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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
Commission File Number 0-20945
MEDI-JECT CORPORATION
161 Cheshire Lane, Suite 100
Minneapolis, Minnesota 55441
(612) 475-7700
A Minnesota Corporation IRS Employer ID No. 41-1350192
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of November 4, 1997 was 7,060,164.
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1
MEDI-JECT CORPORATION
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets, as of December 31, 1996 and
September 30, 1997................................... 3
Statements of Operations for the nine months ended
September 30, 1996 and 1997.......................... 4
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1997.......................... 5
Notes to Financial Statements........................ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..................... 9
SIGNATURES....................................................11
2
MEDI-JECT CORPORATION
BALANCE SHEETS
(UNAUDITED)
December 31, 1996 September 30, 1997
----------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 9,575,240 $ 3,405,537
Marketable securities................................................. 1,464,277 4,998,897
Accounts receivable, less allowances for doubtful accounts of $12,983. 537,755 316,608
Inventories........................................................... 351,330 420,183
Prepaid expenses and other assets..................................... 86,589 113,056
------------ ------------
12,015,191 9,254,281
------------ ------------
Equipment, furniture and fixtures, net................................ 595,590 1,073,991
------------ ------------
Patent rights......................................................... 345,010 367,136
------------ ------------
$ 12,955,791 $ 10,695,408
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................... $ 353,456 $ 247,391
Accrued expenses and other liabilities................................ 331,446 361,974
Deferred revenue...................................................... 14,019 67,833
Capital lease obligations - current maturities........................ 32,747 15,197
Notes payable - current maturities.................................... 96,097 --
------------ ------------
827,765 692,395
------------ ------------
Long-term liabilities:
Capital lease obligations, less current maturities.................... 8,350 35,276
Shareholders' equity (deficit):
Common Stock: $0.01 par; authorized 17,000,000 shares:
6,925,636 and 7,060,164 issued and outstanding at
December 31, 1996 and September 30, 1997, respectively................ 69,256 70,602
Additional paid-in capital............................................ 23,590,887 23,764,742
Accumulated deficit................................................... (11,540,467) (13,867,607)
------------ ------------
Total shareholders' equity......................................... 12,119,676 9,967,737
------------ ------------
$ 12,955,791 $ 10,695,408
============ ============
See accompanying notes to financial statements.
3
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
For Nine Months Ended For Three Months Ended
------------------------------------- -------------------------------------
September 30, 1996 September 30, 1997 September 30, 1996 September 30, 1997
------------------------------------- -------------------------------------
Revenues:
Sales...................................... $ 1,217,666 $ 1,223,630 $ 403,422 $ 340,456
Licensing & product development............ 1,231,835 1,238,602 545,797 269,372
----------- ----------- ---------- -----------
2,449,501 2,462,232 949,219 609,828
----------- ----------- ---------- -----------
Operating Expenses:
Cost of sales.............................. 724,908 811,122 223,190 263,114
Research and development................... 1,823,395 1,899,300 730,308 556,866
General and administrative................. 965,457 1,283,260 293,378 437,773
Sales and marketing........................ 739,323 1,167,370 272,443 401,385
----------- ----------- ---------- -----------
4,253,083 5,161,052 1,519,319 1,659,138
----------- ----------- ---------- -----------
Net operating loss.............................. (1,803,582) (2,698,820) (570,100) (1,049,310)
----------- ----------- ---------- -----------
Other income (expense):
Interest and other income.................. 94,754 396,639 25,269 124,318
Interest and other expense................. (26,966) (24,959) (6,785) (1,795)
----------- ----------- ---------- -----------
67,788 371,680 18,484 122,523
----------- ----------- ---------- -----------
Net loss........................................ $(1,735,794) $(2,327,140) $ (551,616) $ (926,787)
=========== =========== ========== ===========
Net loss per common share....................... $(.33) $(.13)
Weighted average common shares
outstanding................................ 6,999,152 7,057,035
Proforma net loss per common share
(unaudited) (Note 3)....................... $(.33) $(.10)
Proforma weighted average common shares
outstanding (unaudited) (Note 3)........... 5,260,880 5,260,880
See accompanying Notes to Financial Statements
4
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For Nine Months Ended
---------------------------------------
September 30, 1996 September 30, 1997
---------------------------------------
Cash flows from operating activities:
Net loss.................................................. $(1,735,794) $(2,327,140)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............................. 109,417 190,463
