ITEM 1. BUSINESS
BUSINESS
We are principally engaged in the design, development, licensing and manufacture (through collaborative arrangements with manufacturers) of safety medical devices intended to reduce the incidence of accidental needlesticks. Each safety medical device we design and develop incorporates 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 products generally can be categorized into the following four groups:
o hypodermic syringes used to inject drugs and other fluids into the body;
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 other needle based applications.
We design our products 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.
Becton, Dickinson and Company (BD), a major medical technology company, is the principal licensee of our patented products. The licensing agreements we have entered into with BD grant BD the exclusive worldwide rights to manufacture and market our patented products in three fields of use, Injection Syringe, IV Catheters and Blood Collection. In addition to up-front cash payments, the agreements with BD provide for continuing royalty payments based upon BD's net sales of the licensed products. See "Becton Dickinson Relationship," below.
In June 2001, we entered into a co-promotion agreement with Abbott Laboratories to co-market our pre-filled injector products to the pharmaceutical industry in conjunction with Abbott's pharmaceutical fill/finish technology.
In September 2001, we expanded our relationship with MedAmicus, Inc. by granting MedAmicus the right to exclusively manufacture and distribute our center-line retractable safety needle (Safety Seldinger Introducer Needle) into the arterial access market. This expanded our prior agreement with MedAmicus under which MedAmicus agreed to manufacture and market our Safety Seldinger Introducer Needle for certain venous applications.
In connection with our efforts to enter into collaborative arrangements for the marketing and distribution of certain of our products, we determined that we would enhance our efforts with potential strategic allies that do not possess manufacturing capabilities if we could offer 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 Pre-filled Cartridge Injector. Under the terms of the agreements, we will purchase the automated equipment and molds necessary for Owens-Illinois to manufacture the products. In connection with the Safety Dental Pre-filled Cartridge Injector, we recently entered into a binding term sheet with Sultan Chemists that will, upon execution of a definitive agreement, give Sultan the right to exclusively purchase, market and sell the product for ten years.
We continue to seek collaborative arrangements for the remaining products in our portfolio.
The Problem of Accidental Needlesticks
There is an increasing awareness of the risk of infection from needlesticks and the need for safer medical devices to reduce the risk of accidental needlesticks. The Centers for Disease Control and Prevention (CDC) estimated that 600,000 to 800,000 needlestick injuries occur among health care workers annually.
Accidental needlesticks may result in the spread of infectious diseases such as hepatitis B and C, HIV, and tuberculosis. In March 2000, CDC estimated that, depending on the type of device used and the procedure involved, 62% to 88% of needlestick injuries could be prevented by the use of safer medical devices. We design our products to address the demand for safer medical devices that reduce the risk of accidental needlesticks that result in exposure to bloodborne diseases.
Med-Design Strategy
Our goal is to become the leading developer of safety medical devices designed to reduce the incidence of accidental needlesticks. The principal elements of our strategy are to:
o license some of our currently unlicensed products to the leading manufacturers of hypodermic syringes, fluid collection devices and infusion therapy devices in the pharmaceutical and medical device industries;
o modify and improve our current products in response to market research and input provided by medical professionals;
o develop additional safety medical devices based on our core technology in response to the specific requests and needs of our current and potential licensees and potential strategic allies;
o enter into collaborative arrangements with major pharmaceutical and medical device companies where such arrangements would provide for greater revenue opportunities than licensing; and
o pursue opportunities to manufacture or have manufactured selected products pursuant to collaborative arrangements in which our strategic allies will be responsible for marketing and distribution.
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:
Hypodermic Syringes
Safety Syringe (fixed needle). When the plunger of the Safety Syringe has reached its final destination, and 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. This additional pressure causes the needle of the syringe to automatically and fully retract into the body of the syringe. The needle seals in place rendering it harmless and inoperable. The fixed needle Safety Syringe can be manufactured with needles of various gauges and sizes, and barrels with various sizes.
Safety Syringe (luer needle). The luer needle Safety Syringe is a hypodermic needle with a mating needle/hub assembly. The retraction mechanism of the luer needle Safety Syringe operates in the same manner as the mechanism on the fixed needle Safety Syringe.
Safety Tuberculin/Insulin Syringe. The Safety Tuberculin/Insulin Syringe is a smaller version (1cc) of the fixed needle Safety Syringe. The retraction mechanism of the Safety Tuberculin/Insulin Syringe operates in the same manner as the mechanism on the fixed needle Safety Syringe.
Safety Pre-filled Glass Syringe. After the medication in the syringe has been delivered, a user can cause the needle of the syringe to automatically and fully retract into the body of the syringe by removing his or her thumb from the rear of the plunger. The needle seals in place rendering it harmless and inoperable.
Safety Plunger Syringe. The Safety Plunger Syringe is a syringe that uses the plunger of the syringe as the fluid containing component. The retraction mechanism of the Safety Plunger Syringe operates in the same manner as the retraction mechanism on the Safety Pre-filled Glass Syringe.
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. After the medication in the vial has been delivered, the needle of the syringe automatically and fully retracts into the body of the syringe. The needle seals in place rendering it harmless and inoperable. The Safety Pre-filled Vial Injector can be manufactured with needles of various gauges and sizes.
Safety Pre-filled Cartridge Injector. The Safety Pre-filled Cartridge Injector allows medication to be injected directly into a patient from pre-filled cartridges produced by many pharmaceutical manufacturers. The pre-filled cartridge is threaded onto the rear end of the stationary plunger and becomes integrated as a functional part of the plunger. After the medication in the cartridge has been delivered, the needle of the syringe automatically and fully retracts into the body of the syringe. The needle seals in place rendering it harmless and inoperable. The Safety Pre-filled Cartridge Injector can be manufactured with needles of various gauges and sizes.
Safety Dental Cartridge Syringe. The Safety Dental Cartridge Syringe is used to administer anesthetics in dental procedures. After the anesthetic has been fully delivered, the needle automatically and fully retracts into the device. The Safety Dental Cartridge Syringe uses standard dental needles and anesthetic cartridges and allows for fluid removal. The Safety Dental Cartridge Syringe allows for multiple anesthetic injections, while rendering the needle safe in between injections.
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. After the medication in the vial has been delivered, the needle of the syringe automatically and fully retracts into the body of the syringe. The needle seals in place rendering it harmless and inoperable. The Safety Pre-filled Dual Chamber Injector can be manufactured with needles of various gauges and sizes.
Fluid Collection Devices
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.
Safety Winged Blood Collection Set. The Safety Winged Blood Collection Set uses a smaller diameter needle and is an alternative to the Safety Blood Collection Needle. It is compatible with substantially all standard blood collection needle accessories. The retraction mechanism on the Safety Winged Blood Collection Set operates in the same manner as the mechanism on the Safety Blood Collection Needle.
Safety Arterial Blood Gas Syringe. Arterial blood gas syringes are used to collect small samples of arterial blood and deliver the blood to a blood gas analyzer. The retraction mechanism of the Safety Arterial Blood Gas Syringe operates in the same manner as the retraction mechanism on the Safety Blood Collection Needle. The sealed needle housing can be separated from the syringe barrel and safely discarded into a sharps container. The filled syringe barrel is then ready for delivery to a laboratory for analysis. The Safety Arterial Blood Gas Syringe is designed for conventional laboratory processing and attaches to any standard blood gas syringe 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 retraction mechanism of the Safety Blood Donor Needle Set operates in the same manner as the retraction mechanism on the Safety Blood Collection Needle. 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.
