======================================================================
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 JUNE 30, 1998
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
----------------------------------
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 July 23, 1998 was 7,192,315.
==================================
MEDI-JECT CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets, as of December 31, 1997 and
June 30, 1998...................................................3
Statements of Operations for the six months and three months
ended June 30, 1997 and 1998....................................4
Statements of Cash Flows for the six months ended
June 30, 1997 and 1998..........................................5
Notes to Financial Statements...................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................6
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................10
SIGNATURES..............................................................12
2
MEDI-JECT CORPORATION
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................... $ 3,745,851 $ 1,580,692
Marketable securities ................................................... 3,537,483 3,760,266
Accounts receivable, less allowance for doubtful accounts of $ 22,284
and $21,209, respectively ............................................. 760,948 351,432
Inventories ............................................................. 397,072 591,660
Prepaid expenses and other assets ....................................... 71,495 68,200
------------ ------------
8,512,849 6,352,250
------------ ------------
Equipment, furniture and fixtures, net ........................................... 1,165,213 1,360,586
------------ ------------
Patent rights .................................................................... 369,406 390,608
------------ ------------
$ 10,047,468 $ 8,103,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 321,758 $ 247,653
Accrued expenses and other liabilities .................................. 379,776 367,933
Capital lease obligations - current maturities .......................... 7,083 2,183
------------ ------------
708,617 617,769
------------ ------------
Capital leases, less current maturities .......................................... 1,721 593
Shareholders' equity:
Common Stock: $0.01 par; authorized 17,000,000 shares:
7,071,589 and 7,192,315 issued and outstanding at
December 31, 1997 and June 30, 1998, respectively ..................... 70,716 71,923
Additional paid-in capital .............................................. 23,778,648 23,845,837
Accumulated deficit ..................................................... (14,512,234) (16,432,678)
------------ ------------
9,337,130 7,485,082
------------ ------------
$ 10,047,468 $ 8,103,444
============ ============
See accompanying notes to financial statements.
3
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR SIX MONTHS ENDED FOR THREE MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- -------------- ------------- -------------
Revenues:
Sales ......................... $ 883,174 $ 1,257,936 $ 477,093 $ 648,741
Licensing & product development 969,230 434,625 404,286 130,847
----------- ----------- ----------- -----------
1,852,404 1,692,561 881,379 779,588
----------- ----------- ----------- -----------
Operating Expenses:
Cost of sales ................. 548,008 1,001,370 277,960 533,547
Research and development ...... 1,302,301 1,193,656 665,902 601,170
General and administrative .... 885,620 1,111,627 468,899 566,815
Sales and marketing ........... 765,985 473,014 399,623 226,171
----------- ----------- ----------- -----------
3,501,914 3,779,667 1,812,384 1,927,703
----------- ----------- ----------- -----------
Net operating loss .................. (1,649,510) (2,087,106) (931,005) (1,148,115)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ..... 272,321 178,053 132,326 83,460
Interest and other expense .... (23,164) (11,391) (19,384) (10,233)
----------- ----------- ----------- -----------
249,157 166,662 112,942 73,227
----------- ----------- ----------- -----------
Net loss ............................ $(1,400,353) $(1,920,444) $ (818,063) $(1,074,888)
=========== =========== =========== ===========
Basic and diluted net loss
per common share ........... $ (.20) $ (.27) $ (.12) $ (.15)
Basic and diluted weighted average
common shares outstanding ..... 6,969,730 7,115,001 6,991,969 7,157,935
See accompanying notes to financial statements.
