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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number: 1-11765
MEDJET INC.
(Name of Small Business Issuer as Specified in its Charter)
DELAWARE 22-3283541
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1090 KING GEORGES POST ROAD, SUITE 301
EDISON, NEW JERSEY 08837
(Address of Principal Executive Offices)
(732) 738-3990
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES |X| NO
|_|
As of August 11, 2003, 3,901,431 shares of Common Stock, par value
$.001 per share, were outstanding.
Transitional Small Business Disclosure Format: Yes |_| No X|
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDJET INC.
(A Development Stage Company)
Condensed Interim Balance Sheet
June 30, 2003
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 128,547
Prepaid expenses 7,183
---------------
Total Current Assets 135,730
---------------
Property and Equipment - less accumulated depreciation of $409,701 37,129
Patents and Trademarks - less accumulated amortization of $62,655 296,982
Security deposits 4,837
---------------
Total Assets $ 474,678
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 113,764
Notes payable - Officer 160,000
Income Tax Payable -
Deferred Rental Obligation 7,651
Deferred income-merger option -
---------------
Total Liabilities 281,415
---------------
Stockholders' Equity:
Common stock, $.001 par value, 30,000,000 shares authorized,
3,935,220 shares issued and 3,901,431 shares outstanding 3,935
Preferred stock, $.01 par value, 1,000,000 shares authorized, 10,400 shares
designated as Series B Convertible Preferred issued and outstanding 104
Additional paid-in capital 7,985,298
Accumulated deficit (including deficit accumulated during development
stage of $9,253,366 of which $1,556,204 was applied to additional
paid-in capital upon conversion from an "S" to a "C" corporation) (7,794,374)
Less: Treasury stock, 33,789 shares, at cost (1,700)
---------------
Total Stockholders' Equity 193,263
---------------
Total Liabilities and Stockholders' Equity $ 474,678
===============
See notes to the condensed interim financial statements.
1
MEDJET INC.
(A Development Stage Company)
Condensed Interim Statements of Operations
For the Six Months Ended June 30,
2003 and 2002 and the Period From December 16,
1993 (Date of Inception), to June 30, 2003
(Unaudited)
December
16, 1993
Three Months Ended June 30, Six Months Ended June 30, (Inception to)
---------------------------------- ---------------------------------- ----------------
2003 2002 2003 2002 30-Jun-03
Revenues: --------------- --------------- --------------- --------------- ----------------
License fee income $ - $ 942,344 $ - $ 1,597,300 $ 4,884,303
---------------- ---------------- ---------------- ---------------- ----------------
Total Revenues $ - $ 942,344 $ - $ 1,597,300 $ 4,884,303
Expenses:
Research, development, general
and administrative $ 186,213 $ 983,608 $ 380,214 $ 1,790,243 $ 15,754,644
---------------- ---------------- ---------------- ---------------- ----------------
Total Expenses $ 186,213 $ 983,608 $ 380,214 $ 1,790,243 $ 15,754,644
Income (Loss) from Operations $ (186,213) $ (41,264) $ (380,214) $ (192,943) $ (10,870,341)
Other Income (Expense): ---------------- ---------------- ---------------- ---------------- ----------------
Merger option income $ - $ 125,001 $ - $ 250,001 $ 500,000
Other income $ - $ - $ - $ - $ 5,154
Net interest income (expense) $ (1,406) $ (786) $ (2,422) $ (1,735) $ 248,484
---------------- ---------------- ---------------- ---------------- ----------------
Income (Loss) Before Income Tax $ (187,619) $ 82,951 $ (382,636) $ 55,323 $ (10,116,703)
Federal income tax $ - $ - $ - $ - $ -
State income tax $ 130 $ 240 $ 1,150 $ 240 $ (817,660)
(benefit) ---------------- ---------------- ---------------- ---------------- ----------------
Total income tax (benefit) $ 130 $ 240 $ 1,150 $ 240 $ (817,660)
Net income (loss) $ (187,749) $ 82,711 $ (383,786) $ 55,083 $ (9,299,043)
Dividends on preferred stock $ - $ - $ - $ - $ 184,923
Net Loss Attributable to ---------------- ---------------- ---------------- ---------------- ----------------
Common Stockholders $ (187,749) $ 82,711 $ (383,786) $ 55,083 $ (9,483,966)
================ ================ ================ ================ ================
Net (Income) Loss Per Share:
Basic and Diluted $ (0.05) $ (0.02) $ (0.10) $ 0.01 $ (2.82)
Weighted Average Common ================ ================ ================ ================ ================
Shares Outstanding:
Basic 3,901,431 3,901,431 3,901,431 3,901,431 3,368,999
================ ================ ================ ================ ================
Diluted 3,901,431 5,382,736 3,901,431 5,396,211 3,368,999
================ ================ ================ ================ ================
See notes to the condensed interim financial statements
2
MEDJET INC.
