $797,820 for the
six month period ending June 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.
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
11
<PAGE>
Plan of Operation (continued)
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 its licensing and
development agreement with Graphic Controls Corporation in accordance with
meeting agreed upon milestones.
As of August 13, 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
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
August 13, 1998. In 1997 and 1998, the Company issued warrants to purchase
375,000 shares and 150,000 shares, respectively, of Common Stock. As of August
13, 1998, the Company has received an aggregate of $798,700 upon the exercise of
said warrants. If the remainder of the warrants were exercised, the Company
would receive approximately an additional $3,024,650, net of registration and
other costs to be paid by the Company as required under the terms of such
warrants.
On May 14, 1998, the Company renewed its ("Loan Agreement") with its
principal lending institution for $6,750,000, including an Equipment Facility.
The Company had additional availability against its line of credit and equipment
financing facility of approximately $6,120,115 at June 30, 1998. 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, 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.
On June 29, 1998, the Company completed a private placement of $1,000,000
of a previously Board approved $1,500,000 offering of Convertible Debentures.
Net proceeds to the Company was $950,000. The Debentures are convertible into
800,000 shares common stock, bear interest of 4% per annum, and mature in five
years.
On July 22, 1998, the Company completed a private placement of $550,000
which completed the Board approved offering with a additional $50,000. Net
proceeds to the Company was $524,000. The Debentures have the same terms as
previously stated and are convertible into 440,000 shares of common stock.
The Company believes that if the milestones associated with the Graphic
Controls' agreement are met on a timely basis and the management plan of action
of cost containment measures with focus on strategic alliances and licensing
arrangements is achieved, it will have sufficient funds to support its planned
operations and capital
12
<PAGE>
Liquidity and Capital Resources (continued)
expenditures through June 30, 1999. The Company thereafter; however, believes
that it will need to raise additional funds through public or private financing
to support its planned operations and capital expenditures. 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 Graphic
Controls= milestones will be met timely, or that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company or its shareholders. 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, 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 June 30, 1998.
* Electronic filing only.
</TABLE>
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 by the
undersigned, thereunto duly authorized.
The Med-Design Corporation
Date: August 13, 1998
/s/ James M. Donegan
--------------------
James M. Donegan
Chief Executive Officer
/s/ Lawrence D. Ellis
---------------------
Lawrence D. Ellis
(Acting Chief Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 62,202
<SECURITIES> 1,633,817
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,960,297
<PP&E> 2,317,655
<DEPRECIATION> 567,809
<TOTAL-ASSETS> 4,060,143
<CURRENT-LIABILITIES> 1,378,302
<BONDS> 1,036,510
0
0
<COMMON> 79,516
<OTHER-SE> 1,645,331
<TOTAL-LIABILITY-AND-EQUITY> 4,060,143
<SALES> 0
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<OTHER-EXPENSES> 1,561,954
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<INCOME-PRETAX> (1,636,188)
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