<PAGE>
===============================================================================
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, 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 October 27, 1998 was 7,192,315.
--------------------------------------------
1
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MEDI-JECT CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets, as of December 31, 1997 and
September 30, 1998........................................ 3
Statements of Operations for the nine months
and three months ended September 30, 1997 and 1998........ 4
Statements of Cash Flows for the nine months ended
September 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.......................... 11
SIGNATURES........................................................ 13
2
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MEDI-JECT CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 3,745,851 $ 661,241
Marketable securities ............................................ 3,537,483 3,277,083
Accounts receivable, less allowance for doubtful accounts of
$22,284 and $21,209, respectively .............................. 760,948 307,875
Inventories ...................................................... 397,072 622,805
Prepaid expenses and other assets ................................ 71,495 83,047
------------ ------------
8,512,849 4,952,051
------------ ------------
Equipment, furniture and fixtures, net ............................... 1,165,213 1,439,631
------------ ------------
Patent rights ........................................................ 369,406 375,854
------------ ------------
$ 10,047,468 $ 6,767,536
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 321,758 $ 198,803
Accrued expenses and other liabilities ........................... 379,776 341,529
Capital lease obligations - current maturities ................... 7,083 2,257
------------ ------------
708,617 542,589
------------ ------------
Capital leases, less current maturities .............................. 1,721 --
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 September 30, 1998, respectively ......... 70,716 71,923
Additional paid-in capital ....................................... 23,778,648 23,847,745
Accumulated deficit .............................................. (14,512,234) (17,694,721)
------------ ------------
9,337,130 6,224,947
------------ ------------
$ 10,047,468 $ 6,767,536
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For Nine Months Ended For Three Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues:
Sales ......................... $ 1,223,630 $ 1,867,864 $ 340,456 $ 609,928
Licensing & product development 1,238,602 527,364 269,372 92,739
----------- ----------- ----------- -----------
2,462,232 2,395,228 609,828 702,667
----------- ----------- ----------- -----------
Operating Expenses:
Cost of sales ................. 811,122 1,502,438 263,114 501,068
Research and development ...... 1,797,994 1,873,682 495,693 680,026
General and administrative .... 1,384,566 1,726,982 498,946 615,355
Sales and marketing ........... 1,167,370 708,077 401,385 235,063
----------- ----------- ----------- -----------
5,161,052 5,811,179 1,659,138 2,031,512
----------- ----------- ----------- -----------
Net operating loss ................ (2,698,820) (3,415,951) (1,049,310) (1,328,845)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ..... 396,639 244,757 124,318 67,004
Interest and other expense .... (24,959) (11,292) (1,795) (201)
----------- ----------- ----------- -----------
371,680 233,465 122,523 66,803
----------- ----------- ----------- -----------
Net loss .......................... $(2,327,140) $(3,182,486) $ (926,787) $(1,262,042)
=========== =========== =========== ===========
Basic and diluted net loss
per common share ................ $ (.33) $ (.45) $ (.13) $ (. 18)
Basic and diluted weighted average
common shares outstanding ....... 6,999,152 7,141,055 7,057,035 7,192,315
</TABLE>
See accompanying notes to financial statements.
