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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 March 31, 1999
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 April 30, 1999 was 1,424,729.
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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, 1998 and
March 31, 1999.............................................. 3
Statements of Operations for the three months ended
March 31, 1998 and 1999..................................... 4
Statements of Cash Flows for the three months ended
March 31, 1998 and 1999..................................... 5
Notes to Financial Statements............................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.. 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 10
SIGNATURES.......................................................... 13
2
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MEDI-JECT CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 2,852,285 $ 2,704,763
Accounts receivable, less allowance for doubtful accounts of
$25,000 and $25,000, respectively ...................... 275,694 227,880
Inventories ................................................ 592,185 397,799
Prepaid expenses and other assets .......................... 52,006 82,975
------------ ------------
3,772,170 3,413,417
------------ ------------
Equipment, furniture and fixtures, net ......................... 1,278,456 1,191,678
------------ ------------
Patent rights, net ............................................. 283,805 283,477
------------ ------------
$ 5,334,431 $ 4,888,572
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 250,512 $ 310,836
Accrued expenses and other liabilities...................... 236,191 229,254
Deferred Revenue............................................ 216,000 --
Capital lease obligations - current maturities.............. 1,721 1,166
------------ ------------
704,424 541,256
------------ ------------
Shareholders' equity:
Series A Convertible Preferred Stock: $0.01 par; authorized
10,000 shares; 1,000 issued and outstanding at
December 31,1998, and March 31, 1999, respectively;
aggregate liquidation preference of $1 million.......... 10 10
Common Stock: $0.01 par; authorized 3,400,000 shares:
1,424,752 and 1,424,729 issued and outstanding at
December 31, 1998 and March 31, 1999, respectively ..... 14,247 14,247
Additional paid-in capital ................................. 24,911,694 24,919,124
Accumulated deficit......................................... (20,295,944) (20,586,065)
------------ ------------
4,630,007 4,347,316
------------ ------------
$ 5,334,431 $ 4,888,572
============ ============
</TABLE>
See accompanying notes to financial statements.
3
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MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
March 31, March 31,
1998 1999
----------- -----------
<S> <C> <C>
Revenues:
Product Sales ................... $ 609,195 $ 567,671
Licensing & product development.. 303,778 1,024,317
----------- -----------
912,973 1,591,988
----------- -----------
Operating Expenses:
Cost of sales ................... 467,823 472,747
Research and development ........ 592,486 660,522
General and administrative ...... 544,812 485,683
Sales and marketing ............. 246,843 264,205
----------- -----------
1,851,964 1,883,157
----------- -----------
Net operating loss .................. (938,991) (291,169)
----------- -----------
Other income (expense):
Interest and other income ....... 94,593 26,099
Interest and other expense ...... (1,158) (51)
----------- -----------
93,435 26,048
----------- -----------
Net loss ............................ (845,556) (265,121)
Preferred stock dividends ........... -- (25,000)
----------- -----------
Net loss applicable to
common shares...................... $ (845,556) $ (290,121)
=========== ===========
Basic and diluted net loss
per common share ................. $ (.60) $ (.20)
=========== ===========
Basic and diluted weighted average
common shares outstanding ........ 1,414,318 1,424,736
</TABLE>
See accompanying notes to financial statements.
