U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
| SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2004
 |
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 No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No
On August 2, 2004, 16,749,486 shares of the registrant’s common stock, $.01 par value, were outstanding.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
2
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, 2004 (unaudited) |
December 31, 2003 |
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| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 4,129,124 | $ | 5,198,837 | ||
| Available-for-sale securities | 12,584,621 | 19,830,912 | ||||
| Trade receivables | 284,631 | 655,056 | ||||
| Inventory | 294,487 | 39,243 | ||||
| Prepaid expenses and other current assets | 476,163 | 265,761 | ||||
| Total current assets | 17,769,026 | 25,989,809 | ||||
| Property, plant, and equipment, net of accumulated depreciation of $1,494,371 and $1,366,305 at June 30, 2004 and December 31, 2003, respectively |
748,543 | 782,872 | ||||
| Patents, net of accumulated amortization of $943,028 and $843,134 at June 30, 2004 and December 31, 2003, respectively |
1,831,256 | 1,773,748 | ||||
| Acquired license rights, net of accumulated amortization of $99,208 at June 30, 2004 |
6,349,294 | — | ||||
| Goodwill | 240,959 | — | ||||
| Total assets | $ | 26,939,078 | $ | 28,546,429 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current liabilities: | ||||||
| Current maturities of long-term debt and capital lease obligations | $ | 250,102 | $ | 1,506 | ||
| Accounts payable | 608,878 | 451,110 | ||||
| Accrued compensation and benefits | 124,716 | 162,740 | ||||
| Accrued professional fees | 169,988 | 138,950 | ||||
| Other accrued expenses | 65,863 | 27,466 | ||||
| Total current liabilities | 1,219,547 | 781,772 | ||||
| Long-term payable, less current maturities | 439,812 | — | ||||
| Total liabilities | 1,659,359 | 781,772 | ||||
| Commitments and Contingencies (See Footnote 4) | ||||||
| Stockholders’ equity: | ||||||
| Preferred stock, $.01 par value, 5,000,000 shares authorized; No shares outstanding at June 30, 2004 and December 31, 2003 |
— | — | ||||
| Common stock, $.01 par value, 30,000,000 shares authorized; 16,749,486 and 16,572,390 shares issued and outstanding as of June 30, 2004 and December 31, 2003, respectively |
167,495 | 165,724 | ||||
| Additional paid-in capital | 71,834,548 | 71,033,777 | ||||
| Accumulated deficit | (46,159,831 | ) | (43,279,731 | ) | ||
| Accumulated other comprehensive loss | (562,493 | ) | (155,113 | ) | ||
| Total stockholders’ equity | 25,279,719 | 27,764,657 | ||||
| Total liabilities and stockholders’ equity | $ | 26,939,078 | $ | 28,546,429 | ||
The accompanying notes are an integral part of these financial statements.
3
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2004 | 2003 | 2004 | 2003 | ||||||||||
| Revenue | $ | 369,330 | $ | 42,145 | $ | 458,841 | $ | 81,236 | |||||
| Costs and expenses: | |||||||||||||
| Product | 316,791 | 23,755 | 319,521 | 23,755 | |||||||||
| General and administrative | 1,304,600 | 1,430,458 | 2,656,056 | 2,964,225 | |||||||||
| Research and development | 301,357 | 350,428 | 660,258 | 764,787 | |||||||||
| Total operating expenses | 1,922,748 | 1,804,641 | 3,635,835 | 3,752,767 | |||||||||
| Loss from operations | (1,553,418 | ) | (1,762,496 | ) | (3,176,994 | ) | (3,671,531 | ) | |||||
| Interest expense | (9,000 | ) | (94 | ) | (9,000 | ) | (207 | ) | |||||
| Investment income | 118,254 | 172,154 | 305,894 | 325,033 | |||||||||
| Net loss | $ | (1,444,164 | ) | $ | (1,590,436 | ) | $ | (2,880,100 | ) | $ | (3,346,705 | ) | |
| Basic and diluted loss per common share: | |||||||||||||
| Net loss | $(0.09 | ) | $(0.13 | ) | $(0.17 | ) | $(0.26 | ) | |||||
| Basic and diluted weighted average common shares outstanding | 16,748,093 | 12,697,718 | 16,675,980 | 12,657,084 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2004 | 2003 | 2004 | 2003 | ||||||||||
| Net loss | $ | (1,444,164 | ) | $ | (1,590,436 | ) | $ | (2,880,100 | ) | $ | (3,346,705 | ) | |
| Other comprehensive loss: | |||||||||||||
| Unrealized gains (losses) on securities |
(534,092 | ) | 231,629 | (407,380 | ) | (191,537 | ) | ||||||
| Comprehensive loss | $ | (1,978,256 | ) | $ | (1,358,807 | ) | $ | (3,287,480 | ) | $ | (3,538,242 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
5
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, |
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| 2004 | 2003 | |||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | (2,880,100 | ) | $ | (3,346,705 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||
| Depreciation and amortization | 327,168 | 191,104 | ||||
| Loss (gain) on sale of available-for-sale securities | 50,410 | (25,954 | ) | |||
| Stock-based compensation | 361,762 | 910,369 | ||||
