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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
31, 2004.
OR
[ ] 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 (I.R.S. Employer Identification No.)
organization)
2810 BUNSEN AVENUE, VENTURA, CA 93003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 339-0375
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The aggregate market value of voting stock held by non-affiliates of the
registrant (computed by reference to the last reported sale price of such stock
on June 30, 2004) was $30,658,259. The number of shares of the registrant's
common stock outstanding as of March 29, 2005 was 16,749,486.
DOCUMENTS INCORPORATED BY REFERENCE:
None
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that address, among other
things, acceptance of safety products by health care professionals; our
expectations regarding contract manufacturing of certain specialty devices; our
pursuit of additional collaborative arrangements; the ability to manufacture
certain specialty devices using our assembly system; plans to rely on our
strategic collaborators to pursue regulatory approvals; expectations regarding
the ability of our products to compete with the products of our competitors;
acceptance of our products by the marketplace as cost effective; the generation
of royalty revenues from our licensees; factors affecting the ability of Becton
Dickinson to sell products licensed from us; sufficiency of available resources
to fund operations; factors affecting the availability of capital; plans
regarding the raising of capital; the size of the market for our products; our
plans regarding sales and marketing; our strategic business initiatives; our
intentions regarding dividends. These statements may be found under "Item
1-Business," "Item 1-Risk Factors" and "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as in this
Report generally. We generally identify forward-looking statements in this
Report using words like "believe," "anticipate," "will," "expect," "may,"
"could," "intend" or similar statements. There are important factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements including lack of demand or low demand for our
products or for safety products generally; a determination of Becton Dickinson
to focus its marketing efforts on products other than those licensed from us;
delays in introduction of products licensed by us due to manufacturing
difficulties or other factors; our inability to license or enter into joint
venture or similar collaborative arrangements regarding our other products;
unanticipated expenses relating to our manufacturing effort and other factors
discussed in "Item 1 - Risk Factors" and matters set forth in this Report
generally. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
PART I
ITEM 1. BUSINESS
BUSINESS
We are principally engaged in the design, development, licensing and
subcontract manufacturing of safety medical devices intended to reduce the
incidence of accidental needle sticks. The majority of the safety medical
devices we design and develop incorporate our proprietary needle retraction
technology. Our technology enables health care professionals to retract a needle
into the body of the medical device for safe disposal without any substantial
change in operating technique. Our product technology generally can be
categorized into the following five groups:
o hypodermic syringes used to inject drugs and other fluids into the
body;
o injectors used to inject drugs and other fluids into the body from a
pre-filled cartridge, vial or carpule;
o fluid collection devices used to draw blood or other fluids from the
body;
o venous and arterial access devices used to provide access to
patients' veins and arteries; and
o specialty safety devices for needle-based and other applications.
We design our product technology to be similar to standard non-safety
medical devices in appearance, size, performance and operation. We believe that
this similarity is important, because health care professionals are more likely
to accept safety products that do not require a change in operating technique
from products they have traditionally used.
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We have licensed a number of applications of our product technology to
medical device manufacturers, principally Becton Dickinson and Company ("BD").
In two instances, products incorporating our product technology are subject to
collaborative arrangements between us and device manufacturers. These products
are the 1Shot Safety Dental Syringe launched in June 2003 and the Safety Huber
Needle acquired in April 2004. We will continue to explore additional
opportunities to have selected products manufactured in this manner.
MED-DESIGN PRODUCTS
We have designed and developed a number of products incorporating our
needle retraction technology. Our products are similar in appearance, size and
performance to standard non-safety products and are operated in essentially the
same manner. A brief description of each of our products follows:
LICENSED PRODUCTS
PRODUCTS LICENSED TO BECTON DICKINSON
BD, a major medical technology company, is the principal licensee of
our patented product technology. Pursuant to two licensing agreements, we have
granted BD the exclusive worldwide rights to manufacture and market our patented
product technology in three fields of use, injection syringe, IV catheters and
blood collection. The agreements with BD provide for continuing royalty payments
based upon BD's net sales of the licensed product technology, subject to annual
minimums.
The following product technologies are currently under license to BD:
o Safety Syringe (fixed needle). After the medication in the
syringe has been delivered, the user applies a light amount of
additional pressure in order to move the plunger slightly beyond
the normal stop point, which causes the needle to automatically
and fully retract into the body of the syringe. The fixed needle
Safety Syringe can be manufactured with needles of various gauges
and sizes, and barrels with various sizes. BD currently markets
the BD Integra(TM) 3ml Syringe, which incorporates our Safety
Syringe technology and was introduced in 2002.
o Safety Syringe (luer needle). The luer needle Safety Syringe is a
hypodermic needle with a mating needle/hub assembly.
o Safety Tuberculin/Insulin Syringe. The Safety Tuberculin/Insulin
Syringe is a smaller version (1ml) of the fixed needle Safety
Syringe. BD launched the BD Integra(TM) 1ml Syringe, which
incorporates our Safety Tuberculin/Insulin Syringe technology on
a limited scope in the United States in February 2004 with full
launch in January 2005.
o Safety Blood Collection Needle. The Safety Blood Collection
Needle is compatible with substantially all standard blood
collection needle accessories. After sufficient fluids have been
extracted from the body, by depressing a conveniently located
button on the barrel of the device, the needle automatically and
fully retracts into the body of the device. The needle seals in
place rendering it harmless and inoperable. BD currently markets
the BD Vacutainer(TM) Push Button Collection Set, which
incorporates our Safety Blood Collection Needle technology and
was introduced in December 2003.
o Safety Winged Blood Collection Set. The Safety Winged Blood
Collection Set uses a smaller diameter needle than the Safety
Blood Collection Needle and is an alternative to that device. It
is compatible with substantially all standard blood collection
needle accessories.
o Safety IV Catheter. Catheters are inserted into veins or other
areas of the body using a catheter insertion needle located
within the flexible catheter tube. After the insertion needle is
partially removed from the Safety IV Catheter, the needle
automatically and fully retracts into the body of the catheter
insertion device. The needle seals in place rendering it harmless
and inoperable. BD currently markets the Autoguard Pro(TM)
Shielded IV Catheter, which incorporates our Safety IV Catheter
technology and was introduced in 2002.
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o Safety PICC Introducer. The Safety PICC Introducer is a catheter
insertion device used to insert a peripherally inserted control
catheter (PICC) for long term venous access to deliver fluids
into a patient.
o Safety Wing Needle Set/Catheter. The Safety Wing Needle
Set/Catheter is used to continuously deliver fluids into a
patient's vein. The sharp end of the needle is completely
shielded within the device, allowing intravenous fluid from a
gravity bag or infusion pump to flow through the retracted steel
needle. Upon completion of the infusion therapy, the Safety Wing
Needle Set/Catheter may be removed from the patient with no
possibility of an accidental needle stick.
The licensing agreement with BD for the Integra(TM) Syringe initially
provided for a two-tier royalty payment. A dispute arose in July 2002 between us
and BD as to the appropriate amount of royalty payment for the BD Integra
Syringe. We submitted the dispute to mediation and reached an agreement in
January 2003 that resolved the dispute and provided that BD will pay us a
royalty rate of 2.5% on all sales of the product in the U.S. and in all
international markets where our retracting needle syringe patents are in force.
The royalty rate is retroactive to the initial introduction date of May 2002 for
the BD Integra(TM) 3ml Syringe and is also applicable to the BD Integra(TM) 1ml
Syringe.
ENPATH MEDICAL INC. (FORMERLY MEDAMICUS, INC.)
We licensed to Enpath Medical Inc. the Safety Seldinger Device
initially for venous access and subsequently for arterial access. We receive
royalties from the sale of the device by Enpath Medical Inc. The Safety
Seldinger Device agreement involves a lower volume, higher margin product
directed to a specialized niche market segment. On December 29, 2004, we entered
into Addendum Number Two to the Development and Licensing Agreement with Enpath
Medical for the Safety Seldinger Device to eliminate the minimum purchase amount
required in 2004 for Enpath to maintain exclusivity under the Development and
Licensing Agreement. In consideration for Med-Design executing the Addendum,
Enpath agreed to negotiate exclusively with Med-Design until April 30, 2005 for
the potential sale of Enpath's safety needle business. Revenue for this product
was $78,581 for the year ended December 31, 2004 and $120,308 for the year ended
December 31, 2003. We expect that future royalties from this product will
decrease significantly.
MANUFACTURED PRODUCTS UNDER AGREEMENT
In connection with our efforts to enter into collaborative arrangements
for the marketing and distribution of certain of our product technologies, we
determined that we could enhance our efforts with potential strategic
collaborators that do not possess manufacturing capabilities if we could arrange
to have the products manufactured. We entered into two OEM Manufacturing
Agreements with Owens-Illinois Closure, Inc. for the manufacture of our Safety
Pre-filled Cartridge Injector and Safety Dental Cartridge Injector. Pursuant to
the terms of the agreements, we have purchased the automated equipment and molds
necessary for Owens-Illinois to manufacture the products. Owens-Illinois is
currently manufacturing the Safety Dental Cartridge Injector and Sultan Chemists
is marketing the product under the name 1Shot Safety Dental Syringe. We continue
to search for a sales and marketing collaborator for the Safety Pre-filled
Cartridge Injector. In addition, Plastics Engineering and Development, Inc.
(PEDI) currently manufactures our Safety Huber Needles and New Alliance of
Independent Medical Distributors, Inc. (Alliance Medical) is marketing the
product. We assumed ongoing agreements with PEDI and Alliance Medical when we
acquired the Safety Huber Needle business of Luther Needlesafe Products, Inc. in
2004.
In April 2004, we acquired the assets of the Safety Huber Needle
business of Luther Needlesafe, Inc. The Safety Huber Needle is contract
manufactured by Plastics Engineering and Development Incorporated. We acquired
the production molds and necessary assembly equipment in the purchase price of
the assets.