(A Development Stage Company)
Condensed Interim Statements of Cash Flows
For The Three Months Ended June 30, 2003 and 2002
And The Period From December 16, 1993 (Date of Inception) to June 30, 2003
(Unaudited)
For the Six Months Ended Period from
June 30, December 16,
---------------------------- 1993 (Inception) to
2003 2002 June 30, 2003
-------------- ------------ ----------------------
Cash Flows from Operating Activities $ (270,608) $ 260,551 $ (7,834,912)
Cash Flows from Investing Activities (10,534) (59,403) (1,028,408)
Cash Flows from Financing Activities - (12,676) 8,991,867
-------------- ------------ ----------------------
Net Increase (Decrease) in Cash and Cash Equivalents (281,142) 188,472 128,547
Cash and Cash Equivalents - Beginning of Period 409,689 213,477 -
-------------- ------------ ----------------------
Cash and Cash Equivalents - End of Period $ 128,547 $ 401,949 $ 128,547
-------------- ------------ ----------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Income taxes $ 24,028 $ - $ 25,888
============== ============ ======================
Interest expense $ 1,814 $ 2,320 $ 77,306
============== ============ ======================
See notes to the condensed interim financial statements.
3
MEDJET INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE
CONDENSED INTERIM FINANCIAL STATEMENTS
NOTE A - NATURE OF ORGANIZATION AND BASIS OF PRESENTATION:
(1) NATURE OF ORGANIZATION:
Medjet Inc. (the "Company") was incorporated in the State of Delaware
on December 16, 1993, and is in the development stage. The Company is
engaged in research and development of medical technology, utilizing
small-diameter, liquid microjets moving at various speeds above
supersonic, depending on the specific application, with a current
emphasis on dental surgical technology and equipment.
(2) BASIS OF PRESENTATION:
The Condensed Interim Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by such rules
and regulations.
The Condensed Interim Financial Statements included herein reflect, in
the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the results for the
interim periods. The results of operations for the six-month period
ended June 30, 2003 are not necessarily indicative of results to be
expected for the fiscal year ending December 31, 2003.
NOTE B - NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share, in accordance with the provisions of
Financial Accounting Standards No. 128, "Earnings Per Share," is
computed by dividing net income (loss) by the weighted average number
of shares of Common Stock outstanding during the period. Diluted net
income per share includes additional dilution from potential issuance
of common stock, such as stock issuable pursuant to the exercise of
stock options and warrants outstanding and the conversion of preferred
stock. Common Stock equivalents for the three and six months ended June
30, 2003 and for the period from December 16, 1993 (inception) to June
30, 2003, have not been included in the computation of dilutive loss
per share as the effect would be anti-dilutive.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING ANY DOCUMENTS THAT ARE
INCORPORATED BY REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. GENERALLY, SUCH
STATEMENTS ARE INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "BELIEVES" AND SIMILAR WORDS AND PHRASES. SUCH STATEMENTS ARE BASED
ON THE COMPANY'S CURRENT EXPECTATIONS AND ARE SUBJECT TO RISKS, UNCERTAINTIES
AND ASSUMPTIONS. CERTAIN OF THESE RISKS ARE DESCRIBED OR REFERRED TO BELOW.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM
THOSE ANTICIPATED, EXPECTED, INTENDED OR BELIEVED.
GENERAL
The Company is a development stage company engaged in research and development
for manufacture of medical technology and has developed a proprietary technology
and derivative devices based on microjets. The Company expects, during the
remainder of 2003, to continue its research and development activities, focusing
principally on waterjet technology and equipment for surgery. However, the
Company had no revenues in the three-month period ended June 30, 2003, and the
Company anticipates that it has cash on hand to fund the Company's working
capital and capital expenditure requirements only through September 2003. The
report of independent certified public accountants to the Company's financial
statements for the year ended December 31, 2002 contains an explanatory
paragraph that there is substantial doubt as to the Company's ability to
continue as a going concern.
In August 2001, the Company, VISX, Inc. ("VISX"), a U.S. provider of equipment
for the vision correction procedure known as the Laser Ablation System for
In-situ Keratomileusis ("LASIK"), and a subsidiary of VISX ("Merger Sub")
entered into an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement"), which provided, among other things, for the potential merger of
Merger Sub with and into the Company, at VISX's option. In connection with the
execution of the Merger Agreement, the Company and VISX also entered into a
separate one-year research and development agreement. VISX had the option to
terminate the Merger Agreement at any time during the one-year period following
the date of its execution for any or no reason.
In August 2002, the Company and VISX amended various agreements in connection
with the proposed merger of Merger Sub with and into the Company. The Company
and a wholly-owned Cayman subsidiary of VISX ("Affiliate") entered into an
amendment and assignment of the one-year research and development agreement
originally executed in August 2001. The amendment extended the term of the
research and development agreement to October 17, 2002, and granted VISX the
option to extend the term to July 17, 2003, in order to allow the Company
additional time to pursue the research and development activities set forth in
the agreement.
The Company and Merger Sub also amended the Merger Agreement to extend the
termination date of the Merger Agreement to October 17, 2002, and provided for
an automatic extension of the termination date of the Merger Agreement to July
17, 2003, if the term of the research and development agreement was similarly
extended. In October 2002, Affiliate elected to extend the term of the research
and development agreement to July 17, 2003, thereby extended the Merger
Agreement to the same date.
5
In November 2002, VISX elected to exercise their right and terminate the Merger
Agreement. On November 11, 2002, VISX paid the Company the $250,000 termination
fee as provided in the Merger Agreement. In addition, Affiliate elected to
terminate the research and development agreement.
