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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 June 30, 2000
Commission File Number 0-20945
MEDI-JECT CORPORATION
161 Cheshire Lane, Suite 100
Minneapolis, Minnesota 55441
(763) 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 August 9, 2000, was 1,427,149.
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MEDI-JECT CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and
June 30, 2000....................................................3
Statements of Operations for the six and three months ended
June 30, 1999 and 2000...........................................4
Statements of Cash Flows for the six months ended
June 30, 1999 and 2000...........................................5
Notes to Financial Statements....................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................11
SIGNATURES ..............................................................14
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MEDI-JECT CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 85,136 $ 141,497
Accounts receivable, less allowance for doubtful accounts of
$25,000 and $20,384, respectively .............................. 167,301 379,681
Inventories ........................................................ 429,472 432,063
Prepaid expenses and other assets .................................. 23,263 39,844
------------ ------------
705,172 993,085
------------ ------------
Equipment, furniture and fixtures, net ...................................... 1,002,554 848,502
------------ ------------
Patent rights, net .......................................................... 302,410 288,381
------------ ------------
$ 2,010,136 $ 2,129,968
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 337,927 $ 207,335
Accrued expenses and other liabilities ............................. 551,104 529,516
Convertible notes payable .......................................... 0 1,950,000
Note payable obligations - current maturities ...................... 14,156 15,040
------------ ------------
903,187 2,701,891
------------ ------------
Note payable, less current maturities ....................................... 54,094 48,774
------------ ------------
Total liabilities ........................................................... 957,281 2,750,665
------------ ------------
Shareholders' equity:
Preferred Stock: $0.01 par; authorized 1,000,000 shares:
Series A Convertible Preferred Stock: $0.01 par; authorized
10,000 shares; 1,000 and 1,100 issued and outstanding at
December 31,1999, and June 30, 2000, respectively;
aggregate liquidation preference of $1 million and
$1.1 million at December 31, 1999 and June 30, 2000,
respectively .............................................. 10 11
Series B Convertible Preferred Stock: $0.01 par; authorized
250 shares; 250 issued and outstanding at December 31, 1999
and June 30, 2000, respectively; aggregate liquidation
preference of $250,000 .................................... 3 3
Common Stock: $0.01 par; authorized 3,400,000 shares;
1,424,729 and 1,424,869 issued and outstanding at
December 31, 1999 and June 30, 2000, respectively .............. 14,247 14,249
Additional paid-in capital ......................................... 25,186,430 25,194,610
Accumulated deficit ................................................ (24,147,835) (25,829,570)
------------ ------------
1,052,855 (620,697)
------------ ------------
$ 2,010,136 $ 2,129,968
============ ============
</TABLE>
See accompanying notes to financial statements.
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MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product Sales ................... $ 407,285 $ 766,854 $ 959,275 $ 1,228,113
Licensing & product development.. 185,291 0 1,209,608 22,788
----------- ----------- ----------- -----------
592,576 766,854 2,168,883 1,250,901
----------- ----------- ----------- -----------
Operating Expenses:
Cost of sales ................... 350,370 563,799 820,839 885,370
Research and development ........ 525,063 288,840 1,185,585 562,708
General and administrative ...... 488,526 661,828 974,209 1,219,427
Sales and marketing ............. 237,433 167,425 488,235 339,380
----------- ----------- ----------- -----------
1,601,392 1,681,892 3,468,868 3,006,885
----------- ----------- ----------- -----------
Net operating loss .................... (1,008,816) (915,038) (1,299,985) (1,755,984)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ....... 23,347 0 49,446 26
Interest and other expense ...... (12,538) (2,002) (12,589) (3,554)
----------- ----------- ----------- -----------
10,809 (2,002) 36,857 (3,528)
----------- ----------- ----------- -----------
Net loss .............................. $ (998,007) $ (917,040) $(1,263,128) $(1,759,512)
=========== =========== =========== ===========
Preferred stock dividends ............. (25,000) (17,460) (50,000) (17,460)
----------- ----------- ----------- -----------
Net loss applicable to common shares... $(1,023,007) $ (934,500) $(1,313,128) $(1,776,972)
=========== =========== =========== ===========
Basic and diluted net loss
per common share ............. $ (.72) $ (.66) $ (.92) $ (1.25)
=========== =========== =========== ===========
Basic and diluted weighted average
common shares outstanding ....... 1,424,729 1,424,832 1,424,733 1,424,781
</TABLE>
See accompanying notes to financial statements.
