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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
|_| 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
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THE MED-DESIGN CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2771475
- -------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2810 Bunsen Avenue, Ventura, CA 93003
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (805) 339-0375
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
On May 9, 2005, 16,749,486 shares of the registrant's common stock, $.01 par
value, were outstanding.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page Number
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004 ......................................................... 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2005 and 2004................................. 4
Consolidated Statements of Comprehensive Loss (unaudited) for the three
months ended March 31, 2005 and 2004....................................... 5
Consolidated Statements of Cash Flows (unaudited) for the three months
ended March 31, 2005 and 2004.............................................. 6
Notes to Consolidated Financial Statements (unaudited)..................... 7
Item 2- Management's Discussion and Analysis of Financial Condition and Results
of Operation................................................................. 14
Item 3- Quantitative and Qualitative Disclosure About Market Risk.................... 16
Item 4- Controls and Procedures...................................................... 16
PART II - OTHER INFORMATION
Item 6- Exhibits..................................................................... 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2005 December 31,
(Unaudited) 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $2,007,913 $3,964,388
Available-for-sale securities 10,628,230 10,635,882
Trade receivables 483,016 386,979
Inventory 441,861 39,250
Prepaid expenses and other current assets 98,595 236,265
------------ ------------
Total current assets 13,659,615 15,262,764
Property, plant, and equipment, net of accumulated depreciation
of $1,401,182 and $1,573,875, respectively 235,091 714,477
Patents, net of accumulated amortization of $1,099,391 and $1,046,700,
respectively 1,776,209 1,816,760
Investment in acquired license rights 6,051,671 6,150,879
Goodwill 232,053 232,053
------------ ------------
Total assets $21,954,639 $24,176,933
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term payable $250,000 $250,000
Accounts payable 349,770 458,122
Accrued compensation and benefits 111,296 111,912
Accrued professional fees 135,345 325,000
Other accrued expenses 17,623 68,742
------------ ------------
Total current liabilities 864,034 1,213,776
------------ ------------
Long-term payable, less current maturities 464,852 456,342
Commitments and Contingencies (Note 4)
Stockholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized;
No shares outstanding at March 31, 2005 and December 31, 2004 -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
16,749,486 shares issued and outstanding at March 31, 2005 and
December 31, 2004, respectively 167,495 167,495
Additional paid-in capital 71,954,814 71,917,610
Accumulated deficit (51,213,051) (49,441,079)
Accumulated other comprehensive (loss) income (283,505) (137,211)
------------ ------------
Total stockholders' equity 20,625,753 22,506,815
------------ ------------
Total liabilities and stockholders' equity $21,954,639 $24,176,933
============ ============
The accompanying notes are an integral part of these financial statements.
3
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-----------------------------
2005 2004
Revenue
Product sales $502,374 $2,880
Licensing revenue 174,190 86,631
------------ ------------
Total Revenue 676,564 89,511
Product costs 719,258 2,729
General and administrative 1,143,688 1,351,502
Research and development 221,991 358,901
------------ ------------
Total operating expenses 2,084,937 1,713,132
Loss from operations (1,408,373) (1,623,621)
Interest expense (8,510) (36)
Investment income 130,261 193,352
Realized gain (loss) on investments (20,953) (5,629)
Write-off of fixed assets (464,398) --
------------ ------------
Net loss ($1,771,973) ($1,435,934)
============ ============
Basic and diluted loss per
common share ($0.11) ($0.09)
Basic and diluted weighted average
common shares outstanding 16,749,486 16,604,217
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended March 31,
-----------------------------
2005 2004
------------ ------------
Net loss ($1,771,973) ($1,435,934)
Other comprehensive gain (loss):
Unrealized holding gain (loss) on
securities (146,294) 126,629
------------ ------------
Comprehensive loss ($1,918,267) ($1,309,305)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss ($1,771,973) ($1,435,934)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 205,608 116,024
Amortization of discount on long-term payables 8,510 --
Loss (gain) on sale of available-for-sale securities 20,954 5,629
Loss on disposal of fixed assets 464,398 --
Stock-based compensation 37,204 233,130
Changes in operating assets and liabilities:
Trade receivables (96,037) 566,621
Inventory (402,611) --
Prepaid expenses and other current assets 137,671 101,526