After the termination of the Merger Agreement, the Company initially sought
another strategic partner, purchaser or licensee of its microjet microkeratome.
However, during 2002, the number of LASIK procedures fell well below the
anticipated rates and the prospects for 2003 and the years beyond were not
encouraging. The price of LASIK procedures had also seen serious degradation.
The Company believed that other companies with which it might have pursued a
strategic relationship involving its microkeratome shared a similar view of the
market and as a result, the Company discontinued its microkeratome development
efforts until additional financing could be procured. The Company has, however,
recently reviewed the vision correction market and developed a new marketing
strategy for its microjet microkeratome. While it continues to focus its efforts
on developing treatments of dental caries using its microjet technique, the
Company has renewed its efforts to procure additional financing to continue to
develop microjet vision correction devices.
APPLICATIONS OF THE COMPANY'S TECHNOLOGY
The Company believes that microjets can bring new surgical capability and
performance to the clinic or operating room and may become the standard of care
for the treatment of several diseases and conditions. The Company intends to
develop additional product applications provided adequate funds become
available.
DENTISTRY
Based on the Company's product-development criteria, the next area identified
for development is treatment of dental caries. Development of such treatment
began in February 2003. The dental caries is a progressive, infected and decayed
portion of a tooth. An opening in the enamel allows the dentin (calcareous
material similar to but harder and denser than bone that composes the principal
mass of a tooth) to be infected. Unchecked, the decayed region enlarges,
potentially leading to nerve involvement, pain, temperature sensitivity, and
ultimately loss of the structural integrity of the tooth. The standard treatment
for dental caries is to remove the decayed, infected portion within the dentin
and to fill the resulting cavity. The removal process involves drilling out the
affected area of the tooth until only sound dentin remains. More recently,
dental lasers have come into limited use for removing the caries. Not all
regions of the tooth are readily accessed by the drill or laser.
Based on its limited experiments and observations to date, the Company has
developed a patented technology whereby a fine beam of high-speed water quickly
and quietly flushes out the dental carries dental through small holes drilled
through the tooth enamel and dentine. No more than 2 oz. of fluid is used and
the process takes seconds. The drilling process is free of vibration, heat,
sound and smell and, the Company believes, is painless in most cases. Based on
the Company's limited experiments and observations to date, the drilling process
does not chip or crack the structure of the tooth. The holes created during this
process should allow access to a cavity within the tooth containing carious
material. The high-speed water beam then quickly washes out every trace of the
carious material without damaging the dentin surrounding the cavity. The cavity
is then ready for filling through the initial access hole. The Company believes
6
that the special filling material that can be used as an alternate to the
conventional amalgam will be longer lasting and more esthetically pleasing.
Based on its limited experiments and observations to date with a prototype
device, the Company believes that a dental procedure based on this technology is
feasible. This equipment could be more cost effective than both the old drill
and burr technology and the new laser technology. The same equipment can be used
to clean teeth of tartar, plaque and calculus and allow various procedures in
periodontistry.
Although the Company's experiments with dental procedures have been limited, and
its prototype is in the early stages of development and has not yet been
confirmed on live patients, the Company believes that the treatment, if
perfected, may require no anesthesia in many circumstances and that the
associated time and cost saving and the perceived advantages of the microjet
technique over traditional treatments are potentially significant. Possible
other advantages include reduced vibration and noise. An important feature of
the Company's microjet technique is that the volume of dentin removed is greatly
reduced compared to drilling, limiting the potential for nerve involvement and
preserving as much as possible the integrity of the tooth. Hence, the capability
may be called "microdentistry."
Although a preliminary associated handpiece and pump have been developed and
constructed, the Company has not yet constructed a complete working prototype of
a microjet dental device. Based on its own internal market study, the Company
believes that a significant market potentially exists for this procedure and
product.
The Company will pursue the other uses of the microjet, such as its the
treatment of skin conditions and pain through a non-contact, broad area,
subdermal injection of drugs, when funding is available.
OPHTHALMOLOGY
The Company's ophthalmic devices relate to surgery of the cornea to achieve
correction of vision error. The cornea is the clear window that provides most of
the focusing power of the vision system of the eye. Vision error occurs when the
refractive power of the unaccomodated eye differs from what is needed to provide
a sharply focused image on the retina for an object at 20 feet. Vision errors
are currently treated primarily by eyeglasses, contact lenses or surgery, all of
which compensate for the existing vision error. The shape of the cornea may be
modified to produce a change in the refractive power of the eye. This is the
basis for the well-known laser-based vision correction procedure known as LASIK.
As discussed above, the Company has currently discontinued its microkeratome
development and is focusing its efforts on developing treatments of dental
caries using its microjet technique. However, the Company has developed a new
marketing strategy for its microjet microkeratome and ophthalmic devices and has
renewed its efforts to procure additional financing to continue to develop
microjet vision correction devices.