4
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MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Three Months Ended
--------------------------
March 31, March 31,
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (845,556) $ (265,121)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........................ 102,677 122,052
Interest on marketable debt securities ............... (48,288) --
Non-cash compensation ................................ -- 7,430
Changes in operating assets and liabilities:
Accounts receivable ............................... 382,860 47,814
Inventories ....................................... (46,688) 194,386
Prepaid expenses and other assets ................. (25,809) (30,969)
Accounts payable .................................. 139,424 60,324
Accrued expenses and other liabilities ............ (23,319) (31,937)
Deferred Revenue .................................. 106,847 (216,000)
----------- -----------
Net cash used in operating activities .................... (257,852) (112,021)
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities ................ (1,519,715) --
Proceeds from sales of mature marketable securities 2,030,271 --
Purchases of equipment, furniture and fixtures .... (268,228) (23,744)
Purchases of patent rights ........................ (11,202)
----------- -----------
Net cash provided by (used in) investing activities ...... 242,328 (34,946)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations ... (5,526) (555)
----------- -----------
Net cash used in financing activities .................... (5,526) (555)
----------- -----------
Net decrease in cash and cash equivalents ................ (21,050) (147,522)
Cash and cash equivalents:
Beginning of period ............................... 3,745,851 2,852,285
----------- -----------
End of period ..................................... $ 3,724,801 $ 2,704,763
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 1998
audited financial statements and notes thereto.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
3. INVENTORIES
Inventories consist of the following:
December 31, 1998 March 31, 1999
----------------- --------------
Raw Material $ 132,884 $ 113,891
Work in-process 95,157 93,469
Finished goods 364,144 190,439
------------- -------------
$ 592,185 $ 397,799
============= =============
4. REVERSE STOCK SPLIT
On January 28, 1999, the Company declared a one-for-five reverse stock
split. All common shares and per share amounts in the financial statements
have been retroactively restated to give effect to this reverse split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1998 and 1999
Total revenues for the three months ended March 31, 1998 and 1999 were $912,973
and $1,591,988, respectively. These figures reflect an increase in the quarter
of $679,015, or 74% compared to the same period in 1998. Product sales decreased
$41,524 or 7% in the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. The decrease is primarily attributable to a 23%
decrease in revenue from disposable products.
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Licensing and product development fee income increased by $720,539 or 237% in
the three months ended March 31, 1999 as compared to the prior year period. This
increase reflects the funds received from Schering-Plough Corporation to settle
mutual obligations of the parties under a contract dated January 20, 1998. The
Company received a one-time payment of $783,317 from Schering-Plough in exchange
for cancellation of a product purchase order and as reimbursement for certain
non-cancelable manufacturing expenses. 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 months ended March 31, 1998 and 1999 were relatively
comparable in dollar terms; however, gross margins decreased from 23.2% to 16.7%
due primarily to reduced average selling prices resulting from a larger portion
of sales going to distributors.
Research and development expenses totaled $592,486 and $ 660,522 in the three
months ended March 31, 1998 and 1999, respectively. The increase of $68,036 or
11% is mainly due to utilization of certain production employees for development
activities and higher clinical study expenses.
General and administrative expenses totaled $544,812 and $485,683 in the three
months ended March 31, 1998 and 1999, respectively. These figures represent a
decrease of $59,129 or 11%. The largest component of the decrease is
attributable to staffing reductions which were completed in October 1998.
Payroll expenses decreased by approximately $44,000 compared to the prior year
period.
Sales and marketing expenses totaled $246,843 and $264,205 in the three months
ended March 31, 1998 and 1999, respectively. This increase of $17,362 or 7% is
primarily due to an increase in advertising and consulting services of
approximately $36,000 offset by a decrease in payroll expense of approximately
$20,000. Payroll decreases resulted from the staffing reductions completed in
October 1998.
Net other income (expense) for the three months ended March 31, 1999 decreased
by 67,387 or 72% relative to the prior year three-month period ending March 31.
This decrease primarily reflects a decrease in interest income attributable to
lower average cash balances.
Liquidity and Capital Resources
Cash and cash equivalents totaled $2,852,285 on December 31, 1998 compared to
$2,704,763 on March 31, 1999. This decrease of $147,522 results primarily from a
net loss of $265,121 adjusted for charges of depreciation and amortization and
changes in operating assets and liabilities of which the significant components
were a decline in inventory of $194,386 offset by a decline in deferred revenue
of $216,000.
7
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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 December 1999. 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. The Company can provide no assurance,
however, that cash available will be sufficient to meet the Company's needs
during the next nine months or beyond, that the Company will ever become
profitable or that the Company will be able to raise additional capital when and
if needed, on terms acceptable to the Company, or at all.