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Safety Dental Cartridge Injector
The Safety Dental Cartridge Injector is used to administer anesthetics
in dental procedures and uses standard dental needles and anesthetic cartridges
capable of fluid removal. The Safety Dental Cartridge Injector allows for
multiple anesthetic injections, while rendering the needle safe between
injections.
We received FDA clearance for this device in February 2003 and launched
the 1Shot Safety Dental Syringe, a one-handed, single use, disposable safety
syringe, for sale in June 2003. The product is manufactured by Owens-Illinois in
accordance with the OEM Agreement and exclusively distributed worldwide by
Sultan Chemists. We began to recognize revenue on the sale of the product to
Sultan in 2003, however, the revenue has not been meaningful to date.
Dual Chamber Pharmaceutical Mixing Device
The Dual Chamber Pharmaceutical Mixing Device is used to package, store
and mix pre-filled pharmaceutical compounds.
In February, 2004, we entered into a development agreement with Atrix
Laboratories to develop a dual chamber pharmaceutical mixing device for the
packaging of certain pre-filled liquid pharmaceutical products. Atrix was
acquired by QLT Inc. in 2004, and organizational changes resulted in delays in
development. Currently the product is in the evaluation phase, and Med-Design is
awaiting results. Under the agreement, if the development phase is successful,
we and Atrix will use best efforts to pursue a long-term contract under which we
would license the technology to Atrix and manufacture and supply the dual
chamber device to Atrix.
Safety Huber Needle
The Safety Huber Needle is used for percutaneous connection to
implanted vascular access ports for the infusion of chemotherapeutic agents.
We acquired this product as part of our acquisition of the Safety Huber
Needle business of Luther Needlesafe Products, Inc. (Luther) in April 2004. The
Safety Huber Needle was launched in the U.S. in October 2003.
PORTFOLIO PRODUCTS
We are seeking to license technology or enter into collaborative
arrangements for a number of additional applications of our technologies
described below. All of the products derived from these applications would
incorporate our needle retraction technology.
Safety Pre-filled Dual Chamber Injector. The Safety Pre-filled Dual
Chamber Injector allows medication to be injected directly into a patient from
freeze-dried powders produced by many pharmaceutical manufacturers. In the first
step, sterile water, in one chamber, is introduced into the freeze-dried powder
chamber. This introduction quickly mixes the water and powder, allowing for the
injection. The Safety Pre-filled Dual Chamber Injector can be manufactured with
needles of various gauges and sizes.
Safety Pre-filled Vial Injector. The Safety Pre-filled Vial Injector
allows medication to be injected directly into a patient from pre-filled vials
produced by many pharmaceutical manufacturers. The pre-filled vial is threaded
onto the rear end of the stationary plunger and becomes integrated as a
functional part of the plunger. The Safety Pre-filled Vial Injector can be
manufactured with needles of various gauges and sizes.
Safety Arterial Blood Gas Needle. Arterial blood gas needles are used
to collect small samples of arterial blood and deliver the blood to a blood gas
analyzer, after which the filled needle barrel is ready for delivery to a
laboratory for analysis. The Safety Arterial Blood Gas Needle is designed for
conventional laboratory processing and attaches to any standard blood gas needle
with a luer fitting, as would a non-safety needle.
Safety Blood Donor Needle Set. The Safety Blood Donor Needle Set is
used to collect large volumes of blood for blood bank storage. The Safety Blood
Donor Needle Set is compatible with all standard blood bag tubing sets and can
be manufactured to include a safety blood sampling adapter.
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Safety Winged A-V Fistula Needle. Safety Winged A-V Fistula Needles are
used to access veins and arteries to perform a hemodialysis procedure.
Hemodialysis removes toxic wastes from the blood of patients in renal failure.
SALES AND MARKETING
Our marketing efforts, with respect to our portfolio products, focus
upon identifying, principally through the use of publicly available information,
market leaders in the pharmaceutical and medical device industries who we
believe have either a desire to incorporate safety applications in their
existing products or who have the ability to distribute our products. We seek
collaborative arrangements with these companies under which we would manufacture
or arrange to have manufactured our products or through which our needle
retraction technology is applied to their existing products.
Our marketing efforts, with respect to our contract manufactured
products, focus on identifying buying groups and distributors through trade
shows and business contacts and working with sales representatives to improve
name recognition and knowledge of our products.
In addition to direct marketing efforts, safety needle legislation and
our relationship with BD have increased industry awareness of our products.
RESEARCH AND DEVELOPMENT
Our research and development efforts in the past have focused primarily
upon the design and development of our needle retraction technology and the
design and development of specific applications of our technology for
incorporation into the products described above as well as, in certain
instances, the equipment necessary to assemble the products. Research and
development expenses were $1,187,835, $1,484,891 and $1,969,709 in 2004, 2003
and 2002, respectively. Our research and development efforts going forward will
focus primarily upon:
o the modification and improvement of our current product technology
in response to market research and input from health care
professionals; and
o the development of new safety medical devices in response to the
specific requests and needs of our licensees and potential strategic
collaborators.
Our research and development staff consisted of seven employees as of
December 31, 2004.
FACILITIES AND MANUFACTURING
Our primary focus has been on the design, development and licensing of
safety medical devices. To date, in most cases, our licensees have arranged for
manufacturing of products incorporating the technology licensed from us. In
2001, to enhance our efforts with potential partners that do not possess
manufacturing capabilities, we entered into two OEM Manufacturing Agreements
with Owens-Illinois for the manufacture of our Safety Pre-filled Cartridge
Injector and Safety Dental Cartridge Injector. Under the terms of the
agreements, we purchased the equipment and molds necessary for Owens-Illinois to
manufacture the Safety Dental Cartridge Injector. In addition, PEDI currently
manufactures our Safety Huber Needles.
We will continue to explore additional opportunities to manufacture
selected products pursuant to collaborative arrangements in which our strategic
collaborators will be responsible for marketing and distribution. We expect that
these products would involve production levels that are substantially lower than
the products of the type licensed to BD.
In July 2003, we were recommended for certification to ISO 13485:1996
by KEMA Registered Quality, Inc., our notified body. This is a recognized
quality standard for medical device manufacturers that will enable us to apply
for international registrations for products we intend to sell internationally.
We lease an approximately 26,000 square foot facility in Ventura,
California. In addition to our corporate offices, the facility includes space
for the following:
5
o a research and development laboratory equipped with assembly and
test equipment for concept modeling and product development;
o a machine shop equipped with tools for the fabrication of new
product parts for concept modeling and assembly; and
o a 3,120 square foot class 100,000 clean room used for the assembly
of prototypes.
Nevertheless, as noted above, our strategy is to utilize a contract
manufacturer to manufacture products for commercial distribution.
GOVERNMENT REGULATION
Our products are subject to regulation by the United States Food and
Drug Administration (FDA) under a number of statutes, including the Federal
Food, Drug and Cosmetic Act (FDCA). The FDA regulates, among other things, the
research, development, testing, manufacture, packaging, labeling, storage,
handling, distribution, advertising and promotion of medical devices in the
United States. Our medical devices must be cleared or approved by the FDA before
they can be sold in the United States.
Historically, our focus has been on the development, design and
licensing of medical safety devices rather than marketing and manufacturing of
the devices. Therefore, we had not typically made the regulatory filings
necessary to sell our products. Rather, we have relied on our licensees and
other strategic collaborators to pursue regulatory approvals. We anticipate that
we will continue to rely on our strategic collaborators to seek regulatory
compliance if we license our products to them.
We have decided to commercially market, through our strategic
collaborators, and have manufactured, through contract manufacturers, some of
the products we develop separate from our current or any future license
agreements. We will be required to file for marketing authorization for these
products. The FDCA provides two basic review procedures by which medical devices
can receive FDA marketing authorization. Certain products qualify for a
submission authorized by Section 510(k) of the FDCA. To receive Section 510(k)
clearance, a pre-market notification must be filed with the FDA that a company
plans to begin marketing a medical device. The filing must establish that the
medical device is substantially equivalent to another medical device that has
been granted prior FDA pre-market notification clearance or was marketed prior
to May 28, 1976, the date of enactment of the Medical Device Amendments.
Marketing may commence when the FDA issues a letter finding substantial
equivalence. If a product does not qualify for Section 510(k) clearance, a
pre-market approval application must be filed. Pre-market approval applications
(PMAs) must demonstrate that the medical device is safe and effective. The
pre-market approval process is typically more complex and time consuming than
the Section 510(k) clearance process, and generally requires the submission of
laboratory, pre-clinical and clinical data. Before initiating clinical trials,
companies sponsoring such trials often must seek and obtain an Investigational
Device Exemption.
Since we will commercially market and have manufactured some of the
products we develop, separate from our current or any future license agreements,
we may be required to file for Section 510(k) clearance, or possibly pre-market
approval, for such products. In that case, we would be subject to device user
fees. The Medical Device User Fee and Modernization Act, enacted in 2002,
authorizes the FDA to assess and collect user fees for Section 510(k) premarket
notifications and premarket approval applications filed on or after October 1,
2002. Fees for fiscal year 2005 range from $3,502 for Section 510(k) premarket
notifications to $239,237 for PMAs, although fee reductions are available for
companies qualifying as small businesses. If we commercially manufacture and
market devices, we also would be required to comply with FDA post-market
reporting requirements, including the submission of reports on certain adverse
events and malfunctions, and requirements governing the promotion of medical
devices. In addition, modifications to our devices may require the filing of new
510(k) submissions or pre-market approval supplements, and we will need to
comply with FDA regulations governing medical device manufacturing practices.
The FDA and the California Department of Health Services (DHS) require medical
device manufacturers to register as such and subject them to periodic FDA and
DHS inspections of their manufacturing facilities. The FDA requires that medical
device manufacturers produce devices in accordance with the FDA's current
Quality System Regulation (QSR), which governs the methods, facilities and
controls used for the design, manufacture, testing, packaging, labeling and
storage of medical devices. We are not currently required to register our pilot
manufacturing facility or comply with QSR requirements because we do not
commercially manufacture and distribute the devices we produce in our facility,
but we will be required to register and comply if we commence commercial
manufacturing. To ensure compliance with QSR requirements, we would need to
expend time, money and effort in the area of production and quality control.