The Company anticipates that the Company's cash on hand will be sufficient to
fund the Company's working capital and planned capital expenditure requirements
through September 2003. However, the Company will require additional financing
in order to maintain its current operations beyond that date. The Company has no
current arrangements with respect to any additional financing and, pursuant to
the terms of the Merger Agreement with VISX, was precluded from seeking such
additional financing while that agreement was effective. Consequently, there can
be no assurance that any additional financing will be available to the Company
on commercially reasonable terms or at all. There can be no assurance that the
proceeds obtained by the Company as a result of such financing would be
sufficient to fund the Company's development efforts or that such efforts to
develop products for dentistry, skin treatment or ophthalmology will be
successful.
7
RESULTS OF OPERATIONS
The Company has not yet initiated sales of its products. The Company generated
no revenues during the three-month and six-month periods ended June 30, 2003,
and generated $942,344 and $1,597,300 of revenues for the comparable periods in
2002, respectively. The revenues generated during the three-month and six-month
periods ended June 30, 2002 resulted from the prior research and development
agreement with VISX. As a result of the termination of the research and
development agreement with VISX, the Company currently has no source of
revenues.
Total expenses during the three months ended June 30, 2003 decreased by $797,395
(81%) to $186,213 from $983,608 for the comparable period of 2002. Total
expenses during the six months ended June 30, 2003 decreased by $1,410,029 (79%)
to $380,214 from $1,790,243 for the comparable period of 2002. This decrease was
primarily due to decreases in purchases for materials, testing and analysis and
other costs associated with continuing development activities. Total expenses
for the three months ended June 30, 2002 included charges of $154,000 resulting
from the amortization of the value of the warrant to purchase 1,320,000 shares
of the Company's common stock issued to VISX in connection with the execution of
the Merger Agreement and the research and development agreement. The total
deferred charge of $616,000 in connection with the issuance of this warrant was
amortized over the one-year period corresponding to the original one-year term
of the research and development agreement, which term was from August 17, 2001
through August 17, 2002.
Other income (expense) for the three months and six months ended June 30, 2002
included $125,001 and $250,001 of merger option income, respectively, based on
the $500,000 payment by VISX to the Company made concurrently with the execution
of the merger agreement in August 2001. This $500,000 payment was recognized
over the original one-year period during which VISX had the option to elect
whether or not to proceed with the merger. This payment was made by VISX in
consideration for this option.
Net interest expense for the three months ended June 30, 2003 was $(1,406)
compared to $(786) for the comparable period of 2002. Net interest expense for
the six months ended June 30, 2003 was $(2,422) compared to $(1,735) for the
comparable period for 2002. These increases resulted principally from decreased
interest income resulting from a decrease in cash and cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Company's cash and cash equivalents was $128,547 and
its working capital was $(145,685).
During March 1999, Eugene I. Gordon, Ph.D., the Company's Chairman of the Board,
Chief Executive Officer, Secretary and Treasurer, agreed to make available to
the Company an unsecured loan of up to $250,000. Under the terms of this
agreement, the Company issued warrants to Dr. Gordon to purchase up to 50,000
shares of the Company's unregistered common stock and agreed to pay a market
interest rate on amounts borrowed. Through June 30, 2003, amounts borrowed by
the Company under this agreement totaled $160,000. As of June 30, 2003, the
amount owed to Dr. Gordon was $160,000 with interest paid monthly. Principal
amounts outstanding under this loan are due and payable on January 26, 2009.
In 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey net
operating loss carryover ("NOLs") and research and development tax credits ("R&D
8
Credits") to corporate taxpayers in New Jersey. Under this program, the New
Jersey Department of Taxation certifies annual NOLs and R&D Credits which may be
sold to third parties. Generally, corporations operating in New Jersey are
subject to a 9% tax on net operating profits. Companies meeting certain criteria
and that had NOLs may apply for certificates for 9% of their cumulative state
certified NOLs and 3% of their R&D Credits. The total value of the certificates
for all companies applying is limited to a fixed amount, as established by
statute. As a result, the value of the certificates issued is usually less than
the total NOLs and R&D Credit amounts for which applications are submitted,
depending on the number of companies applying for such certificates and the
amounts claimed. Any remaining amounts of NOLs and R&D Credits exceeding the
face value of the certificates issued can be carried over into subsequent years.
Whatever certificates are received may be sold for a percentage of their face
value, typically between 80% and 86%. The buyers of these certificates are then
entitled to use these certificates at 100% of their face value to reduce their
own New Jersey state income tax payments. Companies are permitted to apply for
such certificates beginning in June with respect to NOLs and R&D Credits
relating to prior fiscal years. The New Jersey Department of Taxation generally
takes about six months to process these applications and issue the certificates.
As a result, the Company generally does not sell its eligible NOLs and R&D
Credits relating to a given year until near the end of the following year. To
the extent that the NOLs and R&D Credits are sold, they will be unavailable to
the Company to offset future New Jersey state income taxes. As of December 31,
2002, the Company sold all of its available NOLs and R&D Credits. The Company
will not be eligible to receive any certificates in 2003.
As shown in the accompanying financial statements, the Company incurred net
losses of $187,749 during the three-month period ended June 30, 2003. As of June
30, 2003, the Company's cash and cash equivalents was $128,547.
In light of the current market capitalization of the Company, it would be highly
dilutive to the Company's current stockholders if the Company were to obtain the
level of financing necessary to fund the Company's business plans and operation
from an equity investor. However, management believes that the Company's
technology is extremely valuable. The Company has identified three areas of
importance: (1) dentistry, (2) the treatment of skin conditions and pain through
a non-contact, broad area, subdermal injection of drugs and (3) vision
correction surgery.