Accounts payable (108,352) (99,104)
Accrued expenses (241,391) (72,074)
------------ ------------
Net cash used in operating activities (1,746,019) (584,182)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (38,720) (2,509)
Additions to patents (12,141) (95,417)
Investment in available-for-sale securities (1,072,239) (101,031)
Sale of available-for-sale securities 912,643 5,455,197
------------ ------------
Net cash provided by (used in) investing activities (210,457) 5,256,240
------------ ------------
Cash flows from financing activities:
Capital lease payments -- (692)
Warrants and stock options exercised -- 137,180
------------ ------------
Net cash provided by financing activities -- 136,488
------------ ------------
Increase (decrease) in cash (1,956,476) 4,808,546
Cash and cash equivalents, beginning of period 3,964,388 5,198,837
------------ ------------
Cash and cash equivalents, end of period $2,007,913 $10,007,383
============ ============
Cash paid during the period:
Interest paid -- 36
Taxes paid 3,075 5,245
Noncash investing and financing activities:
Change in unrealized loss on available-for-sale
securities $146,294 $126,629
The accompanying notes are an integral part of
these financial statements.
6
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include The
Med-Design Corporation (hereinafter, including its subsidiaries as the context
indicates, the "Company" or "Med-Design") and its wholly-owned subsidiaries. The
accompanying consolidated financial statements have been prepared on a basis
consistent with that used as of and for the year ended December 31, 2004 and, in
the opinion of management, reflect all adjustments (principally consisting of
normal recurring accruals) considered necessary to present fairly the financial
position of the Company as of March 31, 2005, the results of the Company's
operations and comprehensive loss for the three-month period ended March 31,
2005 and 2004 and cash flows for the three-month period ended March 31, 2005 and
2004. The results of operations for the three -month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. The consolidated financial statements included herein
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the applicable
requirements of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements, which were included as part of the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Med-Design Corporation and its wholly-owned subsidiaries, MDC Investment
Holdings, Inc. and MDC Research Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified for comparability.
Cash and Cash Equivalents
Med-Design considers all bank depository cash accounts with initial
maturities of three months or less to be cash equivalents.
Available-for-Sale Securities
Med-Design's investments are classified as available-for-sale securities
and accordingly, any unrealized holding gains or losses, net of taxes, are
excluded from income and recognized as a separate component of stockholders'
equity until realized. Investments in marketable securities are made consistent
with Med-Design's investment guidelines as developed by management and approved
by the Board of Directors. Available-for-sale securities are reported at 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.
The Company records an impairment charge when it believes 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, the Company evaluates 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, the Company
recognizes 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 for 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.
7
Adverse changes in market conditions or poor operating results of
underlying investments could result in additional other-than-temporary losses in
future periods.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Significant additions
or improvements extending the assets' useful lives are capitalized. When
property, plant and equipment are sold, retired or otherwise disposed of, the
applicable costs and accumulated depreciation are removed from the accounts and
the resulting gain or loss recognized.
Depreciation is computed by the straight-line method, utilizing rates
based upon the estimated service life of the various classes of assets.
Leasehold improvements are depreciated over the remaining lease term or asset
life if shorter.
Segment Reporting
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure
about Segments of an Enterprise and Related Information" requires a business
enterprise, based upon a management approach, to disclose financial and
descriptive information about its operating segments. Operating segments are
components of an enterprise about which separate financial information is
available and regularly evaluated by the chief operating decision maker(s) of an
enterprise. The Company has one business segment, which consists of the design,
development and licensing and contract manufacture of safety medical devices.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets except for
goodwill and the related estimated remaining lives at each balance sheet date.
An impairment or change in useful life would be recorded whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable or the useful life has changed in accordance with SFAS No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets."