6
There is a different set of regulatory requirements in place for the
European Union (EU). In the EU the company putting a medical device onto the
market must comply with the requirements of the Medical Devices Directive (MDD)
and affix the CE mark to the product to attest to such compliance. To achieve
this, the medical devices in question must meet the "essential requirements"
defined under the MDD relating to safety and performance, and the relevant
company must successfully undergo a verification of its regulatory compliance by
a third party standards certification provider, referred to in the legislation
as a "Notified Body." The nature of the assessment will depend on the regulatory
class of products concerned, which in turn determines the precise form of
testing to be undertaken by the Notified Body.
The requirements of the MDD must be complied with by the "manufacturer
of the device," which is defined as the party responsible for the design,
manufacture, packaging and labeling of the device before it is placed on the EU
market, regardless of whether these operations are carried out by this party or
on its behalf.
Accordingly, where medical devices are marketed by our licensees or
strategic collaborators under their names, compliance with the MDD will be their
responsibility. In the event that we decide to manufacture devices to be
distributed in the EU market under our name, all compliance responsibilities
will be borne by us.
In the case of devices such as certain versions of the safety
pre-filled vial injector, which incorporates a medicinal product as one
integrated product, the regulatory requirements are those relating to medicines
as opposed to devices and an application for a marketing authorization must be
made under Directive 65/65 EEC. However, the safety and performance of the
device features of the integral product are assessed in accordance with the
essential requirements of Annex I of the MDD. Again, if the device is marketed
by our licensees or strategic collaborators under their names, all regulatory
compliance obligations will be borne by such licensees or strategic
collaborators. The party responsible for regulatory compliance will be subject
to continued surveillance by the Notified Body and will be required to comply
with additional national requirements that are beyond the scope of the MDD. We
currently have no foreign sales.
COMPETITION
The safety medical device market is highly competitive. Licensees of
our products and our other strategic collaborators compete in the United States
and abroad with the safety products and standard products manufactured and
distributed by companies such as:
o Tyco International, Inc. (Kendall Healthcare Products Company),
o B. Braun,
o Terumo Medical Corporation of Japan, and
o Johnson & Johnson.
Developers of safety medical devices which we compete against for
license and collaborative arrangements with medical device and pharmaceutical
companies include:
o New Medical Technologies,
o Retractable Technologies, Inc.,
o Univec, Inc.,
o Specialized Health Products International, and
o Safety Syringes, Inc.
Traditionally, competition regarding non-safety medical devices was
primarily based upon price with little differentiation between products. We
expect that products incorporating our technology will compete against both
safety products and non-safety products based upon safety and ease of use and
disposal. While safety medical devices are priced somewhat higher than
equivalent standard medical devices, we believe that based upon estimated costs
associated with accidental needlesticks, products incorporating our technology
should be considered cost effective by the marketplace. There can be no
assurance, however, that purchasers will be willing to pay the increased price
for safety medical devices unless they are mandated to use such devices by laws
such as those passed by the federal government and those passed at the state
level in California, Tennessee, Texas, New Jersey and Maryland.
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LEGISLATION
Regulatory actions at the federal and state level promote the use of
safety needles to reduce the risk of accidental needlesticks. On July 1, 1999,
California, through its state Occupational Safety and Health Administration
(OSHA) program, began requiring the use of safety needles. Other states
including Texas, Tennessee, Maryland and New Jersey have passed similar
legislation.
On November 6, 2000, President Clinton signed the Needlestick Safety
and Prevention Act amending OSHA's Bloodborne Pathogens Standard to require that
employers implement the use of safer medical devices in their facilities. To
implement the statutory mandates in the Needlestick Safety and Prevention Act,
OSHA issued a number of further revisions to its Bloodborne Pathogens Standard.
The revised standard became effective on April 18, 2001, and imposes several
needle device safety requirements on employers, including:
o evaluation and implementation of safer needle devices as part of the
re-evaluation of appropriate engineering controls during an
employer's annual review of its exposure control plan;
o documentation of the involvement of non-managerial, frontline
employees in choosing safer needle devices; and
o establishment and maintenance of a sharps injury log for recording
injuries from contaminated sharps.
On November 27, 2001, OSHA issued a compliance directive (CPL 2-2.69)
that advises OSHA's regional offices on the proper interpretation and
enforcement of the revised Bloodborne Pathogens Standard provisions. The
compliance directive confirms that the consideration of safer needle devices in
annually reviewing and updating the exposure control plan is a critical element
of the Bloodborne Pathogens Standard. The compliance directive also stresses
that the standard requires employers to use engineering controls (e.g., safer
needle devices) if such controls will remove or eliminate the hazards to
employees. As a result of these regulatory actions, the demand for safety
medical devices has increased, and we believe that this demand will continue to
increase.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend in part on our ability to obtain and maintain
patent protection for our products, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. It is our policy to
protect our intellectual property and maintain the proprietary nature of our
technology by filing patent applications for technology we consider important to
the development of our business and by requiring employees and key consultants
to execute non-disclosure and non-compete agreements.
We have 26 United States patents with expiration dates ranging from
April 29, 2007 to July 26, 2021 covering our retractable needle technology and
specific product applications based upon our technology. In addition, we have 27
foreign national patents and 11 European patents covering at least 10 countries,
with expiration dates ranging from November 7, 2010 to August 28, 2019. We also
have 23 United States, 89 foreign national, 15 European and 2 international
patent applications pending. We also have a United States design patent based on
one of our products, in addition to 6 foreign national design registrations.
EMPLOYEES
As of December 31, 2004, we had 14 full-time employees and 2 part-time
employees, most of whom were located at our corporate offices.
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AVAILABLE INFORMATION
We maintain a website at www.med-design.com and make available free of
charge through this website our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The material on our website is not part of this report,
and the reference to our website address is intended to be an inactive textual
reference only.
RISK FACTORS
WE HAVE A HISTORY OF NET LOSSES AND ANTICIPATE WE WILL INCUR CONTINUED LOSSES
FOR THE FORESEEABLE FUTURE.
We have incurred significant losses since inception. As of December 31,
2004, our accumulated deficit was $49,441,079. Among other things, our ability
to achieve profitability is dependent upon:
o the successful marketing of products incorporating our technology by
licensees;
o the successful marketing of products acquired through purchases;
o our ability to license additional product technologies that are not
currently subject to licenses or have products incorporating our
technology distributed through joint venture or similar
arrangements; and
o our ability to develop additional products incorporating our core
technology.
We have licensed to BD several of our product technologies. Four
products subject to the license have been launched to date, the latest of which
is the 1ml version of the IntegraTM in January 2005. We are unable to predict
whether BD's marketing efforts will be successful and whether the licenses will
generate meaningful revenues for us. If our licensees are not successful in
marketing products incorporating our technology, if we are not successful in
marketing products acquired through purchases, such as the Safety Huber Needle,
and if we are not successful in licensing or entering into other suitable
arrangements relating to the sale of additional products incorporating our
technology, we may never generate meaningful revenues, in which case our
long-term viability would be threatened.
WE ARE DEPENDENT UPON OUR LICENSING AGREEMENTS WITH BD, AND IF BD IS NOT
SUCCESSFUL IN SELLING, OR DETERMINES NOT TO PURSUE THE SALE OF, PRODUCTS
INCORPORATING TECHNOLOGY LICENSED FROM US, OUR BUSINESS WILL BE HARMED.
Although we have increased our product sales, to date, a substantial
portion of our revenues have been derived from "up front" license payments made
by BD and Enpath Medical Inc. (formerly Medamicus) under license agreements with
us. We anticipate that royalty payments from BD related to sales of products
incorporating our technology will represent a substantial portion of our
revenues for at least the next twelve months. BD has the right to terminate its
license agreement with us upon 60 days' notice and would be subject to no
further funding obligations to us with respect to the products incorporating our
technology licensed under the agreement. The ability of BD to sell products
subject to the license agreement will depend on competitive factors and the
resources BD commits to the sale of the products. The extent to which BD commits
its resources to the sale of products is entirely within BD's control. BD is not
obligated to pursue the development and commercialization of these products.
Therefore, our licensing arrangements with BD may not result in the successful
commercialization of products incorporating our technology and may not generate
any future royalty payments. If BD terminates the licensing agreements, is
unsuccessful in developing or selling the products subject to the license
agreement or otherwise determines not to pursue the development and sale of
these licensed products, our business will be significantly harmed.
IF WE ENGAGE IN ANY ACQUISITION OR BUSINESS COMBINATION, WE WILL INCUR A VARIETY
OF RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS.
From time to time we have considered, and we will continue to consider
in the future, strategic business initiatives intended to further the
development of our business. These initiatives may include acquiring businesses,
technologies or products or entering into a business combination with another
company. For example, we purchased the Safety Huber Needle business from Luther
Needlesafe, Inc. on April 1, 2004. The transaction was accounted for as an
acquisition of a business. If we continue to pursue such a strategy, we could,
among other things:
9
o issue equity securities that would dilute our stockholders'
percentage ownership;
o utilize substantial cash resources and incur substantial debt, which
may place constraints on our operations;
o spend substantial operational, financial and management resources in
integrating new businesses, technologies and products;
o assume substantial actual or contingent liabilities; or
o merge, or otherwise enter into a business combination with, another
company, in which our stockholders would receive cash or shares of
the other company, or a combination of both, on terms that our
stockholders might not deem desirable.
Moreover, any strategic business initiative may not provide anticipated
benefits and could, if unsuccessful, hurt our long-term business prospects.
IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS AS REQUIRED, WE MAY HAVE TO REDUCE
THE SCOPE OF, OR CEASE, OUR OPERATIONS.