The Company's current strategy is to create three new subsidiaries, one of which
will target dentistry, one of which will target skin conditions and one of which
will target vision correction surgery. The Company will prepare business plans
and seek funding for each newly-created subsidiary. The subsidiaries would be
partly owned by such new funding sources and partly owned by the Company. The
individual subsidiaries will concentrate on the research, development,
regulatory activity and marketing that is required for its identified line of
business. The Company would then license the Company's intellectual property and
make available other properties needed by each subsidiary. To the extent that
the Company provides space, facilities and support, each of the subsidiaries
will make payments to the Company for its services. The Company is actively
seeking funding for each subsidiary.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
9
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to intangible assets, income taxes,
contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
PATENTS
Costs incurred in connection with patent applications, principally legal and
consulting fees, are capitalized. Once a patent is granted, these costs are
amortized over the lesser of the life of the patent, generally 20 years, or the
estimated future economic life of the technology underlying the patent. Once the
amortization period begins, management continues to evaluate the estimated
future economic life of the patents. Should it be determined that a shorter life
is estimated, than the original estimated future life, the amortization period
is adjusted accordingly. Should a patent application be abandoned or not
approved, the costs incurred in connection with the application are expensed.
At June 30, 2003, unamortized patent costs amounted to $295,442 and are included
in the balance sheet under the caption Patents and Trademarks (trademark costs
are $1,540).
REVENUE RECOGNITION
The Company had no revenues for the six months ended June 30, 2003. The
Company's revenues for the six months ended June 30, 2002 were derived from
payments from VISX pursuant to the research and development agreement that the
Company and VISX executed in August 2001.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
NEED FOR CURRENT FINANCING. The Company anticipates that its cash on hand will
be sufficient to fund its working capital and planned capital expenditures
requirements through September 2003. The Company will require additional
financing in order to maintain its current operations beyond that date. As a
result, the Company will be required to raise additional funds through public or
private financing, including grants that may be available for its research and
development. There can be no assurance, however, that the Company will be able
to obtain additional financing on terms favorable to it, if at all. If adequate
funds are not available to satisfy the Company's capital requirements, the
Company will be unable to maintain its current operations and carry out its
business plans. The Company has no current understandings or commitments to
obtain any additional financing from the sale of its securities or otherwise.
QUALIFICATION IN THE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS RELATING
TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN; ACCUMULATED DEFICIT AND
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES. The report of
independent certified public accountants on the Company's audited financial
statements for the year ended December 31, 2002 contained an explanatory
paragraph stating that there is a substantial doubt as to the Company's ability
to continue as a going concern. The audited financial statements did not include
any adjustments that might result from the outcome of such uncertainty. The
Company incurred operating losses of $186,213 and $41,264 for the three months
ended June 30, 2003 and 2002, respectively, and, at June 30, 2003, had an
10
accumulated deficit of $7,794,374. The Company expects that it will continue
operating at a loss until, at the earliest, the Company generates sufficient
revenues to offset the cost of its operations, including its continuing product
development efforts. The Company's future level of revenues and potential
profitability depend on many factors, including the Company's ability to obtain
additional financing. There can be no assurance that the Company will experience
any significant growth in revenues (or even sustain historic revenue levels) in
the future or that the Company will ever achieve profitability.
DEVELOPMENT STAGE COMPANY. The Company is in the development stage and its
business remains subject to all of the risks inherent in the establishment of a
new business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, complications and delays
frequently encountered in connection with the formation of a new business, the
development of new products, the competitive and regulatory environment in which
the Company is operating and the possibility that its activities will not result
in the development of any commercially viable products. There can be no
assurance that the Company's activities will ultimately result in the
development of commercially saleable or useful products. The Company has not
sold any products.
Since February 2003, the Company's research and development activities are
concentrated on dental procedures. The microjet microkeratome and ophthalmic
device research has been discontinued until additional funding can be procured.
NO SALES REVENUES; UNCERTAIN PROFITABILITY. No sales revenues are expected
until, and only if, the Company begins commercial marketing of the Company's
dental, microkeratome, or other products or the Company sells or licenses its
technology to a third party. Commercial marketing of the Company's products in
the U.S. will be contingent upon obtaining FDA permission or approval and
possibly the approval of other governmental agencies. Regulatory clearance
procedures are often extremely time consuming, expensive and uncertain.
Accordingly, there can be no assurance that the Company will be successful in
obtaining marketing clearance of its devices or that, if such devices are
cleared, it will be able to generate sufficient revenues to operate on a
profitable basis.
DEPENDENCE UPON A KEY OFFICER; ATTRACTION AND RETENTION OF KEY PERSONNEL. The
business of the Company is highly dependent upon the active participation of its
founder, Chairman of the Board, Chief Executive Officer, Secretary and
Treasurer, Dr. Eugene I. Gordon, age 72. The loss or unavailability to the
Company of Dr. Gordon would have a material adverse effect on the Company's
business prospects and potential earning capacity. The recruitment of skilled
scientific personnel is critical to the Company's success. There can be no
assurance that it will be able to continue to attract and retain such personnel
in the future. In addition, the Company's expansion into areas and activities
requiring additional expertise, clinical testing, governmental approvals,
production and marketing of the Company's products (which would be required if
the Company does not enter into licensing arrangements) is expected to place
increased demands upon the Company's financial resources and corporate
structure. The Company expects to satisfy such demands, if they arise, through
the hiring of additional management personnel and the development of additional
expertise by existing management.