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. The mechanism of the Safety Winged A-V Fistula Needle operates in the same manner as the mechanism on the Safety Blood Donor Needle Set.
Venous and Arterial Access Devices
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.
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. The retraction mechanism of the Safety PICC Introducer operates in the same manner as the mechanism on the Safety IV Catheter.
Safety Seldinger Needle. The Safety Seldinger Needle consists of a barrel-like structure within which the needle is retracted and protected once it has been inserted into the patient's vein or artery. Once the needle is placed in the patient, the guidewire is introduced into the patient's vein or artery, enabling an arterial or venous catheter to slide over the guidewire into the patient's vein or artery. By depressing a conveniently located button on the barrel of the device, a user can cause the needle to automatically and fully retract into a protective sheath while still in the patient. The needle seals in place, rendering it harmless and inoperable. The Safety Seldinger Needle is compatible with all standard gauge needles and guidewires.
Safety Wing Needle Set/Catheter. The Safety Wing Needle Set/Catheter is used to continuously deliver fluids into a patient's vein. The catheter is inserted into the patient's vein by a steel needle within the flexible catheter. When the venous access has been successfully completed, a user can cause the needle to automatically and fully retract into the body of the device by pushing the conveniently located button on the side of the device. 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 needlestick.
Specialty Devices
Safety Spinal/Epidural Needle. The Safety Spinal/Epidural Needle can be used for a variety of anesthesia and spinal procedures requiring both fluid removal and fluid injection. After the Safety Spinal/Epidural Needle has been removed from the patient, a user can cause the needle to automatically and fully retract into a flexible sheath by depressing a conveniently place button on the side of the device. The Safety Spinal/Epidural Needle is compatible with all standard gauge size needles and allows for fluid removal or injection with a luer syringe.
Safety Y-Port Infusion Needle. Y-Ports are devices used in intravenous therapy that allow the delivery of secondary fluids into a primary intravenous fluid line. The Safety Y-Port Infusion Needle consists of a barrel with a needle assembly fixed to the barrel and tubing which protrudes from the barrel at an angle allowing connection to the y-port. After completion of delivery of the secondary fluid into the y-port, the needle retraction is automatically initiated, and the needle fully retracts into the barrel.
Sales and Marketing
Because we focus on the design, development, licensing and manufacture (through collaborative arrangements with manufacturers) of safety medical products, we are not engaged in the marketing and sale of our products directly to health care professionals. Our marketing efforts 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 manufacture and/or distribute our products. We seek to have these companies license our products or enter into collaborative arrangements through which our needle retraction technology is applied to their existing products.
In addition to direct marketing efforts, recent safety needle legislation and our relationship with BD have increased industry awareness of our products. Several potential licensees and strategic allies have contacted us to discuss the possibility of applying our needle retraction technology to their existing products. We cannot predict whether these contacts will result in definitive agreements.
Research and Development
Our research and development efforts in the past have focused primarily upon the design and development of the products described above and the equipment necessary to assemble those products. Research and development expenses were $1,073,323 in 2001 and $1,143,938 and $1,228,101 in 2000 and 1999, respectively. Our research and development efforts going forward will focus primarily upon:
o the modification and improvement of our current products 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 allies.
Our research and development staff consists of nine employees.
Facilities and Manufacturing
Our primary focus has been upon the design, development, licensing and manufacture (through collaborative arrangements with manufacturers) of safety medical devices. We have generally sought to contract with third parties for the manufacture and distribution of our products through licensing agreements and collaborative arrangements. In this regard, we determined that we would enhance our efforts with potential partners that do not possess manufacturing capabilities if we could offer to have the products manufactured. We entered into two OEM Manufacturing Agreements with Owens-Illinois for the manufacture of our Safety Pre-filled Cartridge Injector and Safety Dental Pre-filled Cartridge Injector. Under the terms of the agreements, we will purchase the automated equipment and molds necessary for Owens-Illinois to manufacture the products. We will continue to explore additional opportunities to manufacture selected products pursuant to collaborative arrangements in which our strategic allies will be responsible for marketing and distribution. These products would involve production levels that are substantially lower than the products of the type licensed to BD.
We have leased an approximately 26,000 square foot facility in Ventura, California. In addition to our corporate offices, the facility includes space for the following:
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, as well as the fabrication of prototype molds and test fixtures;
o a 3,120 square foot class 100,000 clean room used for the assembly of prototypes; and
o a semi-automated assembly system, which consists of a series of manual and semi-automatic stations.
The assembly system is currently being used to pilot manufacture limited quantities of our products to demonstrate to potential third-party manufacturers the economic feasibility of the commercial production of our products. With some modifications, the semi-automated assembly system is capable of producing up to 6,000,000 units per year and can produce one or more of our products at a time. This assembly system could enable us to manufacture the products we design for certain niche markets which do not involve the same manufacturing scale as more widely used products, such as those licensed to BD. However, as noted above, we have decided 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 Cosmetics Act (FDCA). The FDA regulates, among other things, the research, development, testing, manufacture, labeling, distribution, 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.
Because our focus is on the development, design and licensing of medical safety devices rather than marketing and manufacturing of the devices, we do not typically make the regulatory filings necessary to sell our products. We rely on our licensees and other strategic allies to pursue regulatory approvals and anticipate that we will rely on any strategic allies with whom we may contract in the future in a similar fashion unless we manufacture the product.
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 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 requires the submission of laboratory, pre-clinical and clinical data.
If we decide to commercially market and manufacture some of the products we develop, separate from our current or any future license agreement, we may be required to file for Section 510(k) clearance, or possibly pre-market approval, for such products. In that case, 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.
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, a so-called "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 entity or on its behalf.
Accordingly, where medical devices are marketed by our licensees or strategic allies 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 allies under their names, all regulatory compliance obligations will be borne by such licensees or strategic allies. 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.
Competition
The safety medical device market is highly competitive. Licensees of our products and our other strategic allies will compete in the United States and abroad with the safety products and standard products manufactured and distributed by companies such as:
o Kendall Healthcare Products Company,
o B. Braun,
o Terumo Medical Corporation of Japan,
o Medi-Hut, Inc.,
o Bio-Plexus, Inc., 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 Bio-Plexus, Inc.,
o New Medical Technologies,
o Retractable Technologies, Inc., and
o Univec, Inc.
Traditionally, competition regarding non-safety medical devices was primarily based upon price with little differentiation between products. We expect our products to compete against both safety products and non-safety products based upon safety and ease of use and disposal. While safety medical devices are priced at approximately two to three times that of equivalent standard medical devices, we believe that based upon estimated costs associated with accidental needlesticks, our products 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.