We believe that we have sufficient funds to support our planned
operations and capital expenditures for at least the next twelve months. The
availability of resources over a longer term will be dependent on our ability to
enter into licensing agreements and to receive royalty payments from our current
and future licensees, the ability of Alliance Medical to successfully market the
Safety Huber Needle and our ability to enter into, and profitably operate under
joint venture or similar arrangements. If we are unsuccessful in negotiating
additional agreements, or if licensing revenues are insufficient to support
operations, we may seek to raise funds through public or private equity
offerings or debt financings.
If we raise additional capital by issuing equity securities, our
stockholders' percentage ownership will be reduced, and our stockholders may
experience substantial dilution. Any equity securities issued in future equity
offerings may provide rights, privileges or preferences superior to our common
stock. If we raise additional funds by issuing debt securities, we may be
subject to significant restrictions on our operations. If we raise additional
funds through joint ventures or other collaborations and license arrangements,
we may be required to relinquish rights to our technology or products
incorporating our technology or grant licenses on terms that are not favorable
to us.
If adequate funds are not available on acceptable terms, we may have to
reduce the scope of, or cease, our operations.
PRODUCTS INCORPORATING OUR TECHNOLOGY MUST RECEIVE REGULATORY APPROVAL IN THE
UNITED STATES AND FOREIGN JURISDICTIONS; WE RELY ON OUR LICENSEES TO OBTAIN SUCH
APPROVALS WHEN WE LICENSE OUR PRODUCT TECHNOLOGY, AND IF THEY ARE NOT SUCCESSFUL
IN OBTAINING OR MAINTAINING APPROVALS, THE SALE OF PRODUCTS INCORPORATING OUR
TECHNOLOGY AND OUR ABILITY TO REALIZE ROYALTY REVENUES WOULD BE IMPAIRED.
Products incorporating our technology are medical devices subject to
regulation by the United States Food and Drug Administration (FDA). The FDA
regulates, among other things, product manufacture, testing, labeling,
packaging, storage, handling, distribution, advertising and promotion of medical
devices in the United States. Medical devices incorporating our technology must
be cleared or approved by the FDA before they can be sold in the United States.
Our licensees pursue regulatory approvals. As a result, our ability to
receive royalties from products incorporating our licensed technology may be
impaired or delayed if the licensees do not devote sufficient resources to the
regulatory approval effort. Moreover, obtaining FDA approval or clearance to
market a product can be a lengthy and costly process, which in some cases
involves extensive clinical studies. Our licensees may not be able to obtain the
necessary FDA authorizations to enable marketing of products incorporating
licensed technology in a timely fashion, or at all.
10
Even if our licensees obtain the necessary approvals or clearances,
later problems with the product could cause the FDA to suspend or revoke the
approvals or clearances. Also, if the FDA authorizes marketing of products
incorporating licensed technology, our licensees will be subject to continuing
requirements governing, among other things, modifications made to the products'
labeling, the claims that can be made for the products, reporting of adverse
events and recalls and manufacturing processes. We could confront similar
difficulties and obstacles if, in connection with joint venture or similar
arrangements, we directly pursued regulatory approvals or clearances. Failure to
comply with the FDA's requirements can result in issuance of FDA Warning
Letters, agency refusal to approve or clear products, revocation or withdrawal
of approvals previously granted, product seizures, injunctions, recalls,
operating restrictions, limitations on continued marketing and civil and
criminal penalties.
There is a different set of regulatory requirements in place for the
European Union (EU). To market a product in the EU a manufacturer must be
entitled to affix to the device a CE marking, which is a European symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. A CE marking allows a device to be marketed in all
member states of the EU and accordingly, failure to be entitled to affix a CE
marking will prohibit the marketing of a device anywhere in the EU.
The responsibilities for compliance with the CE requirements lies with
the "manufacturer of the device," which is defined in the Medical Devices
Directive (MDD) as the party responsible for the design, manufacture, packaging
and labeling of the device before it is placed on the EU market, regardless of
whether these operations are carried out by this party or on its behalf.
Accordingly, we rely upon our licensees and strategic collaborators under whose
names products incorporating our technology are marketed to satisfy the
necessary compliance criteria, and if our licensees do not devote sufficient
resources to this process, our ability to receive royalties from the sale of the
products by the licensees and strategic collaborators will be diminished.
Furthermore, the licensees and strategic collaborators may not be able to
satisfy the necessary requirements to allow marketing of products based on our
technology in a timely fashion or at all.
In the case of devices incorporating a medicinal product as a single
integrated product, such as the safety pre-filled glass syringe, the regulatory
requirements are those relating to medicines as opposed to devices, in which
case our licensees and, if applicable, our strategic collaborators, must make an
application for a marketing authorization under Directive 2001/83/EC. The
application must be made to one EU country, and if approved, is then mutually
recognized in all other remaining EU countries. The process can be very lengthy,
if authorization is granted at all.
Our failure or the failure of our licensees or strategic collaborators
to comply with the FDA and other applicable foreign or domestic regulations
could cause our business to be harmed significantly.
PRODUCTS MANUFACTURED UNDER OUR CONTROL THROUGH A CONTRACT MANUFACTURER MUST
RECEIVE REGULATORY APPROVAL OR CLEARANCE AND IF WE ARE NOT SUCCESSFUL IN
OBTAINING OR MAINTAINING SUCH APPROVALS OR CLEARANCES, WE WOULD NOT BE PERMITTED
TO SELL THESE PRODUCTS.
Our Safety Huber Needle and 1Shot Safety Dental Syringe are
manufactured for us by contract manufacturers. In addition, we plan to
manufacture and market additional products incorporating our technology, either
ourselves, or through joint ventures or other contractual arrangements under
which third parties manufacture and, in some instances, sell our products. Our
current contractual arrangements require, and any future contractual
arrangements into which we enter will require, us to seek separate clearance or
approval by the FDA of these products, to pay user fees for applications filed
and to comply with ongoing FDA requirements for submission of safety and other
post-market information. Moreover, obtaining FDA approval or clearance to market
a product can be a lengthy and costly process, which in some cases involves
extensive clinical studies. We may not be able to obtain the necessary FDA
authorizations to enable marketing of products incorporating licensed technology
in a timely fashion, or at all. Even if we obtain the necessary approvals for
clearances, later problems with the product could cause the FDA to suspend or
revoke the approvals or clearances. These arrangements also may involve our
assumption of commercial manufacturing responsibility with respect to some of
our products. If we engage in commercial manufacturing, we will be required to
adhere to requirements pertaining to the FDA's current Quality System
Regulation, commonly known as the QSR. The current QSR requirements govern the
methods, facilities and controls used for the manufacture, testing, design,
packaging, labeling, storage and distribution of medical devices. Compliance
with QSR requirements will involve continued expenditure of time, money, and
effort. We may not be able to comply with current QSR regulations or other FDA
regulatory requirements, resulting in delay or inability to manufacture the
products. To the extent that we utilize contract manufacturers, those
manufacturers will be subject to the QSR and other requirements described above.
11
Our failure or the failure of our licensees or contract manufacturers
to comply with FDA and other applicable regulations could cause our business to
be harmed significantly.
WE ARE DEPENDENT ON OUR LICENSEES AND CONTRACT MANUFACTURERS FOR THE MANUFACTURE
OF PRODUCTS INCORPORATING OUR TECHNOLOGY.
We previously have relied on our licensees to arrange for the
commercial manufacture of products incorporating our technology. Our licensees
generally manufacture products incorporating our technology at their own
facilities. Pursuant to an agreement between Owens-Illinois, Closure Inc. and
us, Owens-Illinois is manufacturing one of our products and may manufacture
another if we enter into a distribution agreement for that product. Also,
pursuant to an agreement we assumed in connection with our purchase of the
Safety Huber Needle business from Luther, PEDI is manufacturing our Safety Huber
Needles. Contracting with third parties or relying on licensees to manufacture
products incorporating our technology presents the following risks:
o delays in the manufacture of the products could have a material
adverse effect on the marketing of the products;
o the manufacturers may not comply with requirements imposed by the
FDA or other governmental agencies, which are described in the
preceding risk factor;
o we may have to share intellectual property rights to improvements in
the manufacturing processes or new manufacturing processes for the
products;
o in those instances where we seek third party manufacturers, we may
not be able to locate acceptable manufacturers or enter into
favorable long-term agreements with them; and
o we may not be able to find substitute manufacturers, if necessary.
Any of these factors could delay commercialization of products
incorporating our technology and adversely affect the sale of the products and
our license or joint venture revenues.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OR TO AVOID INFRINGING
THE RIGHTS OF OTHERS, OUR ABILITY TO COMPETE EFFECTIVELY WILL BE IMPAIRED.
Our intellectual property consists of patents, licenses, trade secrets
and trademarks. Our success depends in part on our ability to:
o obtain and maintain patents and other intellectual property;
o establish and maintain trademarks;
o operate without infringing the proprietary rights of others; and
o otherwise maintain adequate protection of our technology and
products in the United States and other countries.
We have a number of patents and pending United States patent
applications relating to our product technology. Patent applications filed by us
or on our behalf may not result in patents being issued to us. Even if a patent
is issued, the patent may not afford protection against competitors with similar
technology. Furthermore, others may independently develop similar technology or
duplicate our technology.
12
Our commercial success depends in part on our avoiding the infringement
of patents and proprietary rights of other parties and developing and
maintaining a proprietary position with regard to our own technology and
products. We cannot predict with certainty whether we will be able to enforce
our patents. We may lose part or all of our patents as a result of challenges by
competitors. Patents that may be issued, publications relating to technology
subject to our patent applications or other actions could block our ability to
obtain patents or to operate as we would like. Others may develop similar
technology or duplicate technology that we have developed or claim that we are
infringing their patents.
We may become involved in litigation or interference proceedings
declared by the U.S. Patent and Trademark Office, or oppositions or other
intellectual property proceedings outside of the United States. If any of our
competitors have filed patent applications or obtained patents that claim
inventions that we also claim, we may have to participate in an interference
proceeding to determine who has the right to a patent for these inventions in
the United States. If a litigation or interference proceeding is initiated, we
may have to spend significant amounts of time and money to defend our
intellectual property rights or to defend against infringement claims of others.