4
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR SIX MONTHS ENDED
-------------------------------------
JUNE 30, 1997 JUNE 30, 1998
-------------------------------------
Cash flows from operating activities:
Net loss .............................................. $(1,400,353) $(1,920,444)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 123,359 215,682
Loss from disposal of assets .......................... 16,664 9,445
Interest on marketable debt securities ................ (117,812) (93,147)
Other ................................................. -- 3,816
Changes in operating assets and liabilities:
Accounts receivable ................................. 174,592 409,516
Inventories ......................................... (8,187) (194,588)
Prepaid expenses and other assets ................... (7,678) 3,295
Accounts payable .................................... (142,396) (74,105)
Accrued expenses and other liabilities .............. (6,424) (11,843)
----------- -----------
Net cash used in operating activities .......................... (1,368,235) (1,652,373)
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities .................... (4,947,230) (2,729,831)
Proceeds from sales of marketable securities .......... 513,225 2,600,195
Purchases of equipment, furniture and fixtures ........ (260,969) (393,561)
Proceeds from sale of equipment, furniture and fixtures 300 2,200
Purchases of patent rights ............................ (61,514) (50,341)
----------- -----------
Net cash used in investing activities .......................... (4,756,188) (571,338)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations ....... (20,811) (6,028)
Proceeds from issuance of common stock ................ 102,826 64,580
Principal payments on notes payable ................... (63,264) --
Offering costs ........................................ (5,692) --
----------- -----------
Net cash provided by financing activities ...................... 13,059 58,552
----------- -----------
Net decrease in cash and cash equivalents ...................... (6,111,364) (2,165,159)
Cash and cash equivalents:
Beginning of period ...................................... 9,575,240 3,745,851
----------- -----------
End of period ............................................ $ 3,463,876 $ 1,580,692
=========== ===========
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 1997 audited financial statements and
notes thereto.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month and six month periods ended June
30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
3. Inventories consist of the following:
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
Raw Material $ 196,579 $ 219,670
Work in-process 78,220 139,892
Finished goods 122,273 232,098
------------- -------------
$ 397,072 $ 591,660
============= =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and 1997
Total revenues for the three and six months ended June 30, 1998, were $779,588
and $1,692,561, respectively. These figures reflect decreases of $101,791 or 12%
and $159,843 or 9% over the same periods in 1997. In each period, the revenue
decrease is attributable to a decrease in licensing and development fee income,
offset in part by an increase in product sales. Sales of injector products and
services increased by $171,648 or 36% in the three months ended June 30, 1998,
and by $374,762 or 42% in the six months ended June 30, 1998, compared to the
same periods in the prior year. These increases were driven by an increase in
the number of injector units and related disposables sold in each period. The
average selling price of injector units decreased approximately 5% in the six
months ended June 30, 1998, compared to the prior year
6
period, as a result of increased sales through distributors in both the human
growth hormone and insulin markets. Sales volume decreased in the retail insulin
market as a consequence of the reduced selling efforts in that market, as
discussed in the sales and marketing section below.
Licensing and product development fee income decreased by $273,439 or 68% in the
three months ended June 30, 1998, and by $534,605 or 55% in the six months ended
June 30, 1998, compared to the same periods in 1997. These decreases relate
primarily to the completion in December 1997 of a two-year development funding
contract with Becton Dickinson and Company. The Company expects that licensing
and product development fee income will fluctuate on a quarter to quarter basis,
depending on a variety of factors, including the timing of execution of
potential 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 six months ended June 30, 1998, were $533,547 and
$1,001,370, respectively. These figures reflect increases of $255,586 or 92% and
$453,362 or 83% from the three and six month periods of the prior year,
respectively. The increase in cost of sales is primarily attributable to an
increase in the amount of product sold, along with higher per unit manufacturing
costs. Manufacturing expenses were higher as a result of additional engineering
and manufacturing personnel, higher levels of outside processing, increased
inventory reserves, higher rent and increased depreciation expense, much of
which relates to preparing for higher volumes in future periods.
Research and development expenses decreased 10% to $601,171 in the three months
ended June 30, 1998, from $665,902 during the same period in 1997. Research and
development expenses decreased to $1,193,655 in the first six months of 1998,
from $1,302,301 in the first six months of 1997, a decrease of approximately 8%.
These decreases are primarily attributable to a transition of the development
program to an internally staffed program in 1998 compared to a program that was
heavily reliant upon contract engineering services in the first half of 1997.
General and administrative expenses totaled $566,815 and $1,111,627 in the three
and six months ended June 30, 1998. In comparison to the prior year, these
figures reflect increases of $97,916 or 21% and $226,007 or 26%, in the three
and six months ended June 30, 1998, respectively. The largest component of these
increases is attributable to the development of a Regulatory and Quality
Assurance department, with related expenses totaling $100,428 and $167,072 for
the three and six month periods ended June 30, 1998, respectively, compared to
$31,242 and $40,133 for the comparable periods in 1997. The balance of the
increases in general and administrative expenses relates to moderate increases
in personnel, depreciation, insurance and facilities expenses.
Sales and marketing expenses totaled $226,171 and $473,014 in the three and six
months ended June 30, 1998, respectively. These figures reflect year to year
decreases of $173,452 or 43%, and $292,971 or 38%, compared to the three and six
months ended June 30, 1997, respectively.