Patents
Patents, patent applications, and patent rights are stated at acquisition
costs. Amortization of patents is recorded by the straight-line method over the
estimated useful lives of the patents, not to exceed the legal life.
Investment in Acquired License Rights
On April 1, 2004, Med-Design acquired the assets of the Safety Huber
Needle business of Luther Needlesafe Products, Inc., which has been accounted
for as an acquisition of a business in accordance with SFAS No. 141 with the
guidance in "EITF 98-3", Determining Whether a Non-monetary Transaction Involves
Receipt of Production Assets or of a Business. The Company amortizes acquired
license rights over 16 years, which represents both the term of the underlying
sublicense agreement and expiration date of the related patent.
Goodwill Resulting from Business Acquisition
The Company accounts for goodwill in accordance with SFAS No. 142. SFAS
No. 142 addresses the accounting and reporting of goodwill subsequent to its
acquisition. SFAS No. 142 provides that goodwill will no longer be amortized.
Goodwill of a reporting unit is tested for impairment on an annual basis or
between annual tests if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying amount.
Revenue Recognition
Fees received in connection with the entry into licensing contracts for
the Company's patented, proprietary products are recorded as revenue following
the execution of a binding agreement, and when the Company has fulfilled its
obligations under the arrangement or when Med-Design's only remaining obligation
is to maintain and defend the licensed patent rights.
8
Royalties received on licensed products which are based on the licensee's
product volume are recorded as revenue in the period when the royalty payments
are earned. Minimum contractual royalty payments related to licensed products
are recorded as revenue during the period to which the minimum payments relate.
Revenues from the sale of the Safety Dental Needle are recorded upon
acknowledgement of receipt of the product by our distributor, Sultan Chemists as
title and risk of loss remain with the Company until acknowledgement of receipt
by Sultan Chemists.
Revenues from the sale of the Safety Huber Needle are recorded upon
shipment of the product to the Company's distributor as title and risk of loss
transfer upon shipment.
Sales returns and allowances are recorded as an adjustment of revenue when
they occur. Med-Design historically has experienced an immaterial number of
returns and does not believe that experience affects its revenue recognition at
this time.
Accounts Receivable
Med-Design does not believe an allowance for doubtful accounts is
necessary. Historically, the Company has collected 100% of its outstanding
receivables. The majority of Med-Design's receivables have historically been
related to royalty revenue with manufacturing companies and large distributors
that have substantial financial means and a history of timely payment to the
Company.
Product Cost
Product cost includes direct expenditures for material, packaging,
sterilization, freight, amortization of investment in acquired license rights
and consulting expense related to the acquisition of the Safety Huber Needle
business. The Company also allocates a portion of its overhead (labor, use of
facilities and depreciation) to product cost.
Income Taxes
Med-Design accounts for income taxes under the asset and liability method
in accordance with SFAS 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 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 the Company will not be able
to recover the deferred tax asset.
Research and Development
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
Stock-Based Compensation
The Company applies the intrinsic value method of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and the
Financial Accounting Standards Board Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" (FIN 44) in accounting for
its stock plans. The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
9
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No.
123:
Three Months Ended
March 31,
2005 2004
------------ ------------
Net loss - as reported ($1,771,973) ($1,435,934)
Add: stock-based employee compensation
expense included in reported net loss 37,204 233,130
Deduct: total stock-based employee
compensation expense determined
under fair-value based method for all
awards (227,298) (484,117)
------------ ------------
Net loss - pro forma ($1,930,328) ($1,686,921)
------------ ------------
Net loss per share:
Basic & diluted loss per share - as reported ($0.11) ($0.09)
Basic & diluted loss per share - pro forma ($0.12) ($0.10)
In August 2000 and March and November 2002, the Company entered into
several equity arrangements with officers and consultants of the Company
involving grants of stock options and warrants to purchase common stock. The
Company recorded compensation expense in the amount of $37,204 and $233,130 in
connection with these transactions for the three months ended March 31, 2005 and
March 31, 2004, respectively, to reflect partial vesting of the grants.