Litigation or interference proceedings could divert our management's time and
effort. Even unsuccessful claims against us could result in significant legal
fees and other expenses, diversion of management time and disruption in our
business. Any of these events could harm our ability to compete and adversely
affect our business.
An adverse ruling arising out of any intellectual property dispute
could invalidate or diminish our intellectual property position. An adverse
ruling could also subject us to significant liability for damages, prevent us
from using processes or products, or require us to license intellectual property
from third parties. Costs associated with licensing arrangements entered into to
resolve litigation or an interference proceeding may be substantial and could
include ongoing royalties. We may not be able to obtain any necessary licenses
on satisfactory terms.
In addition, we rely on trade secrets to protect technology. We attempt
to protect our proprietary technology by requiring certain of our employees and
key consultants to execute non-disclosure and non-competition agreements.
However, these agreements could be breached, and our remedies for breach may be
inadequate. In addition, our trade secrets may otherwise become known or
independently discovered by our competitors. If we lose any of our trade
secrets, our business and ability to compete could be harmed.
BECAUSE WE ARE DEPENDENT ON A SINGLE CORE TECHNOLOGY, WE ARE PARTICULARLY
VULNERABLE TO THE DEVELOPMENT OF PRODUCTS INCORPORATING COMPETING TECHNOLOGY AND
TECHNOLOGICAL CHANGE.
The majority of the products we have designed and developed to date,
and products we currently intend to design and develop, are based upon our
proprietary retraction technology. Our focus on a single core technology makes
us vulnerable to the development of superior competing products and changes in
technology that could eliminate any demand for products incorporating our
technology. Our business would suffer if a superior competing product were
developed, or if there were a reduced demand for products incorporating our
technology. Moreover, we may not be able to successfully develop additional
product applications of our technology.
WE ARE DEPENDENT ON KEY PERSONNEL, AND IF WE ARE UNABLE TO RETAIN THESE
PERSONNEL, OUR BUSINESS COULD BE HARMED.
Our success depends upon the skills, experience and efforts of our
executive officers and certain marketing and technical personnel. If any of our
key personnel do not continue in their present capacities, our operations could
be materially adversely affected.
PRODUCTS INCORPORATING OUR TECHNOLOGY MAY NOT ACHIEVE MARKET ACCEPTANCE.
The use of safety needles is relatively new. Although the market for
syringes, fluid collection devices and infusion therapy devices is large, actual
sales of products incorporating our technology have not been significant. Sales
of products incorporating our technology will depend mostly upon our licensees'
ability to demonstrate the operational and safety advantages of products
incorporating our technology compared to standard syringes, fluid collection
devices and infusion therapy devices, and safety medical devices developed by
competitors. Our licensees and others who have contracted to sell products
incorporating our technology may be unable to sell products due to the higher
cost of safety medical devices relative to standard medical devices. There may
never be a significant demand for products incorporating our technology.
13
WE ARE DEPENDENT ON THE SALES AND MARKETING EFFORTS OF OUR LICENSEES AND
STRATEGIC COLLABORATORS TO SELL PRODUCTS INCORPORATING OUR TECHNOLOGY, AND OUR
BUSINESS WILL SUFFER IF OUR LICENSEES OR STRATEGIC COLLABORATORS DO NOT
SUCCESSFULLY MARKET THESE PRODUCTS.
We currently have limited sales and marketing capabilities, and we do
not intend to build a sales and marketing infrastructure for commercial sales of
products incorporating our technology. Accordingly, we are dependent on our
licensees and other strategic collaborators to sell products incorporating our
technology and generate royalties for us. If our licensees and strategic
collaborators do not devote sufficient effort to the sale and marketing of
products incorporating our technology, or are otherwise unsuccessful in
marketing these products, our business will suffer. In this regard, the
co-promotion agreement with Abbott Laboratories to co-market our pre-filled
injector products has not been successful.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The manufacture and sale of medical devices entails an inherent risk of
liability in the event of product failure or claim of harm caused by product
operation. We may not be able to avoid product liability claims. Although we are
unaware of any potential claims, we currently maintain product liability
insurance coverage ($1,000,000 per occurrence and in the aggregate), such
coverage may not be sufficient to protect us or may not remain available at a
reasonable cost. If we are unable to obtain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims, we could be severely harmed if a person brings a successful product
liability claim against us.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The safety medical device market is highly competitive. Products
incorporating our technology will compete in the United States and abroad with
the safety products and standard products manufactured and distributed by
companies such as:
o Tyco International, Inc. (Kendall Healthcare Products Company),
o B. Braun,
o Terumo Medical Corporation of Japan, and
o Johnson & Johnson.
Developers of safety medical devices against whom we compete include:
o New Medical Technologies,
o Retractable Technologies, Inc.,
o Univec, Inc.,
o Specialized Health Products International, Inc., and
o Safety Syringes, Inc.
Many of our competitors are substantially larger and better financed
than we are and have more experience in developing medical devices than we do.
These competitors may use their substantial resources to improve their current
products or to develop additional products that may compete more effectively
with products incorporating our technology. In addition, new competitors may
develop products that compete with products incorporating our technology, or new
technology may arise that could significantly affect the demand for products
incorporating our technology. We cannot predict the development of future
competitive products or companies. We will be materially adversely affected if
we are unable to compete successfully.
OUR STOCK PRICE IS VOLATILE.
Historically, our stock price, like the market price of the securities
of other companies engaged in the design and development of medical devices, has
fluctuated widely. In this regard, the closing price per share of our stock as
reported by Nasdaq declined from $42.15 on July 26, 2001 to $0.81 on March 28,
2005. On March 29, 2005, the closing price per share was $$0.83. Our stock price
may be subject to similar future fluctuations in response to:
14
o announcements regarding technological innovations by us or our
competitors;
o the licensing of products or the formation of joint ventures or
similar arrangements by us or our competitors;
o government regulatory action regarding products incorporating our
technology;
o the development of new products by us or our competitors;
o general conditions in the medical device industry;
o quarter-to-quarter variations in operating results; and
o our failure to meet analysts' expectations.
Investors may lose money upon the resale of our shares.
OUR COMMON STOCK IS SUBJECT TO DILUTION.
As of December 31, 2004, there were 16,749,486 shares of our common
stock issued and outstanding. In addition, an aggregate of 3,670,076 additional
shares of our common stock are issuable pursuant to stock options granted under
our Non-Qualified Stock Option Plan and warrant agreements. As of March 1, 2005,
24,822 shares of our common stock were available for issuance under our
Non-Qualified Stock Option Plan. Our common stock may be subject to further
dilution should we offer our equity securities in the future.
WE ARE UNLIKELY TO PAY DIVIDENDS ON OUR COMMON STOCK.
No cash dividends have been paid on our common stock. We anticipate
that future earnings, if any, will be used to finance operations and expand our
business. Accordingly, we do not anticipate that we will pay cash dividends in
the future.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND THE DELAWARE GENERAL
CORPORATION LAW PROVIDE BARRIERS TO TAKEOVER OFFERS EVEN THOUGH SUCH OFFERS
COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Various provisions of our certificate of incorporation and bylaws and
Delaware law could delay or prevent a third party from acquiring shares of our
stock.
We have an authorized class of 5,000,000 shares of preferred stock,
none of which are issued and outstanding. The Board of Directors has the
authority, without shareholder approval, to issue preferred stock in one or more
series and to fix the relative rights and preferences of the preferred stock,
including their redemption, dividend and conversion rights. The issuance of
preferred stock could have the effect of delaying, deterring or preventing a
change in control.
Section 203 of the Delaware General Corporation Law generally prohibits
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
is defined to include mergers, asset sales and other specified transactions
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is defined as a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of a
corporation's voting stock. Section 203 may discourage transactions in which our
stockholders might otherwise receive a premium for their shares over the then
current price and may limit our stockholders' ability to approve transactions
even if they believe the transaction is in their best interests.
ITEM 2. PROPERTIES
We lease a facility of approximately 26,000 square feet in Ventura,
California. In addition to our corporate offices, the facility includes space
for the following:
15
o a research and development laboratory equipped with assembly and
test equipment for concept modeling and product development;
o a machine shop equipped with tools for the fabrication of new
product parts for concept modeling and assembly; and
o a 3,120 square foot class 100,000 clean room used for the assembly
of prototypes.
Our annual lease payments for this facility are approximately $185,104,
and the lease expires on October 31, 2008.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the knowledge of
management, threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq National Market under the symbol
"MEDC." Set forth below are the high and low sales prices of our common stock,
as reported by Nasdaq, during each of the quarterly periods in 2003 and 2004.
MARKET INFORMATION
FISCAL YEAR ENDED DECEMBER 31, 2003 HIGH LOW
- ----------------------------------- -------- ------
First Quarter..................................... $ 10.13 $ 2.90
Second Quarter.................................... 5.29 2.90
Third Quarter..................................... 5.62 3.69
Fourth Quarter.................................... 4.50 3.25
FISCAL YEAR ENDED DECEMBER 31, 2004 HIGH LOW
- ----------------------------------- -------- ------
First Quarter..................................... $ 4.80 $ 3.50
Second Quarter.................................... 3.88 1.66
Third Quarter..................................... 2.09 0.86
Fourth Quarter.................................... 1.48 0.89
On March 29, 2005, the last reported price of our common stock was
$0.83.
HOLDERS
As of March 29, 2005, we estimate that we had approximately 113 holders
of record of our common stock. We believe that the number of beneficial holders
of our stock is greater.
