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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to __________
Commission file number 0-20945
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MEDI-JECT CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1350192
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
1840 Berkshire Lane, Minneapolis, Minnesota 55441
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (612) 553-1102
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT;
Common Stock, $.01 Par Value
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 _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 19, 1997 was approximately $33,058,228 (based upon the
last reported sale price of $4.75 per share on March 19, 1997 on the Nasdaq
National Market).
The number of shares outstanding of the registrant's common stock as of March
19, 1997: 6,959,627.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G, certain responses in Part III are
incorporated herein by reference to information contained in the Company's
definitive Proxy Statement for its 1996 annual meeting to be filed on or before
April 30, 1997.
1
FORWARD LOOKING STATEMENTS:
Certain statements included in this From 10-K are "forward looking
statements" as defined in the Private Securities Litigation Reform Act of of
1995 and are subject to risks and uncertainties. Factors that may affect future
results and performance are set forth in Exhibit 99, "Cautionary Statements",
which was filed with the United States Securities and Exchange Commission an
exhibit to this Form 10-K.
PART I
Item 1. BUSINESS
GENERAL
Medi-Ject Corporation ("Medi-Ject" or the "Company) is a drug delivery
company focused on developing, manufacturing and marketing needle-free injection
systems for the self-administration of a wide range of parenteral (injectable)
drugs. The Company's product, the Medi-Jector system, is a hand-held, spring-
powered device that injects drugs from a front-end chamber through the skin
without a needle as a narrow, high pressure stream of liquid approximately
7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to
pierce the skin with a sharp needle and manipulate a plunger with the needle
inserted through the skin. Therefore many people perceive injections with the
Medi-Jector system to be less threatening than injections with a needle. Today's
Medi-Jector systems are smaller, easier to use, less expensive and more
comfortable than previous needle-free injection systems. The Company believes
that the key to widespread market acceptance of its needle-free injection
systems depends upon continued improvements in these areas.
The Company believes that individuals who require self-injection will
benefit from the Medi-Jector system because it (i) eliminates the need to pierce
themselves with needles for each injection, which should lead to increased
compliance with a prescribed injection regimen and consequently reduce health
complications, (ii) provides the ability to inject themselves discreetly and
(iii) eliminates the need for sharps disposal of used needles. In addition,
healthcare industry providers and payors may benefit from the decrease in long-
term costs of patient care which may result from improved patient compliance.
Furthermore, based upon discussions with pharmaceutical companies, the Company
believes that those companies are motivated to provide improved drug delivery
methods in an attempt to differentiate their products in the marketplace and
improve patient compliance, which may result in increased sales and larger
market share. Although the single largest indication for self-injection is the
administration of insulin for the treatment of diabetes, the number of drugs
associated with frequent self-injection is increasing as novel
biopharmaceuticals are introduced and individuals previously managed in the
hospital are now cared for in the home.
Medi-Ject was a pioneer in the development of portable needle-free
injection systems. Prior to the development of portable systems, needle-free
injection systems were powered by large air compressors and their use was
limited to mass vaccination by the military or school health programs. These
injectors were painful in comparison to today's injectors. The Company's first
commercial injector was five times as heavy as its current injector, which
weighs six and one half ounces. Acceptance of the Company's needle-free
injection systems has gradually expanded as functionality and ease of use have
improved and the purchase price has been reduced.
Medi-Ject is a Minnesota corporation, incorporated in February 1979. The
Company's offices are located at 1840 Berkshire Lane, Minneapolis, Minnesota
55441; telephone (612) 553-1102.
2
INDUSTRY TRENDS
Historically, with the exception of the self-administration of insulin,
parenteral drug administration was limited to hospitals, doctors' offices and
clinics. Liquid injectable medicines came packaged in single or multi-dose
vials. Healthcare professionals filled disposable syringes with the medication,
injected the patient and discarded the used syringe. Advances in pharmacology
have resulted in an increasing number of drugs that require frequent injections
over long periods of time. These drugs have provided dramatic therapeutic
effects for conditions that in the past resisted more conventional medications.
Although the availability of these drugs provides new treatment
opportunities, the Company believes that the requirement to inject the drugs has
and will continue to hinder their acceptance and reduce patient compliance. The
Company believes that most individuals view piercing their skin with a needle as
unpleasant. In addition, individuals are often reluctant to use needles in
public because needles are frequently associated with illegal drug use and cause
fear of accidental needle sticks in others. These and other factors can deter
patients from fully complying with their doctor-prescribed injection regimens.