2. Investment in Acquired License Rights
Acquisition of a Business
On April 1, 2004, the Company acquired the assets of the Safety Huber
Needle business of Luther Needlesafe Products, Inc. The Company paid $5.6
million in cash, $250,000 in the Company's common stock (67,094 shares valued at
$3.73 per share, which was the average of the reported closing prices of the
Company's common stock on the Nasdaq National Market for the 10 trading days
preceding the date of the acquisition) and $750,000 to be paid in cash or, at
the Company's option, in the Company's common stock over the next three years.
The three year payment arrangement was valued at its discounted present value of
$680,812. The purchase price of the acquired business was thus $6,840,958,
inclusive of costs related to the acquisition of $301,240. Results of operations
for the Safety Huber Needle business are included in the Company's income
statement effective April 1, 2004. See also Note 4.
Safety Huber Needle Business Transaction Summary
Purchase price:
Cash $ 5,901,240
Stock 250,000
Liability--additional purchase consideration 680,812
-----------
$ 6,832,052
===========
Allocated as follows:
Inventory $ 90,000
Property and equipment 61,498
Acquired license rights 6,448,501
Goodwill 232,053
-----------
$ 6,832,052
===========
10
The acquired license rights are being amortized over the remaining patent life
of approximately 16 years. The life of the patent is also the life of the
sublicense agreement. Goodwill is expected to be a non taxable deduction.
11
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the Safety Huber Needle
business for the three months ended March 31, 2004 as if the acquisition had
occurred on January 1, 2004.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Historical
------------------------------
Safety
The Med-Design Huber Needle Pro Forma Pro
Corporation Business Adjustments Forma
-------------- ------------ ------------ ------------
Revenue $89,511 $257,404 $-- $346,915
Net loss ($1,435,934) ($2,432,461) $1,857,632(a) ($2,010,763)
============ ============ ============ ============
Basic and diluted loss per common share ($0.09) ($0.12)
Basic and diluted weighted average
common shares outstanding 16,604,217 67,094 16,671,311
(a) Net loss was adjusted for pro forma purposes to recognize the effect of the
difference between historical costs of the business and the costs attributable
to the recorded values of assets and liabilities following the acquisition.
Those net loss decreases (increases) were:
Executive Bonuses $1,992,000(1)
Depreciation/Amortization (125,858)
Interest Expense (8,510)
-------------
$1,857,632
=============
1) Represents bonuses to Luther executives resulting from the disposition of the
assets related to the Safe-Step(R) Safety Huber Needle business.
12
3. Basic and Diluted Loss per Share
Basic and diluted loss per common share is calculated by dividing net loss
by the weighted average number of common shares outstanding during the period.
Options and warrants to purchase 3,958,425 shares of common stock as of March
31, 2005 and 3,600,527 shares of common stock as of March 31, 2004 were not
included in computing diluted earnings per share as the effect was
anti-dilutive.
4. Commitments and Contingencies
In August 2000, Med-Design's stockholders approved the issuance of a
warrant to purchase 50,000 shares of common stock at an exercise price of $6.26
per share and the issuance of 125,000 shares of common stock to John F. Kelley,
at the time a director of the Company, in connection with the performance of
consulting services. The compensation arrangement was approved, subject to the
conclusion of negotiations of Mr. Kelley's contract. The Company is unable to
predict whether it will be able to negotiate a compensation arrangement with Mr.
Kelley.
In conjunction with the acquisition of the Safety Huber Needle business
(Note 2), the Company entered into a four year consulting agreement with the
seller that provides for quarterly payments of $25,000. Related costs are
charged to product costs and expenses.