DIVIDENDS
We have never paid dividends, and we do not anticipate declaring or
paying any cash dividends in the foreseeable future. We currently intend to
retain any future earnings for use in our business.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data
with respect to the five most recent fiscal years ended December 31, 2004, 2003,
2002, 2001 and 2000. The selected consolidated statement of operations data set
forth below for the fiscal year ended December 31, 2004 is derived from the
consolidated financial statements which have been audited by BDO Seidman, LLP,
independent registered public accounting firm, as indicated in their report
which is included elsewhere in the Annual Report and our consolidated financial
statements as of, and for the years ended, December 31, 2003, 2002, 2001 and
2000 were audited by another auditor. The selected consolidated financial data
should be read in conjunction with the consolidated financial statements of
Med-Design, and the Notes thereto, included elsewhere in the Annual Report, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,:
Revenue............... $ 1,773,507 $ 826,725 $ 474,325 $ 2,330,000 $ 4,128,993
Net loss.............. (6,161,348) (6,046,489) (8,081,061) (4,026,991) (2,793,365)
Dividends on Series A
preferred stock..... -- -- -- -- 150,000
Net loss per common
share............... $ (0.37) $ (0.42) $ (0.67) $ (0.38) $ (0.30)
At December 31,:
Total assets.......... $ 24,176,933 $ 28,546,429 $ 16,989,224 $ 8,259,960 $ 8,565,573
Long-term payable..... 706,342 1,506 4,080 16,806 20,895
- -------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FUTURE UNCERTAINTIES
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes, which appear elsewhere
in the Annual Report on Form 10-K. It contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly under the heading "Risk Factors."
OVERVIEW
We consider the following to be the most important matters on which
management focuses in evaluating our operating performance and financial
condition.
Revenue Growth. We believe that revenue growth is the key factor
affecting our results of operations. Our revenues have historically consisted of
royalties and up-front licensing fees. In 2004, we recognized a majority of our
revenues from sales of our Safety Huber Needle. Our arrangement regarding the
sale of the Safety Huber Needle, under which we have contracted for manufacture
and distribution of the product and purchased the sublicense rights to the
intellectual property, provides us with an expanded safety product line and
provides greater potential for per unit revenues than would be the case with a
licensed product. We believe our short term revenue growth will largely be
dependent on our ability to gain market share in the expanding Safety Huber
Needle market and the efforts of BD in selling products incorporating technology
licensed from us. Sales of the Safety Huber Needle in 2004 were below
management's expectations. We evaluated the realization of the acquired license
rights under SFAS 144 and concluded that there was sufficient undiscounted cash
flows to support the carrying value amount. The current fair value of the
acquired license rights is less than the carrying value. We will continue to
evaluate the realization of the assets and record an impairment charge if
necessary. Management continues to provide the distributor of our Safety Huber
Needle with sales assistance and other support in an effort to increase sales of
the Safety Huber Needle. We cannot assure that this effort will achieve
meaningful success.
18
The extent to which BD commits its resources to the sale of our
licensed technology products is entirely within BD's control. Management has
been disappointed with the pace of commercialization of these products in the
past and has encouraged BD to accelerate its efforts. In this regard, although
license revenues from BD have increased, all of such revenues constitute minimum
royalties. Although management is encouraged by the growth in sales of the BD
VacutainerTM Push Button Blood Collection Set and the limited launch of the 1ml
version of the IntegraTM Syringe in February 2004, management expected greater
revenues to be generated in 2004, and the fact that Med-Design is paid only
minimum royalties underscores the limited market penetration of these new
products.
We receive royalties from the sale of the Safety Seldinger Device from
Enpath Medical, Inc. Royalties from this product were approximately $120,000 in
2003 and declined to approximately $78,000 in 2004. Enpath Medical, Inc.'s major
customer decided to use a non-safety version of Seldinger, and sales declined
significantly. On December 29, 2004, we entered into Addendum Number Two to the
Development and Licensing Agreement with Enpath Medical, Inc. for the Safety
Seldinger Device to eliminate the minimum purchase requirement to maintain
exclusivity. We expect the future royalties from this product will decrease
significantly.
Management was also disappointed with the sales of the 1Shot Safety
Dental Syringe. This product, which Med-Design has contract manufactured, was
launched in June 2003. Revenue was approximately $168,000 in 2003, and declined
to approximately $19,000 in 2004. Management is attempting to assist Sultan
Chemists, the product's distributor, with its efforts to increase sales through
alternative marketing channels as well as a campaign to increase the awareness
of safety legislation through lobbyists.
In addition to the efforts of management to increase sales of the
Safety Huber Needle and the 1Shot Safety Dental Syringe, management is focused
on increasing revenues by entering into additional collaborative arrangements
and possibly by acquiring complementary businesses.
We rely on our licensees to provide us with sales information in order
to calculate the royalties due to us as a result of sales. While we have to date
relied on this sales information without independent verification, we are
currently developing appropriate procedures to verify this information in the
future and will have such information audited when we deem it appropriate.
Liquidity. We have historically generated cash principally from
issuances of equity and up-front licensing fees. In 2004, revenue from sales of
the Safety Huber Needle and the minimum royalty payments from BD also
contributed cash but considerably less than necessary to support operations.
Although we believe that our cash on hand is sufficient to support ongoing
operations for at least the next twelve months, our ultimate success depends on
our ability to generate sufficient revenues to support operations. If we cannot
generate sufficient revenues to support operations, we will likely have to rely
upon debt or equity financing. There is no assurance we will be able to obtain
such financing.
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Total revenue was $1,773,507 in 2004, as compared to revenue of
$826,725 in 2003. Revenue in 2004 reflects $1,011,641 in sales of the Safety
Huber Needle, all of which occurred after our acquisition of the Safety Huber
Needle business in April 2004, royalties of $664,341 from BD and $78,581 from
Enpath Medical, Inc. and $18,944 from sales of the1Shot Safety Dental Syringe.
Revenue in 2003 reflected sales of the 1Shot Safety Dental Syringe of $168,471
and royalty payments from the sale of our licensed products of $658,254.
19
Product costs, which consist of $942,535 direct and indirect costs
related to our contract manufactured products, the amortization of the
investment in acquired licensed products of $297,622, consulting expense of
$75,000 and a write-off of inventory obsoleted due to design change of $154,000,
were $1,469,581 for the period ended December 31, 2004. Product costs for the
period ended December 31, 2003 consisted of direct and indirect costs related to
the Safety Dental Syringe sales of $153,953.
General and administrative expenses were $5,441,572 in 2004, a decrease
of $486,141 as compared to general and administrative expenses of $5,927,713 in
2003. The decrease was primarily due to a reduction of charges for stock based
compensation of $1,011,389 offset by increases in professional and technical
fees and audit fees of approximately $480,000 related to implementing internal
controls principally to effect compliance with the applicable provisions of the
Sarbanes-Oxley Act.
Research and development expenses were $1,187,835 in 2004, a decrease
of $297,056, as compared to research and development expenses of $1,484,891 in
2003. The decrease was due primarily to a reduction in expenditures for employee
compensation resulting from a reduction in work force. We have focused our R&D
activities on design changes to our current portfolio driven by the preferences
expressed by potential customers, and therefore are comfortable reducing
employee related expenditures.
Investment income was $591,588 in 2004, a decrease of $64,653 as
compared to $526,935 in 2003. The decrease was due to a decrease in invested
cash resulting from the purchase of the assets of the Safety Huber Needle
business.
Realized loss on investments were $401,319 for the year ended December
31, 2004. We sold fixed income securities which yielded lower rates of interest
to avoid further deterioration of our portfolio in a rising interest market. The
securities were sold in September 2004 at a loss of $340,000.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Total revenue was $826,725 in 2003, as compared to revenue of $474,325
in 2002. Revenue in 2003 reflected the sales of the 1Shot Safety Dental Syringe
as well as royalty payments under our licensing agreements, including $445,701
in minimum royalty payments from BD and Enpath Medical, Inc. Revenue in 2002
also reflected royalty payments from the sale of our licensed products.
General and administrative expenses were $5,927,713 in 2003, a decrease
of $674,707 as compared to general and administrative expenses of $6,602,420 in
2002. The decrease was primarily due to a reduction of expenditures for employee
compensation of approximately $227,000 resulting from a reduction in staff,
legal expense reductions of approximately $266,000, professional cost decreases
of approximately $125,000 and stock based compensation decreases of
approximately $309,000 offset by an increase in bad debt expense of $250,000.
Research and development expenses were $1,484,891 in 2003, a decrease
of $484,818 as compared to research and development expenses of $1,969,709 for
the corresponding period in 2002. The decrease is partially attributable to a
$350,000 charge recorded in December 2002 resulting from the settlement of a
claim by our former Director of Research and Development and consulting costs of
approximately $96,000 in 2002 related to the implementation of a quality program
required for companies engaged in the manufacture of medical devices.
Investment income was $526,935 in 2003, an increase of $224,106 as
compared to $302,829 in 2002. The increase was due primarily to an increase of
approximately $11,000,000 in invested cash in 2003.
In 2002, we recorded an impairment charge on our investment in Enpath
Medical Inc. (formerly Medamicus) of $331,419.
LIQUIDITY AND CAPITAL RESOURCES
In 2004, our principal sources of cash were $1,116,614 of royalties
from the sale of our licensed products, $928,173 from the sale of our contract
manufactured products and the net sale of investment securities of $8,811,613,
however available for sale securities decreased by $9,195,030 from 2003 to 2004.
In 2003 our principal sources of cash were the net proceeds of approximately
$16,000,000 from our August 2003 private placement of common stock, the
$2,241,329 of cash generated from our sale of Enpath Medical, Inc. common stock,
and royalties of $329,398 from the sale of our licensed products. Additionally,
in 2002, our principal source of cash was the net proceeds of approximately
$14,200,000 from our March 2002 private placement of common stock.
20
Our primary uses of cash in 2004 consisted of general and
administrative costs, including cash payments of $2,036,799 for salaries and
research and development costs and the purchase of the Safety Huber Needle
business of $5,901,240. General and administrative costs in 2003 included cash
payments of $2,115,645 for salaries and research and development costs. General
and administrative costs in 2002 included cash payments of $2,687,661 for
salaries and research and development costs.
