MED-DESIGN CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the quarterly period ended September 30, 2003

( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the transition period from __ to__

Commission file number 0-25852

THE MED-DESIGN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware			23-2771475
(State or other Jurisdiction of Incorporation or Organization)			(IRS Employer Identification No.)

2810 Bunsen Avenue, Ventura, CA			93003
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s Telephone Number, Including Area Code (805) 339-0375

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes

On November 10, 2003, 16,572,390 shares of the registrant’s common stock, $.01 par value, were outstanding.

THE MED-DESIGN CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q

		Page Number
PART I – FINANCIAL INFORMATION

Item 1-	Financial Information

	- Financial Statements

	Consolidated Balance Sheets as of September 30, 2003 (unaudited) and as of December 31, 2002	3

	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2003 and 2002	4

	Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2003 and 2002	5

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2003 and 2002	6

	Notes to Consolidated Financial Statements (unaudited)	7-10

Item 2-	Management’s Discussion and Analysis of Financial Condition and Results of Operation	11-13

Item 3-	Quantitative and Qualitative Disclosure About Market Risk	13

Item 4-	Controls and Procedures	13

PART II – OTHER INFORMATION


Item 2-	Changes in Securities and Use of Proceeds	14

Item 4-	Submission of Matters to Vote of Security Holders	14

Item 6-	Exhibits and Reports on Form 8-K	14

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

THE MED-DESIGN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30, 2003 (Unaudited)			December 31, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	10,459,208		$	1,917,130
Available-for-sale securities		15,916,321			12,248,170
Trade receivable		139,095			—
Prepaid expenses and other current assets		373,033			564,177


Total current assets		26,887,657			14,729,477

Note receivable – related party		275,774			250,000

Property, plant, and equipment, net of accumulated depreciation of $1,299,190 and $1,158,603 at September 30, 2003 and December 31, 2002, respectively		843,552			345,130
Patents, net of accumulated amortization of $795,296 and $659,144 at September 30, 2003 and December 31, 2002, respectively		1,694,236			1,664,617


Total assets	$	29,701,219		$	16,989,224


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of capital lease obligations	$	2,177		$	2,574
Accounts payable		534,830			290,775
Accrued compensation and benefits		83,548			467,086
Other accrued expenses		215,148			189,447

Total current liabilities		835,703			949,882

Capital lease obligations, less current maturities		—			1,506


Total liabilities		835,703			951,388


Commitments and Contingencies

Stockholders’ equity
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares outstanding		—			—
Common stock, $.01 par value, 30,000,000 shares authorized; 16,571,590 and 12,519,798 shares issued and outstanding as of September 30, 2003 and December 31, 2002, respectively		165,716			125,198
Additional paid-in capital		70,794,044			53,083,149
Accumulated deficit		(42,052,627	)		(37,233,242	)
Accumulated other comprehensive (loss) income		(41,617	)		62,731


Total stockholders’ equity		28,865,516			16,037,836


Total liabilities and stockholders’ equity	$	29,701,219		$	16,989,224

The accompanying notes are an integral part of these financial statements.

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THE MED-DESIGN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,

		2003			2002			2003			2002


Revenue	$	140,135		$	9,089		$	221,371		$	22,803


Product costs	$	58,041		$	—		$	81,796		$	—
General and administrative		1,372,335			1,607,015			4,336,561			4,897,496
Research and development		420,294			347,560			1,185,080			1,110,591


Total operating expenses		1,850,670			1,954,575			5,603,437			6,008,087

Loss from operations		(1,710,535	)		(1,945,486	)		(5,382,066	)		(5,985,284	)
Interest expense		(159	)		(233	)		(366	)		(901	)
Investment income		238,014			71,974			563,047			160,731


Net loss		($1,472,680	)		($1,873,745	)		($4,819,385	)		($5,825,454	)



Basic and diluted loss per common share:

Net loss applicable to common shares		($0.10	)		($0.15	)		($0.36	)		($0.49	)

Weighted average common shares		15,191,002			12,448,990			13,511,005			11,978,725

Weighted average common shares – diluted		15,191,002			12,448,990			13,511,005			11,978,725

The accompanying notes are an integral part of these consolidated financial statements.

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THE MED-DESIGN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,

	2003		2002		2003		2002


Net loss	($1,472,680	)	($1,873,745	)	($4,819,385	)	($5,825,454	)

Other comprehensive loss:

Unrealized holding gains (losses) on securities	87,189		(138,623	)	(104,348	)	(732,994	)


Comprehensive loss	($1,385,491	)	($2,012,368	)	($4,923,733	)	($6,558,448	)

The accompanying notes are an integral part of these consolidated financial statements.