The failure to administer all prescribed injections can lead to increased health
complications for the patient, decreased drug sales for pharmaceutical companies
and increased healthcare costs for payors. In addition, needles require special
disposal and therefore must be carried after use until they can be discarded in
a special sharps container.
These factors have led pharmaceutical manufacturers to explore many
alternative delivery technologies, including novel needle injectors (for
example, sheathed and spring-powered needle injectors), transdermal patches,
controlled release oral delivery methods and inhalation devices. In Western
Europe, pharmaceutical and medical products companies market pen-like needle
injection systems. Patients have demonstrated a willingness to pay a premium for
these systems over traditional needles and syringes. The Company believes,
however, that injection will continue as the major delivery method because many
of these drugs are protein biopharmaceuticals which are destroyed in the
gastrointestinal tract, do not readily penetrate the skin or are not effectively
absorbed through the lungs.
In addition to the increase in the number of drugs requiring self-
injection, changes in the frequency of insulin injections for the treatment of
diabetes also may contribute to an increase in the number of self-injections.
For many years, standard treatment protocol was for insulin to be administered
once or twice daily for the treatment of diabetes. However, according to a
recent study, tightly controlling the disease by, among other things,
administration of insulin as many as four to six times a day, can decrease its
debilitating effects. The Company believes that as the benefits of tightly
controlling diabetes become more widely known, the number of insulin injections
self-administered by individuals with diabetes will increase. The need to
increase the number of insulin injections given per day may also lead additional
patients to seek an alternative to traditional needles and syringes.
While the Company currently is not pursuing drug applications administered
by healthcare professionals, needle-free injection systems may be attractive to
hospitals, doctors' offices and clinics, and the Company may explore such
applications in the future. The issues raised by accidental needle sticks and
disposal of used syringes have led to the development of syringes with sheathed
needles and have led hospitals to give injections through intravenous tubing to
reduce the number of contaminated needles. The Company believes that needle-free
injection systems may be attractive to healthcare professionals as a further
means to reduce accidental needle sticks and the burdens of disposing of
contaminated needles.
MARKET OPPORTUNITY
An estimated nine to 12 billion needles and syringes are sold annually
worldwide according to industry sources. The Company believes that a significant
portion of these are used for the administration of drugs that could be
delivered using the Company's Medi-Jector system but that only a small
percentage of individuals who self-administer drugs currently use needle-free
injection systems.
3
The Company's focus is on the market for the delivery of self-administered
parenteral drugs, the largest, most developed portion of which consists of the
delivery of insulin. In the United States, over 3.2 million people inject
insulin for the treatment of diabetes, resulting in an estimated 2.3 billion
injections annually, and the Company believes that the number of insulin
injections will increase with time as the result of new diabetes management
approaches which recommend more frequent use. Other parenteral drugs that are
presently self-administered and may be suitable for injection with the Medi-
Jector system include therapies for the treatment of multiple sclerosis,
migraine headaches, growth retardation, impotence, female infertility, AIDS and
hepatitis. The Company also believes that other existing parenteral drugs will
be self-administered in the future and that additional parenteral drugs that are
under development will be deemed appropriate for self-administration.
PRODUCTS AND TECHNOLOGY
Current Needle-Free Injection Systems
The Company's current Medi-Jector system, the Medi-Jector Choice, was
introduced in December 1996 and consists of a coil spring mechanism, a dosage
meter, multi-use disposable needle-free syringe and a plastic adapter. This
injector is used by arming the spring mechanism, filling the needle-free syringe
and then setting the pressure level for an optimally effective and comfortable
injection. The coil spring is armed by turning the two overlapping tubes in the
power pack to shorten the coil spring. The unit is then filled by placing a
plastic adapter on a drug vial, turning the power pack body in the opposite
direction to pull the medication into the needle-free syringe until the proper
dosage is displayed in the dosage window and removing the vial and adapter
assembly. The pressure is adjusted by again turning the winding grip. An
injection is given by holding the Medi-Jector system perpendicular to the skin
in a location appropriate for the injection and pressing the trigger button. The
most common injection sites are the upper arm, upper thigh, buttocks or the side
of the torso. Needle-free syringes need to be replaced after 14 injections.
Based in part upon the results of focus group studies performed by the
Company, it believes that injections using a Medi-Jector system are more
comfortable than injections using a needle because there is no need to pierce
the skin with a sharp needle and manipulate a plunger with the needle inserted
through the skin. In addition, the Company believes injections can be
administered more discreetly using a Medi-Jector.
The first lightweight Medi-Jector system, the Medi-Jector EZ system, was
introduced by the Company in 1987. Although the Medi-Jector EZ system provided
significant advantages over previous needle-free injection systems, it was
fabricated from stainless steel parts, which are expensive to manufacture.