On October 14, 2004 James M. Donegan resigned as President and Chief
Executive Officer of Med-Design. Mr. Donegan and the Company executed a
Separation Agreement and Release on October 14, 2004. Pursuant to the agreement,
Mr. Donegan will make himself available on a part-time basis for consultation
with the Company. The Company will pay Mr. Donegan an aggregate severance of
$497,275 of which $346,304 will be paid in bi-weekly installments from October
14, 2004 through November 15, 2005 and the remaining balance of $150,971 will be
paid in bi-weekly installments from November 15, 2005 to November 14, 2006. In
addition, until November 15, 2005, the Company will provide medical and life
coverage for Mr. Donegan or, if such coverage is not permitted or would affect
the tax status of the plans, the Company will pay any required premiums under
the Consolidated Omnibus Budget Reconciliation Act (COBRA). Amounts are paid and
expensed as services are provided. The Company also accelerated vesting of
options to purchase 120,000 shares of Company 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. The Company 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.
5. Related Party Transactions
For the three months ended March 31, 2005 and 2004, the Company paid
$5,945 and $5,425, respectively, for legal services to a firm, of which a
partner is a director, officer and stockholder of Med-Design.
6. Warrants Outstanding
As of March 31, 2005 and 2004, warrants to purchase a total of 1,525,532
and 1,575,532 shares of Med-Design's common stock, respectively, were
outstanding with various vesting and expiration periods.
7. Indemnification
Pursuant to the asset purchase agreement with Luther Needlesafe Products,
Inc., Med-Design agreed to indemnify Luther for any damages to Luther that arise
out of the liabilities and obligations Med-Design assumed under the agreement
and Med-Design's ownership or operation of the acquired assets following the
closing.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of The Private Securities Litigation Reform Act of 1995
that address, among other things, demand for certain of our products; the
generation of royalty revenues from our licensees; and sufficiency of available
resources to fund operations. 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 continued growth in sales of the
Safe-Step(R) Safety Huber Needle, lack of demand or low demand for our products
or for safety products generally; a determination of our licensees to focus
their 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
arrangements regarding our other products and other factors discussed in this
report generally and in our Annual Report on Form 10-K for the year ended
December 31, 2004. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this report. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
Overview
Reference is made to the "Overview" section in our Annual Report on Form
10-K for the year ended December 31, 2004. The following discussion supplements
the discussion in the Form 10-K "Overview" under the caption "Revenue Growth."
We acquired the assets of the Safety Huber Needle business of Luther
Needlesafe Products, Inc. ("Luther") on April 1, 2004. The Safe-Step(R) Safety
Huber Needle, the version of the Safety Huber Needle product marketed by us and
used for the delivery of chemotherapeutic agents, was launched in the U.S. in
October 2003. Revenue from the sales of this product for the three months ended
March 31, 2005 was $501,654, an increase of $88,164 from the previous fiscal
quarter ended December 31, 2004. We are optimistic that we will realize
continued growth in sales of the Safety Huber Needle in future quarters.
We continue to generate revenue from the licensing of our product
technologies to Becton Dickinson and Company ("BD"). Revenues are increasing but
still remain below our expectations. We are hopeful that the trend of increasing
revenues will continue.
Revenue from the sale of the 1Shot(TM) Safety Dental Syringe has never
been meaningful. We have assessed the position of this product in the
marketplace and our relationship with the exclusive distributor of the product,
Sultan Chemists, and have determined to discontinue production of the product
and exit the business. This decision resulted in the write-off of equipment of
$464,000 and inventory of $194,000 which we recorded during the three-month
period ended March 31, 2005.
Revenue from the sales of the Safety Seldinger Device has also been
limited. We licensed to Enpath Medical, Inc. the Safety Seldinger Device for
venous access applications and subsequently for arterial access applications. On
December 29, 2004, we entered into Addendum Number Two to the Development and
Licensing Agreement with Enpath Medical to eliminate the minimum purchase amount
required in 2004 for Enpath to maintain exclusivity under the agreement. We are
currently negotiating for the potential purchase of Enpath's safety needle
business. Revenue for the Safety Seldinger Device for the three months ended
March 31, 2005 was nominal and is not expected to increase.