| Changes in operating assets and liabilities net of effect from acquired business: |
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| Trade receivables | 370,425 | (41,690 | ) | |||
| Prepaid expenses and other current assets | (210,402 | ) | (262,601 | ) | ||
| Inventory | (165,244 | ) | — | |||
| Note receivable-related party | — | (19,836 | ) | |||
| Accounts payable | 157,768 | (148,965 | ) | |||
| Accrued compensation, benefits, professional fees and other accrued expenses |
67,714 | (383,556 | ) | |||
| Net cash used in operating activities | $ | (1,920,499 | ) | $ | (3,127,834 | ) |
| Cash flows from investing activities: | ||||||
| Purchases of property, plant and equipment | (32,238 | ) | (45,073 | ) | ||
| Additions to patents | (157,402 | ) | (82,067 | ) | ||
| Investment in available-for-sale securities | (941,462 | ) | (4,476,900 | ) | ||
| Sale of available-for-sale securities | 7,729,962 | 6,146,888 | ||||
| Purchase of acquired license rights | (5,910,146 | ) | — | |||
| Net cash provided by investing activities | 688,714 | 1,542,848 | ||||
| Cash flows from financing activities: | ||||||
| Capital lease payments | (1,403 | ) | (1,250 | ) | ||
| Warrants and stock options exercised | 163,475 | 320,359 | ||||
| Net cash provided by financing activities | 162,072 | 319,109 | ||||
| Decrease in cash | (1,069,713 | ) | (1,265,877 | ) | ||
| Cash and cash equivalents, beginning of period | 5,198,837 | 1,917,130 | ||||
| Cash and cash equivalents, end of period | $ | 4,129,124 | $ | 651,253 | ||
| Noncash investing and financing activities: | ||||||
| Change in unrealized loss on available-for-sale securities | $ | (407,380 | ) | $ | (191,537 | ) |
| Acquired business (note 2) | ||||||
| Cash paid | $ | 5,910,146 | ||||
| Non-cash consideration: | ||||||
| Stock issued | 250,000 | |||||
| Liability – additional purchase consideration | 680,812 | |||||
| Total fair market value | $ | 6,840,958 | ||||
The accompanying notes are an integral part of these financial statements.
6
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include The Med-Design Corporation (hereinafter, including its subsidiaries as the context indicates, the “Company” or “Med-Design”) and its wholly-owned subsidiaries. The accompanying consolidated financial statements have been prepared on a basis consistent with that used as of and for the year ended December 31, 2003 and, in the opinion of management, reflect all adjustments (principally consisting of normal recurring accruals) considered necessary to present fairly the financial position of the Company as of June 30, 2004, the results of the Company’s operations for the three and six month periods ended June 30, 2004 and cash flows for the six month period ended June 30, 2004. The results of operations for the three- and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The consolidated 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. 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, 2003.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of The Med-Design Corporation and its wholly owned subsidiaries, MDC Investment Holdings, Inc. and MDC Research Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts from prior years have been reclassified for comparability.
Revenue Recognition
Fees received in connection with the entry into licensing contracts for the Company’s patented, proprietary products are recorded as revenue following the execution of a binding agreement, and when the Company has fulfilled its obligations under the arrangement or when Med-Design’s only remaining obligation is to maintain and defend the licensed patent rights.
Royalties received on licensed products which are based on the licensee’s product volume are recorded as revenue in the period when the royalty payments are earned. Minimum contractual royalty payments related to licensed products are recorded as revenue during the period to which the minimum payments relate.
Revenues from the sale of contract manufactured products are recorded upon the receipt of the product by customer when Med-Design pays freight. Revenues from the sale of contract manufactured products are recorded upon shipment of the product when customer pays freight.
Investment in Acquired License Rights
On April 1, 2004, Med-Design acquired the assets of the Safety Huber Needle business of Luther Needlesafe Products, Inc., which has been accounted for as an acquisition of a business in accordance with the guidance in EITF 98-3, Determining Whether a Non-monetary Transaction Involves Receipt of Production Assets or of a Business. The Low Profile Safety Huber Needle, the version of the Safety Huber Needle product marketed by the Company and used for the delivery of chemotherapeutic agents, was launched in the U.S. in October 2003. This acquisition expands the Company’s safety product line and provides contract manufacturing capability and an established distribution channel for the products. See Note 2.