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MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Six Months Ended
---------------------------------
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................... $(1,263,128) $(1,759,512)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............... 211,655 215,555
Loss from disposal of assets ................ 35,444 3,646
Non-cash compensation ..................................... 14,443 7,963
Changes in operating assets and liabilities:
Accounts receivable ......................... 64,245 (212,380)
Inventories ................................. 217,849 (2,591)
Prepaid expenses and other assets ........... (4,840) (16,581)
Accounts payable ............................ 74 (130,592)
Accrued expenses and other liabilities ...... (102,317) 56,188
Deferred revenue ............................ (216,000)
----------- -----------
Net cash used in operating activities ..................... (1,042,575) (1,838,304)
----------- -----------
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures (144,755) (36,178)
Purchases of patent rights ....................... (17,879) (14,940)
----------- -----------
Net cash used in investing activities ..................... (162,634) (51,118)
----------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable .......... -- 1,950,000
Principal payments on capital lease obligations... (1,129) (4,436)
Proceeds from issuance of common stock ........... -- 219
----------- -----------
Net cash provided by (used in) financing activities ....... (1,129) 1,945,783
----------- -----------
Net increase (decrease) in cash and cash equivalents ...... (1,206,338) 56,361
Cash and cash equivalents:
Beginning of period .............................. 2,852,285 85,136
----------- -----------
End of period .................................... $ 1,645,947 $ 141,497
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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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 accounting principles
generally accepted in the United States of America 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
1999 audited financial statements and notes thereto.
2. INTERIM FINANCIAL STATEMENTS
Operating results for the three-month and six-month periods ended June
30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
3. INVENTORIES
Inventories consist of the following:
December 31, 1999 June 30, 2000
----------------- -------------
Raw Material $219,903 $285,079
Work in-process 60,998 ?
Finished goods 148,571 146,984
-------- --------
$429,472 $432,063
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4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the six-month periods ended June 30, 1999
and 2000 was $84 and $4,070, respectively.
Cash paid for taxes during the six-month periods ended June 30, 1999
and 2000 was $250.
5. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. We will be required to adopt the new standard
beginning with the fourth quarter of fiscal 2000. The impact of
adoption on our financial statements is not yet quantifiable.
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In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25,
which clarifies the accounting consequence of various modifications to
the terms of a previously fixed stock option or award. Our stock option
repricing in January 2000 will be accounted for, as a variable plan, on
a prospective basis on July 1, 2000, in accordance with FIN 44. See
note 6 for further details.
6. STOCK OPTION REPRICING
On December 21, 1999, our Board of Directors approved the repricing, as
of January 3, 2000, of all outstanding Qualified and Non-Qualified
Stock Options held by our employees and directors, which had an
exercise price greater than $1.5625 per share. This repricing action
reduced the exercise price to $1.5625 per share for all such Stock
Option Agreements representing 252,517 shares which had exercise prices
ranging from $1.75 to $25.00 per share. Following the repricing, all
other terms and conditions of these option agreements were unchanged,
including the vesting schedules.
Beginning in the third quarter of 2000 and in accordance with Financial
Accounting Standards Board Interpretation No. 44 (FIN 44), the Company
will be recognizing expense on the remaining 250,417 unexpired repriced
shares. Expense of at least $234,512 relates to 87,260 shares of
repriced unvested stock options and will be recognized over a maximum
period of five years. Future expense related to vested and unvested
stock option shares is dependent on the market value of the shares at
the end of each quarter until the repriced stock options are exercised,
forfeited or expire and is therefore unknown at this time.