Becton Dickinson Relationship
On December 11, 1998, we entered into a license agreement with BD under which we licensed certain of our products to BD. In connection with the agreement, we received an up-front licensing fee of $4.5 million in addition to the right to receive royalty payments based on BD's net sales of the licensed products. In addition, the license agreement granted BD an option to license five of our other products. On March 12, 2000, we signed a binding term letter with BD outlining the terms for a definitive agreement under which BD would license certain products that we previously granted them an option to license. We recognized $1.5 million of revenue in the form of an up-front licensing fee upon the signing of the binding term letter. On May 11, 2000, we entered into a definitive license agreement with BD based upon the terms of the March 12, 2000 binding term letter. Under the definitive license agreement, we received an additional $2.5 million in up-front licensing fees and the right to receive royalty payments based on BD's net sales of the products licensed under such agreement. We anticipate market introduction by BD of several licensed products encompassing our safety technology during 2002.
Recent Legislation
Recent 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 such as 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 has issued a number of further revisions to its Bloodborne Pathogens Standard. The revised standard became effective on April 18, 2001. The new standard provisions impose 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, we anticipate that the demand for safety medical devices such as those which we produce, will increase over the next twelve months.
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 15 United States patents covering our retractable needle technology and specific products based upon our technology. In addition, we have 15 foreign national patents and two European patents covering 12 countries. We also have 21 United States, 64 foreign national, 14 European and 12 international patent applications pending. In addition, we have a pending United States design patent application based on one of our products, and two foreign national design registrations and three pending foreign design applications.
Employees
As of March 2, 2002, we had 19 full-time employees and 2 part-time employees, most of whom were located at our corporate offices.
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, 2001, our accumulated deficit was $29,152,181. Among other things, our ability to achieve profitability is dependent upon:
o the successful marketing of our products by licensees;
o our ability to license additional products that are not currently subject to licenses or have these products distributed through joint venture or similar arrangements; and
o our ability to develop additional products based on our core technologies.
We have licensed to BD several of our products. We anticipate that several licensed products will be launched in 2002. 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 our products, and if we are not successful in licensing additional products, 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 licensed from us, our business will be harmed.
To date, substantially all of our revenues have been derived from "up front" license payments made by BD. We anticipate that royalty payments from BD related to sales of our products will constitute all or a substantial portion of our revenues for the next twelve months. Under the license agreement with BD dated December 11, 1998, BD has the right to terminate the agreement upon 60 days' notice and would be subject to no further funding obligations to us with respect to the products licensed under the agreement if it decides to terminate. The ability of BD to sell products it has licensed from us will depend on competitive factors and the resources BD commits to the sale of products they have licensed from us. The extent to which BD commits its resources to the sale of products licensed from us 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 our products and may not generate any future royalty payments. If BD terminates the licensing agreements, is unsuccessful in developing or selling the licensed products or otherwise determines not to pursue the development and sale of the licensed products, our business will be harmed.
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 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 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 technologies or products or grant licenses on terms that are not favorable to us.
At December 31, 2001, we had a revolving line of credit totaling $3,000,000. 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, and borrowings are collateralized by substantially all of the company's assets. The facility expires on May 31, 2002, and there is no assurance that we will be successful in negotiating a continuation of the availability of the line of credit or the terms which will be made available to us. There were no amounts outstanding under the credit facility at December 31, 2001.
If adequate funds are not available on acceptable terms, we may have to reduce the scope of, or cease, our operations.
Our products must receive regulatory approval in the United States and foreign jurisdictions; we rely on our licensees to obtain such approvals, and if they are not successful in obtaining or maintaining approvals, the sale of our products and our ability to realize royalty revenues would be impaired.
Our products are medical devices subject to regulation by the United States Food and Drug Administration (FDA). The FDA regulates, among other things, product manufacture, labeling, distribution, 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.
Our licensees pursue regulatory approvals. As a result, our ability to receive royalties from licensed products 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 allow marketing of our products in a timely fashion, or at all.
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 licensed products, our licensees will be subject to continuing requirements governing, among other things, the claims that can be made with respect to the products 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. Failing 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.
Although we have a manufacturing facility at our headquarters, we have used this facility only for prototype manufacturing and to determine the feasibility of high volume manufacture of a product. The devices manufactured at our facility are not used on humans. Therefore, compliance with regulatory manufacturing requirements is not required with respect to the operation of the manufacturing facility. However, we do, and plan to continue in the future, to seek to, manufacture and market some of our products, either ourselves, or through joint ventures or other contractual arrangements under which third parties manufacture and, in some instances, sell our products. These contractual arrangements may require us to seek separate clearance or approval by the FDA of these products and to comply with ongoing FDA requirements for submission of safety and other post-market information. 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 and storage of medical devices. 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.
To market a product in the European Union (EU) a manufacturer must be entitled to affix a CE marking to the device, 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 members 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 lie with the manufacturer of the device which is defined in the Medical Devices Directive (MDD) as the party putting the device on the EU market under its name. Accordingly, we rely upon our licensees and contract manufacturers to satisfy the necessary compliance criteria and if they do not devote sufficient resources to this process, our ability to receive royalties or other revenues from the sale of the products will be diminished. Furthermore, the licensees and contract manufacturers may not be able to satisfy the necessary requirements to allow marketing of our products 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 EU regulatory requirements are those relating to medicines as opposed to devices, in which case our licensees must make an application for a marketing authorization 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. 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 time consuming, and we cannot assure that authorization would be granted at all.
Our failure or the failure of our licensees or contract manufacturers to comply with the 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 our products.
We previously have relied on our licensees to arrange for the commercial manufacture of our products. Our licensees generally manufacture our products at their own facilities. In addition, in 2001 we signed an agreement with a contract manufacturer to produce two of our products if we enter into a distribution arrangement for the products. Contracting with third parties or relying on licensees to manufacture our products presents the following risks:
o delays in the manufacture of our products could have a material adverse effect on the marketing of our products;
o the manufacturers may not comply with requirements imposed by the Food and Drug Administration 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 our 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 our products 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 technologies and products in the United States and other countries.
We have a number of patents and pending United States patent applications relating to our products. 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 technologies or duplicate our technology.
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 technologies 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, or publications or other actions could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or duplicate technologies 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 competing products and technological change.
All 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 our products. Our business would suffer if a superior competing product were developed, or if there were a reduced demand for products such as ours. Moreover, we may not be able to successfully develop additional products or applications of our technology.
Our products 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 our products may not be significant. Sales of our products will depend mostly upon our licensees' ability to demonstrate the operational and safety advantages of our products compared to standard syringes, fluid collection devices and infusion therapy devices and safety medical devices developed by our competitors. Our licensees and others who have contracted to sell our products may be unable to sell our products due to the higher cost of safety medical devices relative to standard medical devices. There may never be a significant demand for our products.
We are dependent on the sales and marketing efforts of our licensees and strategic allies to sell our licensed products, and our business will suffer if our licensees or strategic allies do not successfully market our 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 our products. Accordingly, we are dependent on our licensees and other strategic allies to sell our products and generate royalties for us. If our licensees and strategic allies do not devote sufficient effort to the sale and marketing of our products, or are otherwise unsuccessful in marketing our products, our business will suffer.
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. We are particularly dependent upon the services of James M. Donegan, our Chief Executive Officer. If Mr. Donegan, or any of our other key personnel, do not continue in their present capacities, our operations could be materially adversely affected.
We are subject to product liability claims.
The manufacture and sale of our 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 currently maintain product liability insurance coverage ($5,000,000 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. Our products will compete in the United States and abroad with the safety products and standard products manufactured and distributed by companies such as:
o Kendall Healthcare Products Company, o B. Braun, o Terumo Medical Corporation of Japan, o Med-Hut, Inc., o Bio-Plexus, Inc., and o Johnson & Johnson.