Loss from disposal of asset............................... -- 17,080
Interest on marketable debt securities.................... -- (191,228)
Changes in operating assets and liabilities:
Accounts receivable..................................... (18,676) 221,147
Inventories............................................. (120,242) (68,853)
Prepaid expenses and other assets....................... (35,493) (26,467)
Accounts payable........................................ (166,498) (106,065)
Accrued liabilities..................................... (233,911) 30,528
Deferred revenue........................................ 70,164 53,814
----------- -----------
Net cash used in operating activities............................... (1,130,215) (2,206,721)
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities........................ -- (5,436,679)
Proceeds from sales of marketable securities.............. -- 2,093,286
Purchases of equipment, furniture and fixtures............ (246,822) (609,062)
Proceeds from sale of equipment, furniture and fixtures... -- 715
Purchases of patent rights................................ (97,468) (63,312)
----------- -----------
Net cash used in investing activities............................... (344,290) (4,015,052)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations........... (33,939) (27,034)
Proceeds from issuance of common stock.................... 101,130 180,892
Proceeds from issuance of convertible preferred stock..... 3,812,500 --
Warrants issued........................................... 125,000 --
Proceeds from issuance of notes payable................... 187,500 --
Principal payments on notes payable....................... (498,663) (96,096)
Offering costs............................................ (710,169) (5,692)
----------- -----------
Net cash provided by (used in) financing activities................. 2,983,359 52,070
----------- -----------
Net increase (decrease) in cash and cash equivalents................ 1,308,854 (6,169,703)
Cash and cash equivalents:
Beginning of period........................................... 35,817 9,575,240
----------- -----------
End of period................................................. $ 1,344,671 3,405,537
=========== ===========
See accompanying Notes to Financial Statements.
5
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying financial statements and
notes should be read in conjunction with the Company's 1996 audited
financial statements and notes thereto.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the nine month period ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
3. PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed by dividing the net loss
attributable to common shareholders by the weighted average number of shares
of common stock and common stock equivalents outstanding, after applying the
treasury stock method and after giving effect to the reverse stock split and
the automatic conversion of all outstanding shares of convertible preferred
stock in accordance with the Company's initial public offering.
Pursuant to certain requirements of the Securities and Exchange Commission,
common stock equivalents include the impact of the issuance of stock,
options and warrants within one year prior to the date of the initial filing
of the Company's initial public offering ("IPO") at exercise prices less
than the initial public offering price per share, whether or not the effects
are antidilutive.
4. Inventories consist of the following:
December 31, 1996 September 30, 1997
----------------- ------------------
Raw Material $175,251 $186,663
Work in-process 119,575 112,289
Finished goods 56,504 121,231
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$351,330 $420,183
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6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three and Nine Months Ended September 30, 1997 and 1996
Total revenues for the three and nine months ended September 30, 1997 were
$609,828 and $2,462,232, respectively. Revenues for the three month period
reflects a decrease of $339,391 or 36% over the same period in 1996. Revenues
for the nine months ended September 30, 1997 reflect an increase of $12,731,
less than 1%, over the same period in 1996. Total revenues include sales of
injector products and services in addition to licensing and development fee
income.
Sales of injector products and services decreased by $62,966 in the three months
ended September 30, 1997 compared to the three months ended September 30, 1996.
The number of injector units sold remained approximately unchanged in the third
quarter of 1997 as compared to the prior year period reflecting a decrease of
$100 in the average selling price per unit. Sales of injector products and
services increased by less than 1% to $1,223,630 in the nine months ended
September 30, 1997 as compared to the same period in 1996. Injector sales,
which account for a majority of product sales in each of these periods, remained
approximately flat in spite of a 25% increase in unit volume in the 1997 period.
As in the quarterly period, the 1997 nine month period reflects a $100 decrease
in the average unit selling price which resulted in flat sales on higher unit
volumes.
Licensing and product development fee income decreased by $276,425 or 51% in the
three months ended September 30, 1997 and increased by $6,767 or less than 1% in
the nine months ended September 30, 1997 compared to the same periods in 1996.