At December 31, 2004, we had a $3,000,000 revolving line of credit at
Wachovia Bank under which borrowings would be collateralized by substantially
all of our assets. This facility can be used to fund working capital needs and
finance capital equipment purchases; however, advances for capital equipment
financing may not exceed $600,000. Any borrowings to meet working capital needs
will bear interest at LIBOR plus 2.25%, while borrowings to finance capital
equipment purchases would bear interest at the prime rate plus 2.5%. There were
no borrowings under this facility during 2004 and 2003. The Wachovia facility
expires on May 31, 2005.
On March 29, 2005, we established an additional revolving line of
credit under which we may borrow up to $3,000,000 with U.S. Bank. The facility
is collateralized by our investments in U.S. Bank. Any borrowing would bear
interest at LIBOR plus 1.75%. There are no financial covenants. The facility
expires on March 29, 2006 and there is no assurance that we will be successful
in negotiating a continuation of the availability of the line of credit or terms
that will be available to us. There are no amounts outstanding under the
agreement.
At December 31, 2004, we had cash, cash equivalents and available for
sale securities of $14,600,270 as compared to $25,029,749 at 2003. We believe
that we have sufficient funds to support our planned operations for at least the
next twelve months. The availability of resources over a longer term will be
dependent on our ability to increase sales of our manufactured products and
royalty payments we receive from our licensees, enter into new licensing
agreements, enter into and profitably operate under collaborative arrangements,
and raise additional equity or debt financing. We have not generated sufficient
cash flows from operations to support our operations on an on-going basis and
anticipate that we may need to seek additional sources of funding in the future.
If we are unsuccessful in negotiating additional agreements, or if licensing
revenues and revenues from sales of our manufactured products are insufficient
to support our operations, we may be required to reduce the scope of, or cease,
our operations.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as of December 31, 2004 consist of the
following:
Payments due by period
-----------------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years
-----------------------------------------------------------------------
Operating lease obligations $ 751,464 $ 196,874 $ 399,501 $155,089
Employment agreement obligations 570,151 489,013 81,138 -
Purchase obligations 586,000 586,000 - -
Obligations under Luther agreement 750,000 250,000 500,000 -
Consulting agreement - Luther 325,000 100,000 225,000 -
Consulting agreement - Donegan 474,869 343,060 131,809 -
-----------------------------------------------------------------------
Total $3,457,484 $1,964,947 $1,337,448 $155,089
=======================================================================
During 2003, we renewed our lease for office space in Ventura,
California. The renewal is for five years beginning November 1, 2003 and
terminating October 31, 2008. The base rent of $15,310 per month and can be
increased annually by 3%.
21
On October 14, 2004 James M. Donegan resigned as President and Chief
Executive Officer of Med-Design. Mr. Donegan and Med-Design executed a
Separation Agreement and Release on October 14, 2004. Pursuant to the agreement,
Mr. Donegan has, and will continue, to make himself available on a part-time
basis for consultation with Med-Design. Med-Design began to pay Mr. Donegan an
aggregate of $497,275 of which $321,512 remains to be paid in bi-weekly
installments through November 15, 2005 with the remaining balance of $150,971 to
be paid in bi-weekly installments from November 15, 2005 to November 14, 2006.
In addition, through November 15, 2005, Med-Design continued to provide medical
and life coverage for Mr. Donegan. Med-Design also accelerated vesting of
options to purchase 120,000 shares of Med-Design common stock at an exercise
price of $3.25 per share, and granted options to purchase 30,000 shares of
common stock at an exercise price of $0.92 per share. Med-Design also agreed to
continue to pay, through April 30, 2005, $2,500 per month to cover Mr. Donegan's
rent and utilities, and agreed to provide all benefits accrued or earned as of
the date of the agreement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, we are required to make
estimates and assumptions that, among other things, affect the reported amounts
of assets and liabilities and reported amounts of revenues and expenses. These
estimates and assumptions are most significant where they involve levels of
subjectivity and judgment necessary to account for highly uncertain matters or
matters susceptible to change, and where they can have a material impact on our
financial condition and operating performance. We discuss below the more
significant estimates and related assumptions used in the preparation of our
consolidated financial statements. If actual results were to differ materially
from the estimates made, the reported results could be materially affected.
Patents. Med-Design capitalizes costs incurred in connection with
patent acquisitions and patent applications. These costs are amortized using the
straight line method over the estimated useful life of the patents, not to
exceed the legal life. The statutory legal life of a patent is 20 years from the
date of application. The carrying value of the patents are regularly reviewed by
management for impairments whenever events or changes and circumstances indicate
that the carrying amount may not be recoverable. Impairments, if any, are
recognized when the expected future cash flows derived from the patent is less
than the carrying value. The estimates of useful lives of the patents and
expected future cash flows are based on a number of factors including product
demand, market conditions, technology developments and the activities of our
competitors. Med-Design does not believe that the value of any of its patents
are impaired and does not believe that it is likely that there will be a change
in the future. Historically, Med-Design has never recorded an impairment to the
value of its patent portfolio. If future events or evaluations cause management
to conclude that the value of one or more patents is impaired, we may recognize
significant losses, and our financial condition may be negatively affected, in
the future.
Investment in Acquired License Rights. We acquired the Safety Huber
Needle business of Luther Needlesafe Products, Inc. We amortized the acquired
license rights over 16 years, which represents both the term of the sublicense
agreement and the expiration date related to the patent. The carrying value of
the investment and the related estimated remaining lives are evaluated at each
balance sheet date. An impairment or charge 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."
Recoverability of Long-Lived Assets and Goodwill. We test long-lived
assets, including property and equipment and amortizable intangible assets, for
recoverability whenever events or change in circumstances indicate that we may
not be able to recover the asset's carrying amount. When events or changes in
circumstances indicate an impairment may exist, we evaluate the recoverability
by determining whether the undiscounted cash flows expected to result from the
use and eventual disposition of that asset cover the carrying value at the
evaluation date. If the undiscounted cash flows are not sufficient to recover
the carrying value, we measure any impairment loss as the excess of the carrying
amount of the asset over its fair value.
We conduct a review for impairment of goodwill at least annually.
Additionally, on an interim basis, we assess the impairment of goodwill whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors that we consider important which could trigger an
impairment review include significant underperformance relative to historical or
expected future operating results, significant changes in the manner or use of
the acquired assets or the strategy for the overall business, significant
negative industry or economic trends or a decline in a company's stock price for
a sustained period.
22
Estimates of recovery of carrying values of long-lived assets and
goodwill are based on a number of assumptions which may not prove to be correct.
In addition, it is reasonably possible that our accounting estimates with
respect to the ultimate recoverability of the carrying value of long-lived
assets and goodwill could change in the near term and that the effect of such
changes on our Consolidated Financial Statements could be material. While we
believe that the current recorded carrying values of our long-lived assets and
goodwill are not impaired, there can be no assurance that a significant
write-down or write-off will not be required in the future.
Available for Sale Securities. Available-for-sale securities are
reported at a fair value, based on quoted market prices, with the net unrealized
gain or loss reported as a component of "Accumulated other comprehensive income
(loss)" in stockholders' equity.
We record an impairment charge when we believe an investment has
experienced a decline in value that is other-than-temporary. In determining if a
decline in market value below cost for a publicly traded security is
other-than-temporary, we evaluate the relevant market conditions, offering
prices, trends of earnings, price multiples and other key measures. When a
decline in value is deemed to be other-than-temporary, we recognize an
impairment loss in the current period to the extent of the decline below the
carrying value of the investment. Factors involved in the determination of
potential impairment include fair value as compared to amortized cost, length of
time the value has been below amortized cost, credit worthiness of the issuer,
forecasted financial performance of the issuer, position of the security in the
issuer's capital structure, the presence and estimated value of collateral or
other credit enhancement, length of time to maturity, interest rates and our
intent and ability to hold the security until the market value recovers. Adverse
changes in market conditions or poor operating results of underlying investments
could result in additional other-than-temporary losses in future periods.
Moreover, if management's evaluation is not correct, we may recognize
significant impairment losses in later periods.
Revenue Recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin (SAB) No. 104, "Revenue Recognition." SAB No. 104 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) require
management's judgments regarding the fixed nature of the fee charged for
services rendered and products delivered and the collectibility of those fees.
To satisfy the criteria, we: (1) input orders based upon receipt of a customer
purchase order; (2) record revenue upon shipment of goods when risk of loss and
title transfer under our arrangements with customers or otherwise complying with
the terms of the purchase order; (3) confirm pricing through the customer
purchase order and; (4) validate creditworthiness through past payment history,
credit agency reports and other financial data. Other than through warranty
rights, our customers do not have explicit or implicit rights of return. Should
changes in conditions cause management to determine the revenue recognition
criteria are not met for certain future transactions, such as a determination
that an outstanding account receivable has become uncollectible, revenue
recognized for any reporting period could be adversely affected.
Income Taxes. Med-Design accounts for income taxes under the asset and
liability method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance is recorded for deferred tax assets where it appears more
likely than not that we will not recover the deferred tax asset.
We experienced an ownership change as defined by Internal Revenue Code
Section 382 in 1997. Losses incurred through January 23, 1997 amounting to $4.9
million are generally limited in their utilization to $1.7 million per year. It
is possible that recent ownership changes may result in further limitations
under Section 382.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 151 "Inventory Costs- An Amendment of ARB No. 43, Chapter 4." SFAS
151 amends the guidance in ARB No. 43, Chapter 4 to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. The provisions of SFAS 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is
not expected to have a material effect on our financial condition or results of
operations.
23
In December 2004, the FASB issued SFAS 153 "Exchanges of Non-monetary
Assets - an amendment of APB Opinion No. 29". SFAS 153 amends APB Opinion 29 to
eliminate the similar productive asset exception and establishes that exchanges
of productive assets should be accounted for at fair value, rather than at
carryover basis unless (1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits, (2) the
transaction is an exchange transaction to facilitate sales to customers, or (3)
the transaction lacks commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of SFAS 153 are
effective for non-monetary exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 is not expected to have a material
effect on our financial condition or results of operations.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment."