Developers of safety medical devices against which we compete include:
o Bio-Plexus, Inc., o New Medical Technologies, o Retractable Technologies, Inc., and o Univec, 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 our products. In addition, new competitors may develop products that compete with our products, or new technologies may arise that could significantly affect the demand for our products. We cannot predict the development of future competitive products or companies. We will be materially adversely affected if we are unable to compete successfully.
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. If we pursue such a strategy, we could, among other things:
o issue equity securities that would dilute our stockholders' percentage ownership;
o 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.
Because our officers and directors own a significant number of shares of our common stock, they may control all major corporate decisions, and our other stockholders may not be able to influence these decision.
As of March 2, 2002, our directors and officers beneficially owned or controlled approximately 18% of the outstanding common stock. Accordingly, such executive officers and directors, as a group, have the ability to exert significant influence over the election of our Board of Directors and corporate actions requiring stockholder approval, including mergers, consolidations and the sale of all or substantially all of the our assets. The interests of these stockholders could conflict with the interests of our other stockholders.
Our stock price is volatile.
Historically, our stock price, like the market price of the securities of other medical device companies, has fluctuated widely, and it may be subject to similar future fluctuations in response to:
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 our products;
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, 2001, there were 10,963,386 shares of our common stock issued and outstanding. In addition, an aggregate of 2,096,413 additional shares of our common stock are issuable pursuant to stock options granted under our Non-Qualified Stock Option Plan and warrant agreements. Our common stock will be subject to 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 that 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. In addition, our certificate of incorporation provides for a classified board of directors, with each board member serving a staggered three-year term. The issuance of preferred stock and the existence of a classified board of directors could have the effect of delaying, deterring or preventing a change in control.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES
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:
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, as well as the fabrication of prototype molds and test fixtures;
o a 3,120 square foot class 100,000 clean room used for the assembly of prototypes; and
o a semi-automated assembly system, which consists of a series of manual and semi-automatic stations.
The assembly system is currently being used to pilot manufacture limited quantities of our products to demonstrate to potential third-party manufacturers the economic feasibility of the commercial production of our products. With some modifications, the semi-automated assembly system is capable of producing up to 6,000,000 units per year and can produce one or more of our products at a time. This assembly system will enable us to manufacture the products we design for certain niche markets which do not involve the same manufacturing scale as more widely used products, such as those licensed to BD.
Our annual lease payments for this facility are approximately $149,712 and the lease expires on October 31, 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending or, to the knowledge of management, threatened against us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2001 through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market under the symbol "MEDC" on March 23, 2001. Prior to that time, our common stock was traded on the Nasdaq SmallCap Market under the same symbol.
Market Information
Fiscal year ended December 31, 2000 High Low - ----------------------------------- ---- --- First Quarter....................................$ 20 3/4 $ 12 5/16 Second Quarter................................... 16 1/2 8 1/8 Third Quarter.................................... 15 3/4 9 1/2 Fourth Quarter................................... 23 11 3/4
Fiscal year ended December 31, 2001 High Low - ----------------------------------- ---- --- First Quarter....................................$ 18 7/8 $ 10 1/2 Second Quarter................................... 31 4/5 13 Third Quarter.................................... 42 3/8 13 7/16 Fourth Quarter................................... 23 1/2 11 3/4
Holders
As of February 28, 2001, we estimate that we had approximately 80 holders of record of our common stock.
Dividends
We have never paid or declared and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain any future earnings for use in our business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this Form 10-K.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are principally engaged in the design, development, licensing and manufacture (through collaborative arrangements with manufacturers) of safety medical devices intended to reduce the incidence of accidental needlesticks. To date, substantially all of our revenues have been derived from "up front" license payments made by BD.
On December 11, 1998, we entered into a license agreement with BD under which we licensed certain of our products to BD. In connection with the agreement, we received an up-front licensing fee of $4.5 million in addition to the right to receive royalty payments based on BD's net sales of the licensed products. In addition, the license agreement granted BD an option to license five of our other products. On March 12, 2000, we signed a binding term letter with BD outlining the terms for a definitive agreement under which BD would license the products subject to the option to license. We recognized $1.5 million of revenue in the form of an up-front licensing fee upon the signing of the binding term letter. On May 11, 2000, we entered into a definitive license agreement with BD based upon the terms of the March 12, 2000 binding term letter. Under the definitive license agreement, we received an additional $2.5 million in up-front licensing fees and the right to receive royalty payments based on BD's net sales of the products licensed under such agreement.
On September 25, 2000, we entered into a development and licensing agreement with MedAmicus, Inc. granting MedAmicus a license to manufacture and market our Safety Seldinger Introducer Needle for certain venous applications. Under the terms of the agreement, we have the right to receive royalty payments based on MedAmicus' net sales of the Safety Seldinger Introducer Needle. On September 7, 2001, we entered into an Addendum (the "Addendum") to the development and licensing agreement with MedAmicus. The Addendum grants MedAmicus an exclusive license to manufacture and market our Safety Seldinger Introducer Needle in the arterial access market and other related fields. Under the terms of the Addendum, we received an initial payment of $2,000,000, $1,000,000 of which was paid in 68,027 shares of MedAmicus common stock and $1,000,000 of which was paid in cash on October 15, 2001. In addition, we are entitled to receive royalties of 20% of net sales of the product, which royalty rate may be reduced to 17% if certain sales volumes are met.
On May 14, 2001, we entered into a five-year co-promotion agreement with Abbott Laboratories. Under the terms of the agreement, Abbott One2One Global Pharmaceutical Services will promote our Safety Pre-filled Cartridge Injector in conjunction with Abbott's filling and finishing of pharmaceuticals and biologics into vials, cartridges, syringes and intravenous bags for sale to other pharmaceutical companies.
In September 2001, 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 Pre-filled Cartridge Injector. Under the terms of the agreements, we will purchase the automated equipment and molds necessary for Owens-Illinois to manufacture the products.
In January 2002, we entered into a binding term sheet with Sultan Chemists that will, upon execution of a definitive agreement, give Sultan the right to exclusively purchase, market and sell the Safety Dental Pre-filled Injector for ten years.
BD introduced the Safety I.V. Catheter using Med-Design's technology in April 2001 as the Autoguard Pro. MedAmicus launched the venous access Seldinger Needle Device in September 2001. We anticipate market introductions by BD of several licensed products encompassing our safety technology during 2002.
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total revenue for the year ended December 31, 2001 was $2,330,000 compared to revenue of $4,128,993 in 2000. The revenue in 2001 consisted principally of an up front license payment from MedAmicus for the Safety Seldinger Introducer Needle arterial access. The revenue in 2000 consisted principally of $4,000,000 in up front licensing payments made by BD under the May 11, 2000 license agreement.
Loss from operations for the year ended December 31, 2001 was $4,245,710, an increase of $1,166,048 as compared to loss from operations of $3,079,662 for the corresponding period in 2000. The increase in operating loss was due primarily to a reduction in revenue that was partially offset by a reduction in general and administrative expenses related to equity based compensation.