7. SHARE TRANSACTION AGREEMENT
On January 25, 2000, we signed a non-binding letter of intent with
Permatec Holding AG, a privately-held drug delivery company located in
Basel, Switzerland, to purchase three subsidiaries from Permatec in
exchange for our Common Stock representing up to approximately 67% of
our outstanding Common Stock (the "Share Transaction"). On July 14,
2000, we signed a definitive Stock Purchase Agreement involving the
Share Transaction. These subsidiaries develop and license certain
pharmaceutical formulation technologies, including transdermal patches
and topical gels.
In the first half of 2000, Permatec invested a total of $1,950,000 in
Medi-Ject convertible notes, which will convert at the closing of the
Share Transaction into a number of shares of Series C Convertible
Preferred Stock equal to the outstanding principal balance of the notes
divided by $200. The Medi-Ject Series C Convertible Preferred Stock
will convert, at the option of the holder, into shares of Medi-Ject
common stock at any time after the closing of the Share Transaction or
after October 31, 2000, if the Share Transaction is not completed by
such date. If the Share Transaction is not completed by October 31,
2000,
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the outstanding balance of the notes will accrue interest at an annual
rate of 10%. Upon conversion of these notes, a one-time interest
expense charge of approximately $1,764,000 related to the in-the-money
conversion features of the outstanding convertible notes will be
recorded by the Company.
8. NASDAQ LISTING REQUIREMENTS
On April 7, 2000, we were notified by Nasdaq/Amex that we no longer met
certain requirements for continued listing on The Nasdaq SmallCap
Market. As a result, our eligibility for continued listing on The
Nasdaq Stock Market is being reviewed. In May we provided to Nasdaq a
plan for achieving compliance during the second and third quarter of
this year. This plan included, among other things, the business
combination agreement with Permatec Holding AG and additional equity
financing. If the plan is not accepted by Nasdaq, our stock will be
taken off the Nasdaq SmallCap Market and we will seek to have it traded
in the over-the-counter market.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three and Six Months Ended June 30, 2000 and 1999
Total revenues for the three and six months ended June 30, 2000 were $766,854
and $1,250,901, respectively. These figures reflect an increase of $174,278, or
29% for the same three month period in 1999 and a decrease of $917,982, or 42%
compared to the same six month period in 1999. Product sales increased $359,569
or 88% in the three month period and $268,838 or 28% in the six month period
ended June 30, 2000, compared to the same periods in the prior year. The
increase in product sales in the three-month period is primarily attributable to
a 201% increase in revenue from sales in the human growth hormone market.
Licensing and product development fee income decreased by $185,291 in the
three-month period and $1,186,820 or 98% in the six-month period ended June 30,
2000, as compared to the prior-year periods. This decrease results from having
received funds from Schering-Plough Corporation during the first quarter of 1999
to settle mutual obligations of the parties under a contract dated January 20,
1998. We received a one-time payment 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.
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Cost of sales in the three months and six months ended June 30, 2000 reflect
increases of $213,429 or 61% and $64,531 or 8% respectively when compared to
prior-year periods. The increases are the result of higher product sales,
primarily products used with human growth hormone applications.
Research and development expenses totaled $288,840 and $562,708 in the three-
and six-month periods ended June 30, 2000, respectively. These figures reflect
decreases from the prior-year periods of $236,223 or 45% and $622,877 or 53%,
respectively mainly due to lower utilization of certain production employees for
development activities and lower clinical study expenses.
General and administrative expenses totaled $661,828 and $1,219,427 in the
three- and six-month periods ended June 30, 2000, respectively. These figures
represent an increase of $173,302 or 35% and $245,218 or 25% when compared to
the same periods in 1999. The largest component of the increase is attributable
to expenses associated with the Permatec Share Transaction activities totaling
$202,189 for the six months ended June 30, 2000.
Sales and marketing expenses totaled $167,425 and $339,380 in the three and six
month periods ended June 30, 2000, respectively. These figures reflect a
decrease in the three month period of $70,008 or 29% and a decrease in the six
month period of $148,855 or 30%. The main components of these decreases are a
decrease in outside marketing services of approximately $33,000 and a decrease
in payroll expense of approximately $66,000. Payroll decreases resulted from
staffing reassignments to the general and administrative department and some
staffing reductions as a result of outsourcing our domestic insulin direct sales
process. We anticipate these staffing levels to remain consistent for the
remainder of the year.