NO ASSURANCE OF FDA AND OTHER REGULATORY APPROVAL OR CLEARANCE. The Company's
proposed medical devices are subject to regulation by the FDA under the Federal
Food, Drug and Cosmetics Act (the "FD&C Act") and implementing regulations.
Pursuant to the FD&C Act, the FDA regulates, among other things, the
development, manufacture, labeling, distribution, and promotion of medical
devices in the United States.
11
The process of obtaining required regulatory clearances or approvals can be
time-consuming and expensive, and compliance with the FDA's Good Manufacturing
Practices regulations and other regulatory requirements can be burdensome.
Moreover, there can be no assurance that the required regulatory clearances will
be obtained, and such clearances, if obtained, may include significant
limitations on the uses of the product in question. In addition, changes in
existing regulations or guidelines or the adoption of new regulations or
guidelines could make regulatory compliance by the Company more difficult in the
future. The failure to comply with applicable regulations could result in fines,
delays or suspensions of clearances, seizures or recalls of products, operating
restrictions and criminal prosecutions, and would have a material adverse effect
on the Company.
UNCERTAINTY OF MARKET ACCEPTANCE; RELIANCE ON SINGLE TECHNOLOGY. Acceptance of
the Company's proposed products is difficult to predict and will require
substantial marketing efforts and the expenditure of significant funds by the
Company. There can be no assurance that the products will be accepted by the
medical community once they are permitted or approved. Market acceptance of the
Company's products will depend in large part upon the Company's ability to
demonstrate the operational advantages, safety and cost-effectiveness of its
products compared to other comparable instruments and techniques. Failure of the
products to achieve market acceptance will have a material adverse effect on the
Company's financial condition and results of operations.
At present, the Company's products (although still in development stage) are its
dental waterjet and microkeratomes. The Company expects that these products will
be, if and when commercially available, its sole products for an indefinite
period of time. The Company's present narrow focus on particular products makes
the Company vulnerable to the development of superior competing products and
changes in technology that could eliminate the need for the Company's products.
There can be no assurance that significant changes in the foreseeable future in
the need for the Company's products or the desirability of those products will
not occur.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend
in part on whether it successfully obtains and maintains patent protection for
its products, preserves its trade secrets and operates without infringing the
proprietary rights of third parties.
The Company has sought to protect its proprietary interest in its products by
applying for patents in the United States and corresponding patents abroad. The
Company currently has eight issued U.S. patents and 21 U.S. and international
patents pending. There can be no assurance that any other patents will be issued
to the Company, that any patents owned by or issued to the Company, or that may
be issued to the Company in the future, will provide a competitive advantage or
will afford protection against competitors with similar technology, or that
competitors of the Company will not circumvent, or challenge the validity of,
any patents issued to the Company. There also can be no assurance that any
patents issued to or licensed by the Company will not be infringed upon or
designed around by others or would prevail in a legal challenge, that others
will not obtain patents that the Company will need to license or design around,
that the microkeratomes or any other potential product of the Company will not
inadvertently infringe upon the patents of others, or that others will not
manufacture the Company's patented products upon expiration of such patents.
There can be no assurance that existing or future patents of the Company will
not be invalidated. Additionally, patent applications filed in foreign countries
and patents granted in such countries are subject to laws, rules and procedures,
which differ from those in the United States. Patent protection in such
countries may be different from patent protection provided by United States laws
and may not be as favorable to the Company.
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Also, there can be no assurance that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and trade secrets or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. As is the case with the Company's patent rights, the
enforcement by the Company of its non-disclosure agreements can be lengthy and
costly, with no guarantee of success. There can be no assurance that the
Company's program of patent protection, internal security of its proprietary
information and non-disclosure agreements will be sufficient to protect the
Company's proprietary technology from competitors.
INFRINGEMENT CLAIMS; LITIGATION. The Company's competitors and potential
competitors may intentionally infringe the Company's patents. Third parties may
also assert infringement claims or other claims against the Company. The defense
and prosecution of patent suits and other lawsuits are both costly and
time-consuming, even if the outcome is favorable to the Company. If any of the
Company's products are found to infringe upon the patents or proprietary rights
of another party, the Company may be required to obtain licenses under such
patents or proprietary rights of such other party. No assurance can be given
that any such licenses would be made available on terms acceptable to the
Company, if at all. If required licenses were to be unavailable, the Company
could be prohibited from using, marketing or selling certain technology and
devices and such prohibition could have a material adverse effect on the
Company. Third parties may seek damages that exceed the Company's insurance
coverage or that are not insured. If the Company sustains damages greater than
its insurance coverage, or actions are brought for damages that are not insured,
there could be a material adverse effect on the Company's cash available to
maintain its current operations and carry out its business plans.