In July 1995, the Company introduced the Medi-Jector VI system which
replaced the stainless steel body of the Medi-Jector EZ system with a composite
plastic body. This change will allow the Company to reduce manufacturing costs
as unit volumes increase. The composite body also provides a natural lubricity
which reduces friction and therefore the effort required to arm the coil spring.
The Medi-Jector Choice system was introduced in December 1996, has a multi-use
disposable needle-free syringe which has replaced the steel front end chamber of
the Medi-Jector VI model.
New Product Research and Development
The Company continues to improve its existing products while developing new
products and technology. Specifically, it is now developing a novel injector
power source which it anticipates will form the basis of a new generation of
pen-like injectors. In addition, the Company is customizing its injectors in
collaboration with pharmaceutical and medical device companies for use with a
broader range of parenteral drugs. These development efforts are focused on
making Medi-Jector systems more attractive to users by further reducing the size
of the system, making the system easier to arm and lowering the cost barrier for
new users.
Pen-Like Injectors. The Company believes that a major obstacle to
widespread market acceptance of needle-free injection systems has been the lack
of a suitably compact and easy to use power source. Although the Company has
reduced the size and complexity of its coil spring injectors, the Company
believes further reduction in size or improvement in ease of use of systems
using a coil spring are not feasible. Other companies have developed and
marketed injectors powered by CO\2\ cartridges but these systems do not
provide any advantage in size and are complex and costly to manufacture.
4
To overcome this obstacle, the Company is developing a novel and
proprietary power source, the gas spring. The Company's gas spring is a
permanently charged gas cylinder that is smaller than a coil spring with
comparable capabilities, allowing the development of smaller systems. A rubber
seal surrounds a central rod, preventing the gas from escaping and allowing it
to be reused thousands of times. The spring is armed by pushing the rod into the
cylinder and compressing the gas in the cylinder. When the rod is released, it
springs forward with the energy stored from arming. Medi-Ject built its first
prototype gas spring injector in 1994 and filed a patent application shortly
after the successful testing of the technology. Use of the Company's proprietary
gas spring will allow its needle-free injection systems to be easier to arm and
reduced in size (anticipated to be approximately 7 3/4 inches long, five ounces
in weight and 30% smaller in diameter than the Medi-Jector Choice system) and
may result in more comfortable injections.
Multi-Use Disposable Needle-Free Syringes. The Company replaced the steel
front-end chamber of the Medi-Jector VI system with a multi-use disposable
plastic front-end chamber in December 1996. The Company believes that one of the
reasons its previous generations of needle-free injection systems have not
gained widespread market acceptance was the inconvenience of cleaning the
systems every two weeks. The disposable front-end chamber has eliminated the
need to perform this cleaning process and has increased the ease of use. In
addition, use of this needle-free syringe will allow the Company to further
reduce the manufacturing costs of the Medi-Jector system.
Each needle-free syringe is labeled for use for 14 injections. The retail
selling price of the Medi-Jector Choice unit (excluding the needle-free syringe)
is $399. The total annual cost to the end user of needle-free syringes and
related supplies is anticipated to be $260 per year (based upon an average of
two injections per day). Although the total cost to use the Medi-Jector Choice
system over time is higher than with previous models that do not require needle-
free syringes, the Company believes that the lower initial purchase price and
increased ease of use of the Medi-Jector Choice system will encourage more
individuals to make the initial investment in the injector and consequently
increase market acceptance.
In addition, the Company plans to introduce a single-use disposable needle-
free syringe for use with its new generation of pen-like injectors. The Company
believes that the single-use disposable needle-free syringe will be priced
competitively but at a premium compared to disposable syringes, and that it will
offer users sterility and increased convenience.
The needle-free syringes to be used with the Medi-Jector Choice system do
not require special disposal. Because a needle-free syringe cannot pierce the
skin, the risk of cross-infection from discarded needle-free syringes is reduced
significantly over the risk associated with needles.
Application Specific Systems. In addition to pen-like injectors for
insulin, the Company, in collaboration with Becton Dickinson and other
pharmaceutical and medical device companies, is in the process of developing
customized pen-like needle-free injection systems for specific drug
applications. Modified injectors currently are being developed for use in gene
therapy, the treatment of erectile dysfunction, and the treatment of multiple
sclerosis.