General and administrative expenses, excluding stock based compensation for the year ended December 31, 2001 were $3,710,305, an increase of $193,145 as compared to general and administrative expenses of $3,517,160 for the corresponding period in 2000. The increase in general and administrative expenses was principally due to an increase in the general level of business activities, primarily related to increased legal and travel expenses, to enable us to market our products.
Stock based compensation, which resulted from the issuance and extension of options, warrants and other stock based grants and awards was $1,792,082 in 2001 and $2,547,557 in 2000, a reduction of $755,475. There were no new agreements for stock based compensation in 2001 that resulted in expense in the period. All expense recorded in 2001 related to the vesting of arrangements entered into in 2000.
Research and development expenses for the year ended December 31, 2001 were $1,073,323, a decrease of $70,615 as compared to research and development expenses of $1,143,938 for the corresponding period in 2000. The higher level of expenses in 2000 were due primarily to research and development activities to modify our licensed products based on specific requests of our licensees.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenue for the year ended December 31, 2000 was $4,128,993; we had no revenue for 1999. The revenue in 2000 consisted principally of $4,000,000 in up front licensing payments made by BD under the May 11, 2000 license agreement.
Loss from operations for the year ended December 31, 2000 was $3,079,662, a decrease of $1,110,852 as compared to loss from operations of $4,190,514 for the corresponding period in 1999. The decrease was due primarily to the receipt of license fee revenue in 2000 offset by increases in general and administrative expenses and stock based compensation expenses described below.
General and administrative expenses, excluding stock based compensation, for the year ended December 31, 2000 were $3,517,160, an increase of $818,746 as compared to general and administrative expenses of $2,698,414 for the corresponding period in 1999. The increase in general and administrative expenses was principally due to an increase in the general level of business activities, primarily related to increased legal and travel expenses, to enable us to market our products.
Stock based compensation for the year ended December 31, 2000, was $2,547,557, an increase of $2,283,558 as compared to $263,999 for the same period in 1999. The increase was due to the extension of options and warrants for retiring officers and employees, and the issuance of shares of common stock, options and warrants to officers in accordance with their employment agreements.
Research and development expenses for the year ended December 31, 2000 were $1,143,938, a decrease of $84,163 as compared to research and development expenses of $1,228,101 for the corresponding period in 1999.
Liquidity and Capital Resources
At December 31, 2001, we had cash, cash equivalents and available securities of $5,889,766 as compared to $6,061,542 for the corresponding period in 2000, a decrease of $171,776 or 3%. Despite losses from operations of $4,245,710, we benefited from the receipt of $2,106,997 as a result of the exercise of stock options and warrants. In addition, our net loss reflected significant non-cash expense, principally consisting of $1,792,082 in stock-based compensation offset by non-cash revenue of $1,000,000.
At December 31, 2001, we had a revolving line of credit totaling $3,000,000. 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, and borrowings are collateralized by substantially all of our assets. Any borrowings to meet working capital needs bear interest at LIBOR plus 2.25%, while borrowings to finance capital equipment purchases bear interest at the prime rate plus 2.5%. The facility expires on May 31, 2002, and there is no assurance that we will be successful in negotiating a continuation of the availability of the line of credit or the terms that will be made available to us. There were no amounts outstanding under the agreement at December 31, 2001.
On March 25, 2002, we completed a private equity placement of 1,326,260 shares of our common stock for $15,000,000. Our net proceeds after giving effect to placement agent fees totaled approximately $14,200,000.
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 enter into licensing agreements and to receive royalty payments from our current and future licensees and our ability to enter into, and profitably operate under collaborative arrangements and our ability to raise additional equity or debt finance. We have not yet 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. Historically, our cash flow has been provided by securities offerings and up-front license fees. If we are unsuccessful in negotiating additional agreements, or if licensing revenues are insufficient to support our operations, we may be required to reduce the scope of, or cease, our operations. Pursuant to our OEM Manufacturing Agreements with Owens-Illinois, we are required to purchase the automated equipment and molds necessary for Owens-Illinois to manufacture our products. These expenditures may be significant. However, we will not incur any such expenses until we have entered into distribution agreements for such products.
Critical Accounting Policies
In preparing our financial statements, management is 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. For a detailed discussion of the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in this annual report beginning on Page. These estimates are most significant in connection with our critical accounting policies, namely those of our accounting policies that are most important in the portrayal of our financial condition and results and require management's most difficult, subjective or complex judgments. These judgments often result from the need to make estimates about the effects of matters that are inherently uncertain.
We believe that our most critical accounting policies relate to (1) revenue recognition involving up-front license fees and royalties based on production or sales volume and (2) stock based compensation.
Our revenue recognition policy with regard to up-front license fees calls for recognition upon the signing of a binding agreement when we have no further obligation under the agreement other than to defend the patent rights associated with such agreement. Our revenue recognition policy with regard to royalties based on production or sales volume calls for recognition in the period in which the relevant products are produced or sold. The recognition of such revenues is dependent on our licensees and strategic allies accurately and timely reporting sales and production volume. Inaccurate or late reporting could result in recognition of revenue and related costs at an earlier or a later time. Certain of our licensees and strategic allies are contractually required to pay minimum royalties if sales or production volumes do not reach specified levels. Our revenue recognition policy with respect to these minimum royalties calls for recognition in the period to which the minimum royalties relate.
We periodically grant compensation to employees and non-employee consultants in the form of equity. These grants typically consist of common stock, stock options and warrants to purchase common stock. We apply the guidance of APB 25 "Accounting for Stock Issued to Employees" in accounting for stock options, warrants and common stock issued to employees. We record compensation expense over the service period of the employee if the exercise price of the option or warrant is less than the fair value of our common stock on the date of the grant. We account for options and warrants issued to our non-employee consultants and directors who perform consulting services in accordance with Statement of Financial Accounting Standard 123, "Accounting for Stock Based Compensation". Accordingly, we record compensation expense over the contractual performance period and re-measure that expense at the end of each fiscal quarter. We measure the value of these instruments using the Black-Scholes valuations model which requires management to make estimates. Variations in these estimates could have a material effect on the reported expenses recorded in the financial statements in any given period, and therefore, a material effect on our reported financial results.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16 entitled "Business Combinations." SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the date of acquisition is subsequent to June 30, 2001. SFAS No. 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition and eliminates the requirement to amortize goodwill and long-lived assets with indefinite lives. SFAS No. 142 requires an annual impairment test to be performed to evaluate the carrying value of such assets. The provisions for SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. These pronouncements will not impact our financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no amounts outstanding under our revolving line of credit at December 31, 2001. 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 the fluctuations in the market, which affect LIBOR or the prime rate, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Incorporated by reference from the consolidated financial statements and notes thereto of Med-Design which are attached hereto beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be included in the our Proxy Statement relating to our Annual Meeting of Stockholders, or 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, and, if applicable, is hereby incorporated by reference to such Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in our Proxy Statement relating to our Annual Meeting of Stockholders, or an amendment to this Form 10-K, which will be filed within 120 days after the close of the fiscal year covered by this report, and, if applicable, is hereby incorporated by reference to such Proxy Statement or amendment.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be included in our Proxy Statement relating to our Annual Meeting of Stockholders, or in an amendment to this Form 10-K, which will be filed within 120 days after the close of the fiscal year covered by this report, and is hereby incorporated by reference to such Proxy Statement or amendment.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be included in our Proxy Statement relating to our Annual Meeting of Stockholders, or in an amendment to this Form 10-K, which will be filed within 120 days after the close of the fiscal year covered by this report, and is hereby incorporated by reference to such Proxy Statement or amendment.