7
These decreases relate primarily to a scaleback of expenses in the sales and
marketing program in the U.S. insulin market initiated by the Company in October
1997. This scaleback is consistent with the Company's long term strategy of
selling through pharmaceutical companies with a focus on higher priced
pharmaceuticals.
Net other income (expense), decreased by $39,715 and $82,495 relative to the
prior year in the three and six month periods ended June 30, 1998, respectively.
The majority of these decreases reflect a decrease in interest income
attributable to lower average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $7,283,334 on December
31, 1997, compared to $5,340,958 on June 30, 1998. This decrease of $1,942,376
results primarily from an operating loss of $1,920,444, in addition to increases
in inventory of $194,588, increases in capital equipment of $393,561 related
primarily to tooling investment on next generation products, and was offset in
part by a $409,516 reduction in accounts receivable. The reduction in accounts
receivable was primarily due to the collection of certain licensing and
development fee receivables that were outstanding at year end.
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 debt or equity offerings.
IMPACT OF THE YEAR 2000
The Company has assessed and continues to assess the impact of the Year 2000
issue on its operations and its external relationships. The Year 2000 issue
results from computer programs using two digits rather than four digits to
define the applicable year. Based on existing information and due to recent and
ongoing upgrades of information systems, the Company believes the anticipated
spending necessary to become Year 2000 compliant will not have a material effect
on the financial position, cash flows or results of operations of the Company,
nor will the Year 2000 issues cause any material adverse effect on the future
business operation of the Company.
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, $12,100,000 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:................................ 549,833
----------
Total expenses....................... $1,470,119
==========
All such expenses were paid directly or indirectly to others.
The net offering proceeds to the Company after deducting expenses were
$10,629,881. The amount of net offering proceeds to the Company used
for the following purposes is as follows:
Purchase and installation of machinery and equip........$ 1,393,246
Repayment of indebtedness............................... 184,669
Working capital......................................... 662,454
Temporary investments, marketable securities............ 1,568,360
Other : -market development expenses.......... 2,292,272
-product development expenses......... 4,528,880
-----------
Total................................ $10,629,881
===========
9
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.
On May 19, 1998, an annual meeting of shareholders was held at the
offices of the Company. The first item submitted to Shareholders at the
meeting was for the election of two Class II directors, Geoffrey Guy,
M.D. and Fred L. Shapiro, M.D. Dr. Guy was re-elected to the Board of
Directors with votes cast in favor totaling 6,124,568 and votes
withheld totaling 19,509. Dr. Shapiro was re-elected to the Board of
Directors with votes in favor totaling 6,123,968 and votes withheld
totaling 20,109. Continuing directors of the Company that did not stand
for re-election at this meeting are; Chairman Franklin Pass, Stanley
Goldberg, Kenneth Evenstad, Karl Groth, and Norman Jacobs. The second
item submitted to the Shareholders at the meeting was the ratification
of the Company's independent auditors for the year ending December 31,
1998. This item was approved with votes cast for totaling 6,125,342,
votes against totaling 14,645, abstentions totaling 4,090 and broker
non-votes of 0. The third and final item submitted to shareholders at
the meeting was a proposal to approve the 1998 Stock Option Plan for
Non-Employee Directors. This proposal was approved by shareholders with
votes for totaling 5,965,950, votes against totaling 151,527,
abstentions totaling 26,600 and broker non-votes of 0.
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)
10
4.3 Stock Option, dated January 25, 1996, issued to
Becton Dickinson and Company.(a)
4.4 Reserved.
4.5 Reserved.
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)
10.3 Reserved.
10.4 Reserved.
10.5 Reserved.
10.6 Reserved.
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)
+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)
11
10.22* 1998 Stock Option Plan for Non-Employee Directors.(d)
10.23* Letter consulting agreement dated February 20, 1998
between the Company and Geoffrey W. Guy.(d)
27 Financial Data Schedule
99 Cautionary Statement.(b)
* 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.
(d) Incorporated by references to the Company's Form 10-K for the year ended
December 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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.
MEDI-JECT CORPORATION
August 11, 1998 /s/ Franklin Pass
- --------------------------- -----------------------------------------
Date Franklin Pass, MD, Chairman/CEO
August 11, 1998 /s/ Mark S. Derus
- --------------------------- -----------------------------------------
Date Mark S. Derus, Vice President Finance/CFO
(principal financial & accounting officer)
12