4
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MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Nine Months Ended
----------------------------
September 30, September 30,
1997 1998
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $(2,327,140) $(3,182,486)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 190,463 332,119
Loss from disposal of assets .......................... 17,080 9,445
Interest on marketable debt securities ................ (191,228) (140,548)
Other ................................................. -- 5,724
Changes in operating assets and liabilities:
Accounts receivable ............................... 221,147 453,073
Inventories ....................................... (68,853) (225,736)
Prepaid expenses and other assets ................. (26,467) (11,552)
Accounts payable .................................. (106,065) (122,955)
Accrued expenses and other liabilities ............ 84,342 (38,247)
----------- -----------
Net cash used in operating activities ..................... (2,206,721) (2,921,163)
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities .................... (5,436,679) (2,729,831)
Proceeds from sales of mature marketable securities ... 2,093,286 3,130,779
Purchases of equipment, furniture and fixtures ........ (609,062) (574,287)
Proceeds from sale of equipment, furniture and fixtures 715 2,200
Purchases of patent rights ............................ (63,312) (50,341)
----------- -----------
Net cash used in investing activities ..................... (4,015,052) (221,480)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations ....... (27,034) (6,547)
Proceeds from issuance of common stock ................ 180,892 64,580
Principal payments on notes payable ................... (96,096) --
Offering costs ........................................ (5,692) --
----------- -----------
Net cash provided by financing activities ................. 52,070 58,033
----------- -----------
Net decrease in cash and cash equivalents ................. (6,169,703) (3,084,610)
Cash and cash equivalents:
Beginning of period ................................... 9,575,240 3,745,851
----------- -----------
End of period ......................................... $ 3,405,537 $ 661,241
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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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 nine month periods ended
September 30, 1998, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
3. INVENTORIES
Inventories consist of the following:
December 31, 1997 September 30, 1998
----------------- ------------------
Raw Material $ 196,579 $ 212,097
Work in-process 78,220 123,664
Finished goods 122,273 287,044
---------- -----------
$ 397,072 $ 622,805
========== ===========
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 1998
Total revenues for the three and nine months ended September 30, 1998, were
$702,667 and $2,395,228, respectively. These figures reflect an increase in the
quarter of $92,839, or 15%, and a decrease of $67,004, or 3% in the nine month
period compared to the same periods in 1997. In each 1998 period, licensing and
development fee income decreased and product sales increased compared to the
same periods in 1997.
Product sales increased by $269,372, or 79% in the quarter and by $644,234, or
53% in the nine months ended September 30, 1998, as compared to the same periods
in 1997. These increases
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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 7% in the nine months ended September 30, 1998, compared
to the prior year period, as a result of increased unit sales at a lower selling
price in the human growth hormone market. Product sales decreased in the U.S.
insulin market as a consequence of the reduced selling efforts in that market,
which is discussed more fully in the sales and marketing section below.
Licensing and product development fee income decreased by $176,633, or 66% in
the quarter and $711,238, or 57% in the nine months ended September 30, 1998,
compared to the same periods in 1997. These decreases relate primarily to the
completion in December 1997 of a two-year product development funding contract
with Becton Dickinson and Company. The Company expects that licensing and
product development fee income will fluctuate on a quarterly 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 nine months ended September 30, 1998, were
$501,068 and $1,502,438, respectively. These figures reflect increases of
$237,955, or 90% and $691,316, or 85% from the three and nine month periods of
the prior year, respectively. These increases relate primarily to an increase in
the amount of product sold in each period, along with higher overall
manufacturing overhead expenses. Manufacturing overhead expenses increased as a
result of additional engineering personnel, higher rent and increased
depreciation expense.
Research and development expenses totaled $680,026 and $1,873,682 in the three
and nine months ended September 30, 1998, respectively. These figures reflect
increases of $184,333, or 37% in the quarter and $75,688, or 4% in the nine
months ended September 30, 1998, compared to the same period in 1997. These
increases were attributable to increased compensation and clinical studies
expenses relating to ongoing development projects. Consulting expenses declined
in each period due to a transfer of responsibilities from outside consultants to
internal personnel.
General and administrative expenses totaled $615,355 and $1,726,982 in the three
and nine months ended September 30, 1998, respectively. In comparison to the
prior year, these figures reflect increases of $116,409, or 23% and $342,416, or
25% in the three and nine months ended September 30, 1998, respectively. In the
quarterly period, a majority of the increase is attributable to a one-time
expense relating to the Company's repurchase of certain distribution rights in
the human growth hormone market from one of its distributors. The repurchase of
these rights has allowed the Company to sign a new agreement that is expected to
generate fee income and product sales in the future. The most significant
components of the expense increase in the nine months ended September 30, 1998
include regulatory and quality assurance related items, the repurchase of
marketing rights as discussed above, as well as moderate increases in
compensation, business insurance and depreciation. The regulatory and quality
assurance expense increase relates to both one-time ISO 9000 certification
expenses in 1998, and an increase in on-going quality assurance efforts.
7
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Sales and marketing expenses totaled $235,063 and $708,077 in the three and nine
months ended September 30, 1998, respectively. These figures reflect decreases
of $166,322, or 41% and $459,293, or 39% compared to the three and nine months
ended September 30, 1997, respectively. These decreases relate primarily to a
reduction of expenses in the sales and marketing program in the U.S. insulin
market initiated by the Company in October 1997. This reduction in expenses is
consistent with the Company's long term strategy of selling product through
pharmaceutical companies with a focus on higher priced pharmaceuticals.