The Company is currently involved in ongoing patent litigation and has recently
been named as a defendant, among others, in an action initiated by a former
employee of the Company, each as described under Part II, Item 1. "Legal
Proceedings."
COMPETITIVE TECHNOLOGIES, PROCEDURES AND COMPANIES. The Company is engaged in a
rapidly evolving field. We believe there are companies, both public and private,
universities and research laboratories engaged in research activities relating
to dental drilling and cavity treatment. We believe that competition from these
companies, universities and laboratories will be intense and will increase over
time. The Company's potential products for dental drilling and cavity treatment
will not compete with other presently existing forms of treatment for dental
disorders, including mechanical drills and burrs, as well as other technologies
under development. The main current technology, involving more than 90% of the
practice, is the use of mechanical drills and burrs. There are expensive laser
devices for removing caries and air abrasion systems for drilling holes. Neither
have been well accepted. Based on experiments, the Company believes that its
proposed dental waterjet system will be able to drill holes and remove areas of
enamel and dentin, as well as clean out caries and remove tartar and plaque.
There can be no assurance that the Company's competitors will not succeed in
developing technologies, procedures or products that are more effective or
economical than those being developed by the Company or that would render the
Company's technology and proposed products obsolete or noncompetitive or that
would allow for the bypassing of the Company's patents. Furthermore, in
connection with the commercial sale of its products, the Company will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which the Company has no experience.
NO MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. Assuming additional
financing is procured and the Company is able to continue its microjet
development efforts, the Company may seek to undertake the manufacture and
marketing of its microjet products on a limited scale. However, it would need to
13
pursue other possible arrangements for larger-scale manufacturing, marketing and
distribution. To the extent the Company does not enter into such arrangements,
it will need to engage in the manufacture and marketing of its products.
Manufacturing will consist of purchasing existing parts, having parts formed by
vendors, incoming inspection, assembly, qualification testing and packaging,
i.e., virtual manufacturing. The Company has no volume manufacturing capacity or
experience in manufacturing medical devices or other products. To be successful,
the Company's proposed products must be manufactured in commercial quantities in
compliance with regulatory requirements at acceptable costs. Production in
clinical or commercial-scale quantities will involve technical challenges for
the Company. If the Company is unable or elects not to pursue collaborative
arrangements with other companies to manufacture certain of its potential
products, the Company will be required to establish manufacturing capabilities.
Establishing its own manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
on a timely basis or at all. Delays in receipt of or failure to receive such
approvals or loss of previously received approvals would have a material adverse
effect on the Company. There can be no assurance that the Company will be able
to develop clinical or commercial-scale manufacturing capabilities at acceptable
costs or enter into agreements with third parties with respect to these
activities. The Company's dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit margins and the Company's
ability to develop and deliver such products on a timely basis. Moreover, there
can be no assurance that such parties will perform adequately, and any failures
by third parties may delay the submission of products for regulatory approval,
impair the Company's ability to deliver products on a timely basis, or otherwise
impair the Company's competitive position and any such failure could have a
material adverse effect on the Company.
NO MARKETING OR SALES EXPERIENCE. If the Company does not enter into license or
distribution agreements with respect to its products, and assuming additional
financing is procured and the Company is able to continue its operations, it may
undertake the marketing and sale of its own products. In such event, the Company
intends to market and sell its products in the United States and certain foreign
countries, if and when regulatory approval is obtained, through a direct sales
force or a combination of a direct sales force and distributors or other
strategic partnerships. The Company currently has no marketing organization and
has never sold a product. Establishing sufficient marketing and sales capability
will require significant resources. There can be no assurance that the Company
will be able to recruit and retain skilled sales management, direct salespersons
or distributors, or that the Company's marketing or sales efforts will be
successful. To the extent that the Company enters into distribution arrangements
for the sale of its products, the Company will be dependent on the efforts of
third parties. There can be no assurance that such efforts will be successful.
RISK OF PRODUCT LIABILITY LITIGATION; POTENTIAL UNAVAILABILITY OF INSURANCE. The
testing, manufacture, marketing and sale of medical devices entails the inherent
risk of liability claims or product recalls. As a result, the Company faces a
risk of exposure to product liability claims and/or product recalls in the event
that the use of its future potential products are alleged to have caused injury.
There can be no assurance that the Company will avoid significant liability in
spite of the precautions taken to minimize exposure to product liability claims.
Prior to the commencement of clinical testing, the Company intends to procure
product liability insurance. After any commercialization of its products, the
Company will seek to obtain an appropriate increase in its coverage. There can,
however, be no assurance that adequate insurance coverage will be available at
an acceptable cost, if at all. Consequently, a product liability claim, product
recall or other claims with respect to uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on the Company.