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(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, have been incorporated by reference into Item 8 of this Report on Form 10-K:
2. All schedules are omitted because they are inapplicable, or not required, or the information is shown in the financial statements or notes thereto.
3. 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.
----------------------- * 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.
(b) Reports on Form 8-K
On September 11, 2001, we filed a Form 8-K (Item 9) discussing the execution of Addendum Number One to the Development and Licensing Agreement with MedAmicus, Inc.
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 29, 2002 By: /s/ James M. Donegan -------------------- James M. Donegan President and 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.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of The Med-Design Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity, comprehensive loss and cash flows present fairly, in all material respects, the financial position of The Med-Design Corporation (the "Company") and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA February 22, 2002, except for Footnote 18 for which the date is March 25, 2002
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND ACCUMLATED OTHER COMPREHENSIVE INCOME (LOSS)
[RESTUBBED TABLE]
The accompanying notes are an integral part of these financial statements.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
The Med-Design Corporation ("Med-Design" or the "Company") is principally engaged in the design, development, licensing and manufacture (through collaborative arrangements with contract manufacturers) of safety medical devices intended to reduce the incidence of accidental needlesticks. Each safety medical device Med-Design designs and develops incorporates Med-Design's proprietary needle retraction technology. Med-Design's 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. Med-Design's products generally can be categorized into the following four groups: hypodermic syringes used to inject drugs and other fluids into the body; fluid collection devices used to draw blood or other fluids from the body; infusion therapy devices used to provide access to patients' vessels; and specialty safety devices for other needle based applications.
2. Significant Accounting Policies
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 less than three months to be cash equivalents.
Concentrations of Credit Risk: - ------------------------------
Financial instruments which potentially subject Med-Design to concentration of credit risk, consist principally of cash and available-for-sale-securities. At times, Med-Design's cash balances exceed FDIC insurance limits. The Company invests cash balances in financial institutions with high credit ratings.
Med-Design invests in high credit quality financial instruments and through diversification, attempts to limit the extent of credit exposure on available-for-sale-securities.
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.
Property, Plant and Equipment: - ------------------------------
Property, plant and equipment are carried at cost. Assets held under capital lease are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased assets at the inception of the lease. Significant additions or improvements extending the asset's useful lives are capitalized.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting Policies, continued
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.
Recoverability of Long-Lived Assets: - ------------------------------------
Med-Design's assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount may not be recoverable. When necessary, Med-Design assesses the recoverability of its assets by determining whether the carrying value can be recovered through projected undiscounted future cash flows.
Patents: - --------
Patents, patent applications, and rights are stated at acquisition costs. Amortization of patents is recorded by the straight-line method over the legal lives of the patents. Patent amortization expense from the years ended December 31, 2001, 2000 and 1999 was $191,579, $162,753, and $51,509, respectively.
Revenue Recognition: - --------------------
Fees received in connection with licensing contracts for the Company's patented, proprietary products are recorded as revenue upon the execution of a binding agreement, and when the Company has fulfilled its obligations under the arrangement or when Med-Design's only remaining obligation is to maintain and defend the licensed patent rights.
Royalties received on licensed products which are based on the licensee's product volume are recorded as revenue in the period when the royalty payments are earned. Minimum contractual royalty payments related to licensed products are recorded as revenue during the period to which the minimum payments relate.
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" ("FAS 109"). 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 taxes 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.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting Policies, continued
Stock Based Compensation: - -------------------------
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock plans. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" ("FAS 123").
Estimates Utilized in the Preparation of Financial Statements: - --------------------------------------------------------------
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income: - ---------------------
Comprehensive income (loss) consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles, are excluded from net income. Such items consist primarily of unrealized gains and losses on marketable equity investments.
New Accounting Standards: - ---------------------------
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16 entitled "Business Combinations." SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill.
These provisions are effective for business combinations for which the date of acquisition is subsequent to June 30, 2001. SFAS No. 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition and eliminates the requirement to amortize goodwill and long-lived assets with indefinite lives. SFAS No. 142 requires an annual impairment test to be performed to evaluate the carrying value of such assets. The provisions for SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. These pronouncements will not impact our financial position or results of operations.
3. Available-for-Sale Securities
Gross unrealized gains for the years ended December 31, 2001, 2000 and 1999 are as follows:
Gross Cost Unrealized Gains Fair Value ---------- -------- ---------- At December 31, 2001: Corporate Debt Securities.......... $5,435,221 $ 56,780 $5,492,001 ---------- -------- ---------- At December 31, 2000: Corporate Debt Securities.......... $4,307,520 $ 25,919 $4,333,439 ---------- -------- ---------- At December 31, 1999: Corporate Debt Securities.......... $4,150,302 $ 29,960 $4,180,262 ---------- -------- ----------
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. Available-for-Sale Securities, continued
Investment income for the years ended December 31, 2001, 2000 and 1999 consisted of the following:
4. Property, Plant and Equipment
Balances of major classes of assets and accumulated depreciation and amortization at December 31, 2001 and 2000 are as follows:
Depreciation and amortization expense was $158,935, $185,164, and $224,485 for the years ended December 31, 2001, 2000 and 1999, respectively.
5. Short-Term Borrowings
At December 31, 2001, Med-Design had a $3,000,000 revolving line of credit under which borrowings are collateralized by substantially all the assets of the Company. 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 borrowing to meet working capital needs will bear interest at LIBOR plus 2.25%, while borrowings to finance capital equipment purchases bear interest at the prime rate plus 2.5%. There were no borrowings under this facility during 2001 and 2000. The facility expires on May 31, 2002.
On May 29, 1998, Med-Design obtained a $250,000 loan from a private investor, who is a director of the Company, with interest at the prime rate. In connection with the loan, the Company issued 33,000 shares of common stock to the holder. The fair value of the shares was recorded as debt issue costs. The loan was renewed and amended on May 29, 1999 with interest at the prime rate plus 810 shares of Med-Design's common stock per month and was repaid in full in February 2000. Interest expense of $24,401 and $59,758 was recognized for the years ended December 31, 2000 and 1999, respectively, representing the fair value of 6,480 shares of the Company's common stock that remained unissued at December 31, 2001.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. Debt
Debt at December 31, 2001 and 2000 consisted of the following:
The aggregated amount of capital lease obligations maturing in each of the next four years, is as follows:
Capital Lease --------------- 2002................................ $ 12,720 2003................................ 2,581 2004................................ 1,505 2005................................ -- --------------- $ 16,806 ===============
7. Commitments and Contingencies
Med-Design leases a building, office space, and other office equipment under non-cancelable operating leases that expire at various times through 2003.
Total rent expense under all operating leases for years ended December 31, 2001, 2000 and 1999 was $160,975, $163,068, and $160,395, respectively.
In August, 2000, the Company's shareholders approved an employment contract for the Company's Chairman and CEO, which provided for the issuance of 59,700 shares of common stock per year for the next four years totaling 238,806 shares beginning April 1, 2000 provided Mr. Donegan remains an officer, director or consultant of the Company. The fair value of Med-Design common stock at the date of shareholder approval of this grant was $12.63.