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. The Company intends to have all systems analyzed, reprogrammed and
tested by June 30, 1999. To date, confirmations have been received from
virtually all 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 defects in the
technology used in its internal operating systems, which are composed
predominantly of third party software and hardware technology, or by the failure
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 $8,000 of expense to address the Year 2000
problem to date and expects that it 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 and all related Year 2000 compliance initiatives will
be completed by June 30,1999.
Reverse Stock Split
On January 28, 1999, the Company declared a one-for-five reverse stock split of
its outstanding common stock, applicable to shareholders of record at close of
trading on January 28, 1999. The reverse split was affected in response to the
Nasdaq National Market listing requirements which require that the Company
maintain a minimum value of public float of $5,000,000 and a minimum bid price
of $1.00 per share. After the reverse split, the Company met the requirements
for continued listing on the Nasdaq Small Cap Market, which require the Company
to maintain a minimum bid price of $1.00 per share and to maintain a minimum
value of public float of
8
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$1,000,000. After the reverse split, the Company had 1,424,729 shares of common
stock outstanding as fractional shares were paid out in cash to respective
shareholders. All common share and per share amounts in this report have been
retroactively restated to give effect to this reverse stock split.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosure
There have been no material changes in reported market risks faced by the
Company since December 31, 1998.
9
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities
None.
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)
4.2 Second Amended and Restated Bylaws of the Company.(a)
3.3 Certificates of Designations for Series A Preferred
Stock.(e)
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)
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
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4.7 Warrant issued to Elan International Services, Ltd. on
November 10, 1998.(e)
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 Reserved.
10.5 Reserved.
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* Reserved
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
(terminated January 1, 1999). See Exhibit 10.24 (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)
11
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10.23* Letter consulting agreement dated February 20, 1998 between
the Company and Geoffrey W. Guy.(d)
10.24# Agreement with Becton Dickinson and Company dated January 1,
1999.(e)
10.25 Securities Purchase Agreement with Elan International
Services, Ltd. dated November 10, 1998.(e)
10.26# License & Development Agreement with Elan Corporation, plc,
dated November 10, 1998.(e)
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.
# Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibits 10.24 and 10.26 were deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
(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 reference to the Company's Form 10-K for the year ended
December 31, 1997.
(e) Incorporated by reference to the Company's Form 10-K for the year ended
December 31,1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
12
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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.
MEDI-JECT CORPORATION
April 30, 1999 /s/ Franklin Pass
- -------------------- ----------------------------------
Date Franklin Pass, MD, Chairman/CEO
April 30, 1999 /s/ Lawrence M. Christian
- -------------------- ----------------------------------
Date Lawrence M. Christian, Vice President--
Finance & Administration/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>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 2,852,285 2,704,763
<SECURITIES> 0 0
<RECEIVABLES> 300,694 252,880
<ALLOWANCES> 25,000 25,000
<INVENTORY> 592,185 397,799
<CURRENT-ASSETS> 3,772,170 3,413,417
<PP&E> 2,451,971 2,475,715
<DEPRECIATION> 1,173,515 1,284,037
<TOTAL-ASSETS> 5,334,431 4,888,572
<CURRENT-LIABILITIES> 704,424 541,256
<BONDS> 0 0
0 0
10 10
<COMMON> 14,247 14,247
<OTHER-SE> 4,615,750 4,333,059
<TOTAL-LIABILITY-AND-EQUITY> 5,334,431 4,888,572
<SALES> 2,223,504 567,671
<TOTAL-REVENUES> 3,042,389<F1> 1,618,087
<CGS> 1,852,026 472,747
<TOTAL-COSTS> 6,944,673 1,410,410
<OTHER-EXPENSES> 13,756 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,398 51
<INCOME-PRETAX> (5,769,464) (265,121)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,769,464) (265,121)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,769,464) (265,121)
<EPS-PRIMARY> (4.07) (.20)
<EPS-DILUTED> (4.07) (.20)
<FN>
<F1>Includes interest income of $291,521 for period ended 12-31-98 and $26,099 for
the period ended 3-31-99.
</FN>
</TABLE>