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SURGICAL RISKS. There can be no assurance that the Company's products will be
successful in supporting dental drilling and cavity treatment. As with all
surgical procedures, the procedures for which the Company's products are
intended entail certain inherent risks, including defective equipment or human
error, infection or other injury. Such injury could expose the Company to
product liability or other claims. The Company believes competing products have
the same risks and have experienced a small number of these situations without
undue impact on the commercial prospects of such products. There can be no
assurance that the Company's product liability insurance, in effect from time to
time, will be sufficient to cover any such claim in part or in whole. Any such
claim could adversely impact the commercialization of the Company's products and
could have a material adverse effect on the Company.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Vice President - Finance and Human
Resources, the Company has evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report, and, based on their evaluation, the Company's
Chief Executive Officer and Vice President - Finance and Human Resources have
concluded that these controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files under the Exchange Act is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Vice President - Finance and Human Resources, as
appropriate to allow timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NJIT LITIGATION
On April 21, 1998, the Company was served with a complaint by the New Jersey
Institute of Technology ("NJIT") commencing a lawsuit in the United States
District Court for the District of New Jersey ("U.S. District Court"). Each of
the Company, Eugene I. Gordon, Ph.D. (the Company's Chairman of the Board, Chief
Executive Officer, Secretary and Treasurer), a former employee of the Company,
certain patent law firms and an individual patent attorney were named as
defendants. The complaint alleged that the defendants, with deceptive intent,
failed to name a NJIT professor and/or NJIT research associate as a co-inventor
on the Company's U.S. Patent No. 5,556,406 on "Corneal Template and Surgical
Procedure for Refractive Correction" (the "406 Patent") and breached fiduciary
duties and contractual obligations owed to NJIT. The complaint sought
unspecified monetary damages from the Company and an order directing that the
Company's 406 Patent (and corresponding foreign patents and patent applications)
be assigned and transferred to NJIT. It further sought an order that NJIT has
not infringed any claims of the 406 Patent and a declaratory judgment that all
of the Company's claims under the 406 Patent are invalid and unenforceable
against NJIT.
Prior to being served with the complaint by NJIT, the Company and Dr. Gordon had
filed a complaint, on March 27, 1998, against NJIT in the Superior Court of the
State of New Jersey, Middlesex County, seeking a declaratory judgment that NJIT
had no ownership or other interest in the patent rights to the Company's 406
Patent and seeking unspecified monetary damages
In October 1998, the lawsuit brought in U.S. District Court by NJIT was
dismissed on jurisdictional grounds. In April 1999, NJIT commenced a second
action in U.S. District Court based on the same allegations NJIT had made in its
April 1998 complaint. In June 2000, the motion filed by the Company to dismiss
the action against the Company, Dr. Gordon and the former employee of the
Company, was granted by the U.S. District Court. In July 2000, NJIT appealed
this decision to the Federal Circuit Court of Appeals. On October 1, 2002, the
Federal Circuit Court of Appeals ruled that RES JUDICATA did not apply to the
1999 lawsuit, and therefore reversed the decision of the U.S. District Court and
remanded the lawsuit back to the U.S. District Court for proceedings on the
merits.
On May 22, 2000, the Superior Court of New Jersey granted the Company's Motion
for Summary Judgment, dismissing NJIT's claims to ownership of the 406 Patent.
On June 30, 2000, NJIT filed a Motion for Reconsideration of the Superior
Court's ruling. The Motion for Reconsideration was later dismissed. The Company
subsequently filed a second Motion for Summary Judgment to dismiss additional
claims that the Company, Dr. Gordon and the third party defendants, among other
things, breached fiduciary duties. This motion was based on the ruling by the
Superior Court judge overturning NJIT's claims of ownership and was heard by a
new judge, who decided to await the outcome of NJIT's appeal of the U.S.
District Court's dismissal of its lawsuit.
NJIT had expressed an interest in avoiding the cost of a trial in the U.S.
District Court and requested mediation. The Company agreed and a mediator was
identified. A mediation meeting was conducted April 1, 2003 and the parties
conducted additional meetings. A status conference was held on July 8, 2003
before the U.S. District Court. The mediation is continuing.
16
The Company believes that NJIT's claim is without merit and that the Company
will prevail in the U.S. District Court litigation. If, however, the Company is
not successful in its defense of the lawsuit, the Company believes that the
impact on it resulting from a finding on the merits in favor of NJIT would not
be material.
ACTION BROUGHT BY FORMER EMPLOYEE
In May 2003, the Company, Dr. Gordon (the Company's Chairman of the Board, Chief
Executive Officer, Secretary and Treasurer) and one of its current directors,
VISX and other parties were named as defendants in a lawsuit by a former
employee of the Company filed in the Superior Court of New Jersey. The related
complaint alleges, among other things, that defendants violated the New Jersey
Law Against Discrimination, tortiously interfered with a contract between the
plaintiff and the Company, tortiously interfered with the prospective economic
gain of the plaintiff and intentionally inflicted emotional distress on the
plaintiff. This lawsuit is in its earliest stages. While the Company believes it
has meritorious defenses, it cannot predict the ultimate outcome of this
lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, by Eugene I. Gordon, Ph.D., Chairman of the Board, Chief
Executive Officer, Secretary and Treasurer.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, by Teresa R. Mathias, Vice President-Finance and Human
Resources.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Eugene I. Gordon, Ph.D., Chairman of the Board, Chief
Executive Officer, Secretary and Treasurer.
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Teresa R. Mathias, Vice President-Finance and Human
Resources.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2003 MEDJET INC.
/S/ EUGENE I. GORDON, PH.D.
-----------------------------
Eugene I. Gordon, Ph.D.
Chairman of the Board,
Chief Executive Officer,
Secretary and Treasurer
(Principal Executive Officer)
18