SFAS 123R establishes that employee services received in exchange for
share-based payment result in a cost that should be recognized in the income
statement as an expense when the services are consumed by the enterprise. It
further establishes that those expenses be measured at fair value determined as
of the grant date. The provisions of SFAS 123R become effective in the third
quarter of 2005. We previously applied 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" in accounting for our stock plans. We
had adopted the disclosure only provisions of Statement of Financial Accounting
Standards N0. 123 "Accounting for Stock Based Compensation. The adoption of SFAS
123R is expected to increase stock-based compensation. We are currently
assessing the impact of the accounting standard on our results of operations and
financial position.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no amounts outstanding under our revolving line of credit at
December 31, 2004. If we were to borrow under our credit facility, borrowings to
meet working capital needs would bear interest at LIBOR plus 2.25% and
borrowings to finance capital equipment purchases would bear interest at the
prime rate plus 2.5%. As a result, any such borrowings would be subject to
interest rate fluctuations which could increase our interest expense,
respectively.
We invest a portion of excess cash in marketable securities in
accordance with our investment guidelines as approved by our Board of Directors.
These investments include corporate debt securities and U.S. government and
agencies securities. These investments are in highly liquid, low risk securities
where our risk of loss is at a minimum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the consolidated financial statements
and notes thereto of Med-Design which are attached hereto beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Acting, Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Disclosure controls and procedures are defined in SEC regulations as
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended, is recorded,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is accumulated and communicated to the issuer's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on their evaluation and in light
of the material weakness in internal control discussed below, the Acting, Chief
Executive Officer and Chief Financial Officer concluded that these controls were
not effective as of December 31, 2004. Med-Design is currently studying ways to
ensure ongoing compliance with relevant accounting and financial reporting
requirements. Med-Design and BDO are continuing to review these matters. A
controls system cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
(b) Management's Report on Internal Control Over Financial Reporting
The Sarbanes-Oxley Act of 2002 (the "Act") imposed many requirements
regarding corporate governance and financial reporting. One requirement under
section 404 of the Act, beginning with this annual report, is for management to
report on the Company's internal controls over financial reporting and for our
independent registered public accountants to attest to this report. In late
November 2004, the Securities and Exchange Commission issued an exemptive order
providing a 45 day extension for the filing of these reports and attestations by
eligible companies. We elected to utilize this 45 day extension, therefore, this
Form 10-K does not include these reports. Med-Design's management and BDO
Seidman have not yet completed the annual report on internal control over
financial reporting and the related audit report for the year ended December 31,
2004. These reports will be included in an amended Form 10-K expected to be
filed in April 2005. During 2004, we spent considerable time and resources
analyzing, documenting and testing our system of internal controls.
25
While the Company has not completed its Sarbanes-Oxley Section 404
assessment, the Company's management is currently assessing the effectiveness of
its internal control over financial reporting as of December 31, 2004 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework. As of the date of this
Annual Report on Form 10-K, management has identified a material weakness in its
internal control over financial reporting related to the misapplication of Step
1 of Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment of Long-Lived Assets" related to our evaluation of the recoverability
of the acquired license rights which caused us to reverse a previously recorded
impairment charge. This adjustment related to the fourth quarter of 2004 and did
not affect prior periods.
A material weakness in internal control over financial reporting (as
defined in Auditing Standard No. 2 of the Public Company Accounting Oversight
Board) is a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected.
(c) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report.
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the close of our fiscal year covered
by this report.
27
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements and notes
thereto of Med-Design which are attached hereto beginning on page F-1, have been
incorporated by reference into Item 8 of this Report on Form 10-K:
Page
----
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-4
Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002 F-5
Consolidated Statements of Stockholders' Equity and Comprehensive
Loss for the years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-8
2. All schedules are omitted because they are inapplicable, or not
required, or the information is shown in the financial statements or notes
thereto.
(b) List of Exhibits. The following is a list of exhibits filed as part of this
annual report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference.
28
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(1) Certificate of Incorporation of Med-Design.
3.2(8) Certificate of Amendment to Certificate of Incorporation of
Med-Design
3.3(1) Bylaws of Med-Design.
4.1(1) Specimen of Common Stock Certificate of Med-Design.
10.1(4) Amended and Restated Non-Qualified Stock Option Plan.
10.2(2) Lease Agreement dated June 15, 1995 between Moen Development and
MDC Research Ltd. and guaranteed by Med-Design.
10.3 Renewal Lease Agreement dated November 1, 2003, Moen Development
and MDC Research Ltd.**
10.4(9) Asset Purchase Agreement dated April 1, 2004 between Med-Design
and Luther Needlesafe Product, Inc.
10.5(4) Licensing and Option Agreement dated December 11, 1998 with
Becton, Dickinson and Company.
10.6(4) Equity agreement dated December 11, 1998 with Becton, Dickinson
and Company.
10.7(5) Addendum to License Agreement dated December 11, 1999 with
Becton, Dickinson and Company.
10.8(5) Second Addendum to License Agreement dated January 25, 2000 with
Becton, Dickinson and Company.
10.9(6) Warrant Agreement dated April 25, 2000 between Med-Design and
Lawrence Ellis.*
10.10(6) Licensing Agreement dated May 11, 2000 with Becton, Dickinson and
Company.
10.11(7) 2001 Equity Compensation Plan.
10.12 Separation of Employment Agreement dated October 10, 2004 between
Med-Design and James Donegan.**
10.13(10) Employment Agreement dated October 10, 2002 between Med-Design
and Joseph Bongiovanni.
10.14(10) Employment Agreement dated October 10, 2002 between Med-Design
and Lawrence D. Ellis.
10.15(11) Employment Agreement dated May 15, 2002 between Med-Design and
David Dowsett
10.16(11) Employment Agreement extension dated October 17, 2003 between
Med-Design and David Dowsett
10.17(12) Developing and Licensing Agreement for Safety "Seldinger" Needle
Device between Med-Design and Enpath Medical, Inc. dated as of
August 25, 2000 )the "Enpath Agreement").
10.18(13) Addendum Number One to the Enpath Agreement.
10.19(14) Addendum Number Two to the Enpath Agreement.
10.20 Plastics Engineering & Development Incorporated Manufacturing
Agreement dated as of May 22, 2003.**
10.21 New Alliance of Independent Medical Distributors, Inc.
Exclusive Master Sales & Distribution Agreement dated as of
November 1, 2003 Agreement.**
21.1 List of Subsidiaries of Med-Design.**
23.1 Consent of BDO Seidman, LLP**
23.2 Consent of PricewaterhouseCoopers LLP**
31.1 Certificate of the Chief Executive Officer required by Rule 15d -
14(a).**
31.2 Certificate of the Chief Financial Officer required by Rule 15d -
14(a).**
32.1 Certificate of the Chief Executive Officer required by Rule 15d -
14(b).**
32.2 Certificate of the Chief Financial Officer required by Rule 15d -
14(b).**
99.1 Experts**
29
- ---------------
* Constitutes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K
** Filed herewith
(1) Incorporated by reference to Form SB-2 filed April 7, 1995 and Amendment
Nos. 1, 2 and 3 thereto (File No. 33-901014).
(2) Incorporated by reference to Form 10-KSB filed on March 29, 1996.
(3) Incorporated by reference to Form 10-KSB filed on March 31, 1998.
(4) Incorporated by reference to Form 10-KSB filed on March 31, 1999.
(5) Incorporated by reference to Form 10-KSB filed on March 7, 2000.
(6) Incorporated by reference to Form 10-K filed March 23, 2001.
(7) Incorporated by reference to Schedule 14A filed on June 28, 2001.
(8) Incorporated by reference to Form 10-K filed on April 1, 2002.
(9) Incorporated by reference to Form 8-K filed on April 15, 2004.
(10) Incorporated by reference to Form 10-K filed on March 28, 2003.
(11) Incorporated by reference to Form 10-K filed on March 12, 2004.
(12) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by Enpath
Medical, Inc. on September 19, 2000.
(13) Incorporated by reference to Exhibit 10.1 to Form S-3 filed by Enpath
Medical, Inc. on October 16, 2001.
(14) Incorporated by reference to Form 8-K filed on January 3, 2005.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE MED-DESIGN CORPORATION
Date: March 30, 2005 By: DAVID R. DOWSETT
-------------------------------
David R. Dowsett
Acting, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
DAVID R. DOWSETT Acting, Chief Executive Officer March 30, 2005
- ------------------------------
David R. Dowsett
LAWRENCE D. ELLIS Vice President, Finance and Chief Financial March 30, 2005
- ------------------------------ Officer (Principal Financial Officer and Principal
Lawrence D. Ellis Accounting Officer)
RALPH BALZANO Director March 30, 2005
- ------------------------------
Ralph Balzano
JOSEPH N. BONGIOVANNI, III Director March 30, 2005
- ------------------------------
Joseph N. Bongiovanni, III
PAUL CASTIGNANI Director March 30, 2005
- ------------------------------
Paul Castignani
D. WALTER COHEN Director March 30, 2005
- ------------------------------
D. Walter Cohen
JAMES M. DONEGAN Director March 30, 2005
- ------------------------------
James M. Donegan
VINCENT J. PAPA Director March 30, 2005
- ------------------------------
Vincent J. Papa
JAMES E. SCHLEIF Director March 30, 2005
- ------------------------------
James E. Schleif
Director
- ------------------------------
Stephen E. Smith, Jr.
PASQUALE L. VALLONE Director March 30, 2005
- ------------------------------
Pasquale L. Vallone
GILBERT M. WHITE Director March 30, 2005
- ------------------------------
Gilbert M. White
Index to Consolidated Financial Statements
Page
----
Reports of Independent Registered Public Accounting Firms................................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 ............................... F-4
Consolidated Statements of Operations for years ended F-5
December 31, 2004, 2003 and 2002.......................................................
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years F-6
ended December 31, 2004, 2003 and 2002.................................................
Consolidated Statements of Cash Flows for the years ended F-7
December 31, 2004, 2003 and 2002.......................................................
Notes to Consolidated Financial Statements.................................................. F-8 to F-31
F-