Fee income decreased in the quarterly period due to the fact that fewer
development projects were generating fee income in the third quarter of 1997
than in the third quarter of 1996. The Company expects that licensing and
product development fee income will fluctuate on a quarter to quarter basis,
depending on a variety of factors. These factors include the timing of the
execution of new development and licensing agreements and the timing, nature and
size of fee payments to be made under existing and new agreements. In addition,
since the Company does not, in general, recognize project-based fee income until
related development work has been performed, quarterly results will fluctuate
with the timing of the Company's research and development efforts.
Cost of sales in the three and nine months ended September 30, 1997 were
$263,114 and $811,122, respectively. These figures reflect increases of $39,924
or 18% and $86,214 or 12% over the three and nine month periods of the prior
year, respectively. With unit volumes approximately flat in the quarterly
periods, the expense increase for these periods relates in part to the
Company's product recall initiated in September 1997. The recall resulted in
excess product scrap expense and an interruption of normal production activities
during the month of September 1997. In the nine month periods, the increase in
expense can be attributed to a 25% increase in unit volume in addition to an
increase in manufacturing overhead costs of approximately $100,000 in 1997. The
largest individual components of this increase were higher tooling amortization
costs and higher facilities costs.
7
Research and development expenses decreased by 24% to $556,866 in the three
months ended September 30, 1997, from $730,308 during the same period in 1996.
The decrease in expenses in the 1997 period is attributable to the transition of
engineering efforts from heavy reliance on outside engineering service firms to
lower cost internally staffed resources. Research and development expenses
totaling $1,899,300 in the nine months ended September 30, 1997 were
approximately unchanged from the prior year period.
General and administrative expenses totaled $437,773 and $1,283,260 in the three
and nine months ended September 30, 1997. In comparison to the prior year,
these figures reflect increases of $144,395 or 49% and $317,803 or 33%, in the
three and nine months ended September 30, 1997, respectively. The majority of
the increases during the 1997 periods can be attributed to two principal
factors. The largest one relates to various expenses of being a publicly traded
company including; increased travel, legal, accounting and insurance expenses.
The second major factor is increased patent rights amortization expenses.
Sales and marketing expenses totaled $401,385 and $1,167,370 in the three and
nine months ended September 30, 1997, respectively. These figures reflect year
to year increases of $128,942 or 47%, and $428,047 or 58%, in the three and nine
months ended September 30, 1997, respectively. These increases are principally
attributable to added promotional activities in the U.S. diabetes market.
Net other income (expense), increased by $104,039 and $303,892 relative to the
prior year in the three and nine month periods ended September 30, 1997,
respectively. These increases are attributable to both increased interest
income as a result of higher cash balances and lower interest expense due to
lower overall indebtedness in the 1997 periods. Higher cash balances are the
result of an initial public offering completed in October 1996.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities totaled $11,039,517 on December
31, 1996 compared to $8,404,434 on September 30, 1997. The decrease results
primarily from an operating loss of $2,327,140 in addition to an increase of
$645,472 in fixed assets.
The Company's long term capital requirements will depend on numerous factors,
including the status of the Company's collaborative arrangements, the progress
of the Company's research and development programs and the receipt of revenues
from sales of the Company's products. The Company believes that cash on hand,
interest expected to be earned thereon and anticipated revenues, will meet its
needs through the next twelve months. In order to meet its capital needs beyond
this period, the Company may be required to raise additional capital through
public or private offerings, including equity offerings.
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities (Use of proceeds from public offering)
The Company's initial Registration Statement on Form S-1, file no. 333-
6661, was declared effective by the Securities and Exchange Commission
on October 10, 1996. The offering of the Company's Common Stock covered
by such Registration Statement commenced on October 2, 1996. Rodman &
Renshaw and R.J. Steichen & Company acted as the managing underwriters
("the Representatives") for the offering. A total of 2,750,000 shares
of Common Stock, including 330,000 shares subject to the
Representatives over-allotment option and 220,000 shares subject to the
warrants issued to the Representatives were registered. In addition,
warrants to purchase 220,000 shares of Common Stock issued to the
Representatives were also registered. The aggregate offering price of
the registered Common Stock and warrants was $15,367,220. Of this
amount, $12,100,220 representing 2,200,000 shares of Common Stock and
warrants to purchase 220,000 shares of Common Stock have been sold. The
underwriter's over-allotment option has expired and these shares were
not sold. The Representative's warrant has not yet been exercised and
consequently the offering has not yet terminated.