14
Results of Operations
Results of Operations for the Three Months Ended March 31, 2005 and 2004
Revenue for the three months ended March 31, 2005 was $676,564, compared
to revenue of $89,511 for the corresponding period in 2004. Revenue for the
three months ended March 31, 2005 included $501,654 of sales of the Safe-Step(R)
Safety Huber Needle and royalty payments of $174,190 under our licensing
agreements.
Product costs for the three months ended March 31, 2005, which consisted
of direct and indirect costs related to our contract manufactured products were
$719,258, and included the amortization of the investment in acquired licensed
products of $99,208, consulting expense of $25,000, and an inventory write down
of obsolete inventory of $224,312 primarily related the 1Shot(TM) Safety Dental
Syringe. Product costs increased by $716,529 for the quarter compared to the
corresponding period in 2004 primarily due to increased sales volume of the
Safe-Step(R) Safety Huber Needle and the inventory write down.
General and administrative expenses for the three months ended March 31,
2005 were $1,143,688, a decrease of $207,814 as compared to general and
administrative expenses of $1,351,502 for the corresponding period in 2004. The
decrease in general and administrative expenses was primarily due to a reduction
in legal expense of approximately $33,000, travel related expenses of
approximately $49,000 and stock based compensation of approximately $195,000,
offset by an increase in business taxes of approximately $56,000.
Research and development expenses for the three months ended March 31,
2005 were $221,991, a decrease of $136,910 as compared to research and
development expenses of $358,901 for the corresponding period in 2004. The
decrease in research and development expenses was due primarily to a reduction
in expenditures for employee compensation.
The Company decided to discontinue production of the 1 Shot Safety Dental
Syringe. As a result, equipment of $464,398 was written off during the quarter.
Liquidity and Capital Resources
At March 31, 2005, cash, cash equivalents and available-for-sale
securities totaled $12,636,143 as compared to $14,600,270 at December 31, 2004,
a decrease of $1,964,127 or approximately 13%. The decrease is primarily due to
operating losses of $1,771,973 and the purchase of raw materials inventory
related to the Safe-Step(R) Safety Huber Needle. Previously, we purchased only
finished inventory from our supplier, but during the first quarter of 2005, we
determined to begin purchasing raw materials and provide them to our supplier.
For the three months ended March 31, 2005, our net cash used in operating
activities was $1,746,019, principally reflecting our net loss of $1,771,973.
Our cash position was also adversely affected by a $402,611 increase in
inventory and the purchase of property and equipment for $38,720.
At March 31, 2005, 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 are
no amounts outstanding under this facility 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. 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 this
facility.
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
15
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There were no amounts outstanding under either of our revolving lines of
credit at March 31, 2005. If we were to borrow under either of our credit
facilities, borrowings would bear interest at a rate equal to LIBOR plus 1.75%
or 2.25% or the prime rate plus 2.5%, depending upon the facility used and the
purpose for the borrowing. As a result, any such borrowings would be subject to
the fluctuations in the market which affect LIBOR or the prime rate,
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 are in highly liquid, low risk securities where our risk of loss is
at a minimum.
Item 4. 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. Based on that evaluation, the Acting Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of
the end of the period covered by this report are functioning effectively to
provide reasonable assurance that the information required to be disclosed by us
in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
including the Acting Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure.
(b) 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.
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Part II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
31.1 Certification of the Acting Chief Executive Officer required
under Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Acting Chief Executive Officer required
under Rule 13a-14(b) of the Securities Exchange Act of 1934
32.2 Certification of the Chief Financial Officer required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
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Signatures
Pursuant to with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Med-Design Corporation
Date: May 9, 2005 DAVID R. DOWSETT
---------------------------------
David R. Dowsett
Acting Chief Executive Officer
LAWRENCE D. ELLIS
---------------------------------
Lawrence D. Ellis
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
31.1 Certification of the Acting Chief Executive Officer required
under Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer required under
Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Acting Chief Executive Officer and Chief
Financial Officer required under Rule 13a-14(b) of the
Securities Exchange Act of 1934
32.2 Certification of the Chief Financial Officer required under
Rule 13a-14(b) of the Securities Exchange Act of 1934
19