7
Goodwill and Other Intangibles Resulting from Business Acquisition
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 upon the acquisition of the assets of the Huber Needle business on April 1, 2004. SFAS No. 142 addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and indefinite-lived intangible assets will no longer be amortized and that impairment will be measured using various valuation techniques based on discounted cash flows. Both goodwill and intangible assets deemed to have indefinite life will be tested for impairment at least annually. Intangible assets with finite lives will be amortized over their useful lives.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives at each balance sheet date. An impairment or change in useful life would be recorded whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed in accordance with SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets”.
Product Cost
Product cost includes direct expenditures for material, packaging, sterilization, freight, amortization of investment in acquired license rights and consulting expense related to the acquisition of the Safety Huber Needle business. The Company also allocated some of its overhead (labor, use of facilities and depreciation) to Product Cost.
Stock-Based Compensation
The Company applies the intrinsic value method of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (APB 25) and the Financial Accounting Standards Board Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” (FIN 44) in accounting for its stock plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”
The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123:
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2004 | 2003 | 2004 | 2003 | ||||||||||
| Net loss – as reported | $ | (1,444,164 | ) | $ | (1,590,436 | ) | $ | (2,880,100 | ) | $ | (3,346,705 | ) | |
| Add: stock-based employee compensation expense included in reported net loss |
128,632 | 443,547 | 361,762 | 910,369 | |||||||||
| Deduct: total stock-based employee compensation expense determined under fair-value based method for all awards |
(484,901 | ) | (1,039,843 | ) | (969,018 | ) | (1,978,165 | ) | |||||
| Net loss – pro forma | $ | (1,800,433 | ) | $ | (2,186,732 | ) | $ | (3,487,356 | ) | $ | (4,414,501 | ) | |
| Net loss per share: | |||||||||||||
| Basic & diluted loss per share – as reported | $(0.09 | ) | $(0.13 | ) | $(0.17 | ) | $(0.26 | ) | |||||
| Basic & diluted loss per share – pro forma | $(0.11 | ) | $(0.17 | ) | $(0.21 | ) | $(0.35 | ) | |||||
In August 2000 and March and November 2002, the Company entered into several equity arrangements with officers and consultants of the Company involving grants of stock options and warrants to purchase common stock. The Company recorded compensation expense in the amount of $128,632 and $443,547 in connection with these transactions for the three months ended June 30, 2004 and June 30, 2003, respectively, and $361,762 and $910,369 for the six months ended June 30, 2004 and 2003, respectively, to reflect partial vesting of the grants.
8
2. Investment in Acquired License Rights
Acquisition of a Business
On April 1, 2004, Med-Design acquired the assets of the Huber Needle business of Luther Needlesafe Products, Inc. The Company paid $5.6 million in cash, $250,000 in Med-Design common stock (67,094 shares valued at $3.73 per share, which was the average of the reported closing prices of Med-Design’s common stock on the Nasdaq National Market for the 10 trading days preceding the date of the acquisition) and $750,000 to be paid in cash or, at Med-Design’s option, in Med-Design common stock over the next three years. The three year payment arrangement was valued at its discounted present value of $680,812. The purchase price of the acquired business was thus $6,840,958, inclusive of costs related to the acquisition of $310,146. Results of operations for the Huber Needle business are included in the Company’s income statement effective April 1, 2004. See also Note 4.
9
Huber Needle Business Transaction Summary
| Purchase price: | ||||
| Cash | $ | 5,910,146 | ||
| Stock | 250,000 | |||
| Liability—additional purchase consideration | 680,812 | |||
| $ | 6,840,958 | |||
| Allocated as follows: | ||||
| Inventory | $ | 90,000 | ||
| Property and equipment | 61,498 | |||
| Acquired license rights | 6,448,501 | |||
| Goodwill | 240,959 | |||
| $ | 6,840,958 | |||
The acquired license rights are being amortized over the remaining patent life of approximately 16 years.
The following unaudited pro forma financial information presents the combined results of operations of the Company and the Huber Needle Business for the year ended December 31, 2003, as if the acquisition had occurred on January 1, 2003. Cost information for the Huber Needle Business for the three and six months ended June 30, 2003 and the three months ended March 31, 2004 are not available. Accordingly, pro forma information for the three and six months ended June 30, 2003 and the six months ended June 30, 2004 is not presented. Revenues of the Huber Needle Business for the three and six months ended June 30, 2003 and for the three months ended March 31, 2004 were approximately $272,000, $510,000 and $431,000, respectively. |
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THE MED-DESIGN
CORPORATION |
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UNAUDITED PRO FORMA STATEMENT
OF OPERATIONS |
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FOR THE PERIOD ENDED DECEMBER
31, 2003 |
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