The amount of expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered are as
follows:
Underwriting discounts and commissions:........ $ 907,500
Finder's fees.................................. 0
Expenses paid to or for the underwriters:...... 12,786
Other expenses:................................ 551,765
----------
Total expenses............................ $1,472,050
All such expenses were paid directly or indirectly to others.
The net offering proceeds to the Company after deducting expenses were
$10,628,170.
9
The amount of net offering proceeds to the Company used for the
following purposes is as follows:
Purchase and installation of machinery and equip.... $ 759,852
Repayment of indebtedness........................... 123,130
Working capital..................................... 638,236
Temporary investments, marketable securities........ 4,998,897
Other : -market development expenses...... 1,447,124
-product development expenses..... 2,660,711
All such payments were made directly or indirectly to others.
The use of proceeds contained herein does not represent a material
change in the use of proceeds described in the prospectus.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Securities Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Second Amended and Restated Articles of Incorporation of the
Company.(a)
3.2 Second Amended and Restated Bylaws of the Company.(a)
4.1 Form of Certificate for Common Stock.(a)
4.2 Stock Warrant, dated January 25, 1996, issued to Becton
Dickinson and Company.(a)
4.3 Stock Option, dated January 25, 1996, issued to Becton
Dickinson and Company.(a)
4.4 Warrant, dated March 24, 1995, issued to Robert
Fullerton.(a)
4.5 Warrant, dated March 24, 1995, issued to Michael
Trautner.(a)
10
4.6 Preferred Stock, Option and Warrant Purchase Agreement,
dated January 25, 1996, between the Company and Becton
Dickinson and Company (filed herewith as Exhibit 10.7).(a)
10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995,
including amendments thereto.(a)
10.3 Security Agreement, dated September 30, 1994, by and between
the Company and Kelsey Lake Limited Partnership and Kerry
Lake Company, a Limited Partnership.(a)
10.4 Promissory Note, dated September 30, 1994, issued to Kelsey
Lake Limited Partnership.(a)
10.5 Promissory Note, dated September 30, 1994, issued to Kerry
Lake Company, a Limited Partnership.(a)
10.6 Loan Agreement, dated as of December 22, 1995, by and
between Ethical Holdings plc and the Company, including the
related Promissory Note, dated December 22, 1995, issued to
Ethical Holdings plc.(a)
10.7 Preferred Stock, Option and Warrant Purchase Agreement,
dated January 25, 1996, between the Company and Becton
Dickinson and Company.(a)
10.8 * Employment Agreement, dated as of January 1, 1997, between
the Company and Franklin Pass, MD. (c)
10.9 * Employment Agreement, dated as of January 3, 1995, between
the Company and Mark Derus.(a)
10.10* Employment Agreement, dated as of January 3, 1995, between
the Company and Todd Leonard.(a)
10.11* Employment Agreement, dated as of January 3, 1995, between
the Company and Peter Sadowski.(a)
10.12* 1993 Stock Option Plan.(a)
10.13* Form of incentive stock option agreement for use with 1993
Stock Option Plan.(a)
10.14* Form of non-qualified stock option agreement for use with
1993 Stock Option Plan.(a)
10.15* 1996 Stock Option Plan, with form of stock option
agreement.(a)
11
+10.20 Development and License Agreement between Becton Dickinson
and Company and the Company, effective January 1, 1996.(a)
10.21 Office-Warehouse lease with Carlson Real Estate Company,
dated February 11, 1997. (b)
27 Financial Data Schedule
* Indicates management contract or compensatory plan or
arrangement.
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibit 10.20 were deleted and filed
separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment, which was subsequently
granted by the Securities and Exchange Commission.
(a) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-6661), filed with the
Securities and Exchange Commission on October 1, 1996.
(b) Incorporated by reference to the Company's Form 10-K for the
year ended December 31, 1996.
(c) Incorporated by reference to the Company's Form 10-Q for the
quarter ended March 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
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.
MEDI-JECT CORPORATION
November 10, 1997 /s/ Franklin Pass
- ---------------------------------- ---------------------------------------
Date Franklin Pass, MD, Chairman/CEO
November 10, 1997 /s/ Mark S. Derus
- ---------------------------------- ---------------------------------------
Date Mark S. Derus, Vice President Finance, CFO
Principal Financial & Accounting Officer
12