Net other income (expense), decreased by $55,720 and $138,215 compared to the
prior year in the three and nine month periods ended September 30, 1998,
respectively. These decreases primarily 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 $3,938,324 on September 30, 1998. This decrease of
$3,345,010 results primarily from an operating loss of $3,182,486 in addition to
increases in inventory of $225,736, increases in capital equipment of $574,287
related primarily to tooling investment on next generation products, and was
offset in part by a $453,073 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. In October, 1998 the Company took certain
actions to reduce its operating expenses. These actions included both voluntary
and involuntary staff reductions. 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 is addressing the issue associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way. The Company is aware of the computing difficulties
that the millennium issue presents for the Year 2000.
The Company has identified a team to address the information technology (IT)
systems used for internal purposes at the Company and to also address the non-IT
systems. It is anticipated that all reprogramming efforts for internally used IT
systems will be complete by December 31,1998, allowing adequate time for
testing. The non-IT systems generally require third-party assurances as to
compliance with Year 2000. To date, confirmations have been received from
approximately 80% of the Company's vendors indicating that plans are being
developed to address processing of transactions in the Year 2000. There can be
no assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or
8
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defects in the technology used in its internal operating systems, which are
composed predominantly of third party software and hardware technology or by the
inability of vendors to correct their Year 2000 issues. The majority of the
Company's current standard product lines and manufacturing equipment are not
date sensitive and therefore are not affected by the Year 2000 issues.
The Company incurred approximately $5,000 of expense to address the Year 2000
problem during fiscal 1998 to date and will incur approximately $20,000 in total
expense. The Company is in the process of establishing a contingency plan if the
Company's IT and non-IT systems are not Year 2000 compliant. It is anticipated
that the contingency plan will be completed by December 31,1998.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1,1998, the Company adopted FASB Statement No. 130 (SFAS No.
130), "Reporting Comprehensive Income". SFAS No. 130 requires that an entity
report a total for comprehensive income or loss in condensed financial
statements of interim periods issued to shareholders. For the three and nine
month periods ended September 30,1998, the comprehensive loss is equal to the
net loss as reported in the Statements of Operations.
9
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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.................................. $ 1,573,972
Repayment of indebtedness.................... 184,669
Working capital ........................... 740,069
Temporary investments, marketable securities. 394,930
Other : -market development expenses........ 2,527,335
-product development expenses....... 5,208,906
-----------
Total.............................. $10,629,881
===========
10
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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 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.
11
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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* Reserved.
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)
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.
12
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(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
November 9,1998 /s/ Franklin Pass
-------------------------------
Date Franklin Pass, MD, Chairman/CEO
November 9,1998 /s/ Mark S. Derus
-------------------------------
Date Mark S. Derus, Vice President Finance/CFO
(principal financial & accounting officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED AND
UNAUDITED INTERNAL FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<CASH> 3,745,851 661,241
<SECURITIES> 3,537,483 3,277,083
<RECEIVABLES> 783,232 329,084
<ALLOWANCES> 22,284 21,209
<INVENTORY> 397,072 622,805
<CURRENT-ASSETS> 8,512,849 4,952,051
<PP&E> 1,967,113 2,510,074
<DEPRECIATION> 801,900 1,070,443
<TOTAL-ASSETS> 10,047,468 6,767,536
<CURRENT-LIABILITIES> 708,617 542,589
<BONDS> 1,721 0
0 0
0 0
<COMMON> 70,716 71,923
<OTHER-SE> 9,266,414 6,153,024
<TOTAL-LIABILITY-AND-EQUITY> 10,047,468 6,767,536
<SALES> 1,686,588 1,867,864
<TOTAL-REVENUES> 4,222,318<F1> 2,639,985
<CGS> 1,221,051 1,502,438
<TOTAL-COSTS> 5,935,894 4,308,741
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37,140 1,328
<INCOME-PRETAX> (2,971,767) (3,182,486)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,971,767) (3,182,486)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,971,767) 3,182,486
<EPS-PRIMARY> (.42) (.44)
<EPS-DILUTED> (.42) (.44)
<FN>
<F1>Includes interest income of $505,295 for PE 12-31-97 and $244,757 for PE
9-30-98.
</FN>
</TABLE>