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THE MED-DESIGN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended September 30,
		2003			2002

Cash flows from operating activities:
Net loss		($4,819,385	)		($5,825,454	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		305,311			420,710
Gain on sale of available-for-sale securities		165,585			—
Stock-based compensation		1,233,887			1,302,350
Changes in operating assets and liabilities:
Trade receivable		(139,095	)		—
Prepaid expenses and other current assets		191,144			(620,225	)
Note receivable-related party		(25,774	)		—
Accounts payable		244,055			(28,445	)
Accrued expenses		(357,837	)		(14,849	)


Net cash used in operating activities		(3,202,109	)		(4,765,913	)


Cash flows from investing activities:
Purchases of property and equipment		(667,581	)		(256,105	)
Additions to patents		(165,771	)		(133,110	)
Investment in available-for-sale securities		(12,758,018	)		(12,325,703	)
Sale of available-for-sale securities		8,819,934			4,812,935


Net cash used in investing activities		(4,771,436	)		(7,901,983	)


Cash flows from financing activities:
Capital lease payments		(1,903	)		(10,173	)
Warrants and stock options exercised		594,407			240,124
Proceeds from private placement-net of issuance costs paid		15,923,119			14,192,440


Net cash provided by financing activities		16,515,623			14,422,391


Increase in cash		8,542,078			1,754,495
Cash and cash equivalents, beginning of period		1,917,130			397,765

Cash and cash equivalents, end of period	$	10,459,208		$	2,152,260


Noncash investing and financing activities:
Change in unrealized loss on available-for-sale securities		($ 104,348	)		($ 732,994	)
Private placement issue costs – warrants issued to placement agent	$	1,055,844		$	319,604

The accompanying notes are an integral part of these financial statements.

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THE MED-DESIGN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements include The Med-Design Corporation (hereinafter, including its subsidiaries as the context indicates, the “Company” or “Med-Design”) and its wholly-owned subsidiaries, MDC Investment Holdings, Inc. and MDC Research Ltd. All significant intercompany transactions and accounts are eliminated. The accompanying consolidated financial statements have been prepared on a basis consistent with that used as of and for the year ended December 31, 2002 and, in the opinion of management, reflect all adjustments (principally consisting of normal recurring accruals) considered necessary to present fairly the financial position of the Company as of September 30, 2003, the results of the Company’s operations for the three and nine month periods ended September 30, 2003 and cash flows for the nine month period ended September 30, 2003. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The financial statements included herein have been prepared in accordance with generally accepted accounting principles accepted in the United States for interim financial information and the applicable requirements of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles accepted in the United States for complete financial statements. The consolidated balance sheet at December 31, 2002 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles accepted in the United States. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements, which were included as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Product Cost

Product Cost includes expenditures for material, packaging, sterilization and freight. We also allocate certain overhead costs, including labor, use of facilities and depreciation, to Product Cost.

Stock-Based Compensation

The Company applies the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and the Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (FIN 44) in accounting for our stock plans. The Company has adopted the disclosure-only provisions of Statements of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.”

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The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002


Net loss – as reported	($1,472,680	)	($1,873,745	)	($4,819,385	)	($5,825,454	)
Add: stock-based employee compensation expense included in reported net loss	323,518		441,094		1,233,887		1,302,350
Deduct: total stock-based employee compensation expense determined under fair-value based method for all awards	(1,255,538	)	(1,105,099	)	(3,233,703	)	(3,297,022	)


Net loss – pro forma	($2,404,700	)	($2,537,750	)	($6,819,201	)	($7,820,126	)


Net loss per share:

Basic & diluted loss per share – as reported	($0.10	)	($0.15	)	($0.36	)	($0.49	)
Basic & diluted loss per share – pro forma	($0.16	)	($0.20	)	($0.50	)	($0.65	)

In August 2000, March and November 2002 and September 2003, the Company entered into several equity arrangements with officers and consultants of the Company involving grants of stock options and warrants to purchase common stock. In connection with these transactions, the Company recorded compensation expense in the amount of $323,518 and $441,094 for the three months ended September 30, 2003 and 2002, respectively, and $1,233,887 and $1,302,350 for the nine months ended September 30, 2003 and 2002, respectively. The compensation expense reflects vesting of the grants.

2. Stockholders Equity

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