In November 1999, the Company approved the issuance, subject to shareholder approval, which was received in August 2000, of 200,000 shares of common stock to the Chief Operating Officer. The stock vests at the earlier of the date when the Company's common stock trades at $22.00 or higher for thirty (30) days or November 11, 2004 provided he has not resigned or been discharged for cause. On July 6, 2001, Med-Design stock maintained a market price of $22.00 or higher for thirty (30) days and this agreement was revised to provide that a third of the stock vests on August 6, 2001 and the remaining shares will vest in two equal tranches on August 6, 2002 and August 6, 2003. In connection with the August 6, 2001 issuance, the Company recorded compensation expense of $944,812 during the year ended December 31, 2001, (based on the fair value of Med-Design's common stock on August 7, 2000 of $12.63).
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Commitments and Contingencies, continued
In August, 2000, Med-Design's shareholders 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, a director of the Company in connection with the performance of consulting services. This compensation arrangement was approved, subject to the conclusion of negotiations of Mr. Kelley's consulting contract. Negotiations have not yet concluded.
8. Licensing Revenues
Becton Dickinson is the principal licensee of Med-Design's patented products. On December 11, 1998, Med-Design entered into a license agreement with Becton Dickinson for certain of Med-Design's products under which Med-Design received an up-front licensing fee of $4.5 million in addition to the right to receive royalty payments based on Becton Dickinson's net sales of the products licensed under such agreement. In addition, the license agreement granted Becton Dickinson an option to license five of Med-Design's other products.
On March 12, 2000, Med-Design signed a binding term letter with Becton Dickinson outlining the terms for a definitive agreement pursuant to which Becton Dickinson would license the products subject to the option to license. Med-Design recorded as revenue $1.5 million in the form of an up-front licensing fee upon the signing of the binding term letter. On May 11, 2000, Med-Design entered into a definitive license agreement with Becton Dickinson based upon the terms of the March 12, 2000 binding term letter pursuant to which Med-Design received, and recorded as revenue, an additional $2.5 million in up-front licensing fees and the right to receive royalty payments based on Becton Dickinson's net sales of the products licensed under such agreement.
MedAmicus is also a licensee of Med-Design's patented products. On September 25, 2000, Med-Design entered into a development and licensing agreement granting MedAmicus a license to market and manufacture the Company's Safety Seldinger Introducer Needle for certain venous applications. Under the terms of the agreement, Med-Design has the right to receive royalty payments based on the net sales of the Safety Seldinger Introducer Needle by MedAmicus, Inc.
On September 7, 2001, Med-Design entered into an Addendum ("the Addendum") to the development and licensing agreement with MedAmicus, Inc. The Addendum grants MedAmicus an exclusive license to manufacture and market the Company's Safety Seldinger Introducer Needle in the arterial access market. Under the terms of the Addendum, Med-Design received an initial payment of $2,000,000, $1,000,000 of which was paid in 68,027 shares of MedAmicus common stock valued at the closing price on the date we entered into the Addendum and $1,000,000 of which was paid in cash on October 15, 2001. In addition, Med-Design is entitled to receive royalties of 20% of net sales of the product, which royalty rate may be reduced to 17% if certain sales volumes are met. During 2001, the Company sold 2,000 shares of MedAmicus common stock received in this transaction at a gain of $2,600. At December 31, 2001, Med-Design held 66,027 shares of MedAmicus stock valued at $1,027,380 and included in Available for Sale Securities at December 31, 2001.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted loss per share:
Options and warrants to purchase 2,096,413, 1,589,900, and 1,639,200 shares of Med-Design's common stock as of December 31, 2001, 2000 and 1999, respectively were not included in computing diluted earnings per share as the effect of these instruments is anti-dilutive.
10. Preferred Stock
In December 1999 in connection with the Company entering into a licensing agreement with Becton Dickinson, Med-Design issued 300,000 shares of Series A Convertible Preferred Stock ("Preferred Stock") for total proceeds of $1.5 million. The Preferred Stock, which was convertible at the holders option at $5.00 per share, was converted into 300,000 shares of common stock in March 2000. Dividends under the Preferred Stock were payable semi-annually at the rate of 8% per annum in cash or in additional shares of Preferred Stock (at the option of Med-Design). In 2000, the Company declared and paid a dividend of $150,000 in cash on the Preferred Stock.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Stock Option Plan
In 1995, Med-Design adopted a Non-Qualified Stock Option Plan ("Stock Option Plan") which provides for the grant of 500,000 options to directors, officers and employees of the Company. Under the Stock Option Plan, the exercise price of each option may not be less than the fair market value (as of the date of grant) of the Company's common stock and the term of each option may be no more than 10 years from the date of grant. Additionally, the Stock Option Plan provides for the annual issuance of options for the purchase of 16,000 shares of common stock to each non-employee director.
On June 11, 2001, the Board adopted the 2001 Equity Compensation Plan. The 2001 Plan will be administered by the Company's Compensation Committee. The Compensation Committee has the authority to (i) determine the individuals to whom grants will be made under the 2001 Plan; (ii) determine the type, size and terms of each grant; (iii) determine the time when grants will be made and the duration of any applicable exercise or restriction period; (iv) amend the terms of any previously issued grant; and (v) deal with any other matters arising under the Plan. As of December 31, 2001 there were 778,460 shares available for future grants which may be applied to either plan.
Options granted to employees under the Non-qualified Option Plan vest at a rate of 20% per year and expire either, in five years from the date of grant or on the vesting date. Options granted to directors expire in five years and vest one year from the date of grant. Activity under the Stock Option Plan during the years ended December 31, 2001, 2000 and 1999 is as follows:
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. Stock Option Plan, continued
The following table summarizes information regarding stock options outstanding at December 31, 2001:
12. Stock Based Compensation
The Company entered into arrangements, subject to shareholder approval, which was obtained on August 7, 2000, for the issuance of shares of common stock, stock options and warrants to purchase shares of common stock to officers of the Company during 2000. Compensation expense in the amount of $1,792,082 and $886,807 was recorded during the years ended December 31, 2001 and 2000 based on the difference between the exercise price of the option or warrant and the fair value of Med-Design's common stock on August 7, 2000 of $12.63 and calculated in accordance with the individual vesting schedules of these grants.
In connection with the termination of employment of an officer and employee, the Company extended to February 29, 2000 the expiration date to purchase 59,000 and 1,000 shares of common stock for an officer and an employee of the Company, respectively. Compensation expense of $825,000 was recorded during the year ended December 31, 2000, based on the difference between the exercise price of the options and the fair value of the Company's common stock at the date of the modification, in accordance with APB 25.
The Company extended to August 31, 2000 the expiration date on a warrant issued to a consultant to purchase 100,000 shares of common stock. Compensation expense of $823,270 was recorded during the year 2000, based on the fair value of the warrant, calculated using a Black-Scholes valuation model in accordance with FAS 123.
The Company issued a warrant to Edward Allard for consulting services on February 19, 2000 and recorded compensation expense during the year ended December 31, 2000 in the amount of $12,480, based on the fair value of the warrant, calculated using a Black-Scholes valuation model in accordance with FAS 123.