Net other income for the three and six months ended June 30, 2000 decreased by
$12,811 or 119% and $40,385 or 110% relative to the prior-year three-month and
six-month periods ending June 30. This decrease primarily reflects a decrease in
interest income attributable to lower average cash balances.
Liquidity and Capital Resources
Cash and cash equivalents totaled $85,136 on December 31, 1999, compared to
$141,497 on June 30, 2000. This increase of $56,361 results primarily from
proceeds from convertible notes payable in the amount of $1,950,000 offset by a
net loss of $1,759,512 adjusted for charges for depreciation and amortization
and changes in operating and treasury activities. Significant components of
changes in operating assets and liabilities include an increase in accounts
receivable of $212,380 and a decrease in accounts payable of $130,592.
We expect to report a net loss for the year ended December 31, 2000 as we
continue to incur marketing and development cost related to bringing future
generations of products to market. Our long-term capital requirements will
depend on numerous factors, including the status of collaborative arrangements,
the progress of research and development programs and the receipt of revenues
from sales of products.
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To continue our existence, we will be required to raise additional working
capital or combine with another entity or both. We are currently pursuing the
share transaction with Permatec Holding AG, as more fully explained in Item 1,
Note 7 above. Regarding this transaction, we have been financing our operations
through advances from Permatec under convertible promissory notes described
above. To date, Permatec has provided $1,950,000 to us under such notes. Even
with such share transaction, we will be required to raise additional capital to
continue operations. There can be no assurance that we will be able to raise the
needed additional capital on acceptable terms or at all.
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, 1999.
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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.(a)
3.2 Second Amended and Restated Bylaws.(a)
3.3 Certificate of Designations for Series A Convertible
Preferred Stock.
3.4 Certificate of Designations for Series B Convertible
Preferred Stock.
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.
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4.6 Preferred Stock, Option and Warrant Purchase Agreement,
dated January 25, 1996, with Becton Dickinson and Company
(filed herewith as Exhibit 10.7).(a)
4.7 Warrant issued to Elan International Services, Ltd. on
November 10, 1998.
4.8 Warrant issued to Grayson & Associates, Inc. on September
23, 1999.
10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995,
including amendments thereto.(a)
10.3 Development and Supply Agreement with Ferring N.V., dated
December 31, 1993 and amendments.
10.4 Exclusive License & Supply Agreement with Bio-Technology
General Corporation, dated December 22, 1999.
10.5 Preferred Stock Purchase Agreement with Bio-Technology
General Corporation, dated December 22, 1999.
10.6 Reserved.
10.7 Preferred Stock, Option and Warrant Purchase Agreement,
dated January 25, 1996, with Becton Dickinson and
Company.(a)
10.8* Employment Agreement, dated December 21, 1999, with
Franklin Pass, M.D.
10.9* Employment Agreement, dated December 21, 1999 with
Lawrence Christian.
10.9.1* Employment Agreement, dated May 1, 2000, with Lawrence
Christian.
10.10* Reserved.
10.11* Employment Agreement, dated December 21, 1999, with Peter
Sadowski.
10.11.1* Employment Agreement, dated May 1, 2000, with Peter
Sadowski.
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)
12
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10.20+ Development and License Agreement with Becton Dickinson
and 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.(c)
10.23* Letter consulting agreement dated February 20, 1998 with
Geoffrey W. Guy.(c)
10.24# Agreement with Becton Dickinson dated January 1, 1999
10.25 Securities Purchase Agreement with Elan International
Services, Ltd. dated November 10, 1998
10.26# License & Development Agreement with Elan Corporation,
plc, dated November 10, 1998
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 our 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 our Form 10-K for the year ended December
31, 1996.
(c) Incorporated by reference to our 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, 2000.
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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
August 9, 2000 /s/ Franklin Pass
---------------------------------- ------------------------------------------
Date Franklin Pass, MD, Chairman/CEO
August 9, 2000 /s/ Lawrence M. Christian
---------------------------------- ------------------------------------------
Date Lawrence M. Christian, Vice President-
Finance & Administration/CFO
(principal financial & accounting officer)
14