In connection with the resignation of a director and termination of certain employees in July 1999, the Company extended the date of expiration of certain options. Compensation expense of $263,999 was recorded based on the fair value of the options using a Black-Scholes valuation model in accordance with FAS 123 during the year ended December 31, 1999.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. Stock Based Compensation, continued
Had compensation expense for Med-Design's Stock Option Plan and warrant grants been recorded based on the fair value of the options or warrants at the grant dates in 2001, 2000 and 1999, consistent with the provisions of FAS 123, Med-Design's net loss and net loss per share would have reflected the pro forma amounts indicated below:
The fair value of each option or warrant grant was estimated using the Black-Scholes option-pricing model with the following weighted-average assumption used for grants during the years ended December 31, 2001, 2000 and 1999: dividend yield of 0%; expected volatility of 90.66% and range of risk free interest rate of 4.32% to 5.11% in 2001: dividend yield of 0.00%; expected volatility of 89.80% to 95.02% and range of risk free interest rate of 5.85% to 6.74% in 2000: dividend yield of 0.00%; expected volatility of 82.64% and risk free interest rate of 5.69% in 1999. Expected lives are based on actual terms of options and warrants granted.
13. Warrants Outstanding
As of December 31, 2001 and 2000, warrants to purchase a total of 684,000 and 882,000 shares of Med-Design's common stock were outstanding with various vesting and expiration periods as outlined below.
On January 23, 1997, Med-Design completed the sale of 1,000,000 shares of common stock. In connection with the sale, Med-Design also sold to the placement agent, for nominal consideration, warrants to purchase 100,000 shares of common stock, of which warrants to purchase 10,000 shares remain unexercised as of December 31, 2001. This warrant is exercisable at a price of $5.50 per share and remained unexercised at December 31, 2001.
On March 19, 1997, Med-Design issued a warrant to purchase 100,000 shares of common stock at an exercise price of $7.50 per share to a director of the Company who was engaged to perform consulting services. The warrant was exercisable on issuance and was repriced to $2.88 per share on January 14, 1999. Of the shares underlying the warrant, 50,000 shares remained unexercised at December 31, 2001.
On October 10, 1997, Med-Design issued a warrant to purchase 100,000 shares of common stock at an exercise price of $5.44 to a director of the Company who was engaged to perform consulting services. The warrant was exercisable upon issuance, expires on October 10, 2002 and was repriced to $2.88 per share on January 14, 1999. The warrant remained unexercised at December 31, 2001.
On January 14, 1998, Med-Design issued a warrant to purchase 100,000 shares of common stock at an exercise price of $2.88 per share to a director of the Company who was engaged to perform consulting services. The warrant was exercisable upon issuance and expires on January 14, 2003. The warrant remained unexercised at December 31, 2001.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. Warrants Outstanding, continued
On September 9, 1998, Med-Design issued a warrant to purchase 200,000 shares of common stock at a price of $1.25 per share to a director of the Company who was engaged to perform consulting services. This warrant vested upon completion of performance on December 23, 1998 and expires on September 9, 2003. The warrant remained unexercised at December 31, 2001.
On January 21, 1999 the Med-Design issued a warrant to purchase 50,000 shares of common stock at an exercise price of $3.25 to a director of the Company who was engaged to perform consulting services. The warrant was exercisable upon issuance and expires on January 21, 2004. The warrant remained unexercised at December 31, 2001.
On March 5, 1999 Med-Design issued a warrant to purchase 100,000 shares of common stock at $3.94 per share to the Company's Corporate Secretary. The warrant vested on March 5, 2000 and expires on March 5, 2004. The warrant remained unexercised as to 75,000 shares at December 31, 2001.
On November 5, 1999, in connection with the acquisition of a patent, Med-Design issued a warrant to purchase 25,000 shares of common stock at an exercise price of $8.00 per share. The warrant is exercisable on or before November 5, 2004. The warrant remained unexercised as to 10,000 shares at December 31, 2001.
On February 18, 2000 the Company issued a warrant to purchase 40,000 shares of common stock to a director of Med-Design in connection with his separation from the Company. The warrant vested upon issuance, expires on February 18, 2005 and has an exercise price of $16.375. The warrant remained unexercised at December 31, 2001.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000 shares of common stock at $11.875 per share to its Chief Operating Officer. The warrant vested as to 33,000 shares in November 2000 and 33,000 shares in November 2001 and expires April 25, 2005. The warrant remained unexercised as to 33,000 at December 31, 2001.
On April 25, 2000, Med-Design issued a warrant to purchase 66,000 shares of common stock at $11.875 per share to its Chief Financial Officer. The warrant vested as to 33,000 shares on November 2000 and 33,000 shares in November 2001 and expires on April 25, 2005. The warrant remained unexercised as to 16,000 shares at December 31, 2001.
14. Defined Contribution Benefit Plan
Med-Design sponsors a 401(k) defined contribution benefit plan. Participation in the plan is available to substantially all employees. There have been no Company contributions to this plan to date.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. Income Taxes
The following is a summary of the components of income taxes from operations:
The deferred income tax assets and liabilities recorded in the consolidated balance sheets at December 31, 2001, 2000 and 1999 are as follows:
The tax effect of option and warrant exercises was $4,592,942, $3,790,949, and $754,448 in 2001, 2000 and 1999, respectively. However, these benefits were deferred because the Company is in a net operating loss position. Also such benefits will be credited to additional paid-in capital in the year in which the benefits are realized.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. Income Taxes, continued
At December 31, 2001, the Company has a federal net operating loss carry forward of approximately $39.4 million which will expire, if unused, in the years 2010 through 2021. At December 31, 2001, the Company has $42.1 million in net operating losses for state purposes which will expire, if unused, in the years 2002 through 2011.
In addition, the Company experienced an ownership change in accordance with Internal Revenue Code Section 382 in 1997. Losses incurred through January 23, 1997 amounting to $4,853,939 are generally limited in their utilization to $1,738,559 per year.
The Company has unused research tax credit in the amount of $457,593 which will expire if unused in the years 2010 through 2021.
A reconciliation of the Federal statutory rate to the effective tax rate is as follows:
16. Related Party Transactions
During 2001 and 2000, The Company paid $44,265 and $54,924 respectively, for legal services to a firm, of which a partner is a director, officer and stockholder of Med-Design.
17. Fair Value of Financial Instruments
The following methods and assumptions were considered by Med-Design in determining its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet approximates fair value.
Marketable securities: Available-for-sale securities consist of corporate bonds, common stock and commercial paper. Fair value is based on quoted market prices.
(Continued)
THE MED-DESIGN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Subsequent Events
On January 15, 2002, Med-Design signed a binding term sheet agreement with Sultan Chemists that, upon execution of a definitive agreement, will give the Company the right to exclusively market and sell Med-Design's Safety Dental Pre-filled Cartridge for ten years. Sultan is committed to purchase a minimum of 6,000,000 units per year for the next ten years.
On March 25, 2002, Med-Design successfully completed a private equity placement of the Company's common stock. Med-Design sold 1,326,260 shares of its common stock for $15,000,000. The net proceeds to the Company after giving effect to placement agent fees were approximately $14,200,000.
19. Quarterly Information (unaudited)