Research and Development Programs. The Company manages four outside
product development programs relating to the further development of (i) the gas
spring, (ii) an electronic dosage display, (iii) an electric arming system and
(iv) the miniaturization of its systems. In addition, over the past year, the
Company has expanded its internal development efforts by hiring additional
technical personnel, purchasing laboratory equipment and dedicating facility
space to internal product development efforts. Product development currently is
the largest single category of Company expenditure, in part supported by fees
under license and development agreements. The Company has expended approximately
$401,000, $1,195,000 and $2,585,000 on research and development efforts during
fiscal years 1994, 1995 and 1996, respectively. Of these amounts, approximately
$470,000, $921,000 and $1,854,000, respectively, were funded by third-party
sponsored development programs and licensing fees.
TARGET MARKETS
The Company intends to target the following markets for use of the Medi-
Jector system. To date, the Medi-Jector system has only been approved for use in
the United States, Japan and certain European countries for the administration
of insulin and human growth hormone.
5
Insulin
Approximately 3.2 million people take insulin daily for the control of high
blood sugar observed in individuals with diabetes according to the National
Institutes of Health. Most of these individuals take two injections daily, often
combining short acting insulin and long acting insulin. In the United States,
the vast majority of insulin users use disposable plastic syringes and needles,
while in Western Europe and Japan, in addition to disposable plastic syringes,
patients use pen-like injectors that hold small vial cartridges of insulin and
use small needles. The management of Type I (insulin dependent) diabetes has
been found to be benefited by a more disciplined approach to glucose management,
including, among other things, more frequent injections, which have been proven
to reduce long-term complications such as heart disease, strokes, neuropathy
(degeneration of the nervous system), kidney failure and loss of vision. As a
result, some individuals with diabetes take four to six injections daily.
Needle-free injectors have been available to and used by diabetes patients with
a serious aversion to needles for many years and for these patients, cost and
complexity are not significant barriers to use. The Company believes that
another, much larger group of individuals, not seriously averse to needles yet
still reluctant to piercing themselves, find it difficult to comply with
injection regimens and would benefit from the Company's new, less costly and
more user friendly needle-free technology.
Human Growth Hormone
Approximately 52,000 children worldwide receive frequent injections of
human growth hormone for the treatment of growth retardation according to
industry sources. The disease may be diagnosed as early as age three, with
injections administered until bone maturity is reached at age seventeen or
beyond. The hormone drug used for the treatment of this condition costs an
estimated $20,000 or more at the wholesale level annually. Despite the use of
pen-like needle injection systems which are more convenient to use than
traditional needles, compliance with the prescribed injection regimen continues
to be a problem. A study in Germany found that 36% of children on human growth
hormone therapy did not fully comply with the therapy using needle injections.
In addition, a study performed in the Netherlands showed that most children in
the study preferred to have their human growth hormone administered using a
Medi-Jector system rather than a pen-like needle injector. A small number of
pharmaceutical companies currently hold a significant percentage of the
worldwide human growth hormone market. The Company believes that its needle-free
injector system offers a marketing advantage to the pharmaceutical companies
with which it has agreements relating to human growth hormone.
Erectile Dysfunction
Studies estimate the number of men in the United States suffering from
impotence at over fifteen million. The causes, earlier thought to be mainly
psychogenic, are now thought to be most often a natural result of aging, or a
complication of diabetes, urogenital surgery or other physiological causes. Over
ten years ago, it was observed that penile injections of vasoactive (blood
vessel relaxing) drugs caused temporary erections sufficient to allow
satisfactory sexual intercourse. The first drug approved for such use in the
United States was the generic drug prostaglandin E\1\. However, the Company
believes that use of this drug has been hindered because penile self-injection
is difficult and viewed as unpleasant by most men. As a result, one company has
introduced an intra-urethereal prostaglandin E\1\ applicator. The Company
believes that its needle-free injection technology may provide yet an additional
attractive alternative to needles.
Gene Therapy
Gene therapy involves the injection of replacement genes into the body
instead of biopharmaceutical protein drugs. In recent years, investigators have
been successful in inserting missing genes directly into the body for
therapeutic purposes. For example, theoretically, an intramuscular injection of
genes of Factor VIII (the blood component necessary for proper clotting) which
is missing in individuals with hemophilia, could produce sufficient levels of
Factor VIII to prevent excessive bleeding. Gene therapy is also being tested as
a more effective method of vaccination. At least one published study suggests
that gene delivery with a needle-free injector results in higher blood levels of
the protein drug or antibodies to vaccines in animals.
6
Multiple Sclerosis
Multiple sclerosis is a progressive neurological disease where, most
commonly, nerve function loss occurs following an acute episode of peripheral
nerve damage. The cause of the disease is obscure, but recent studies have
demonstrated that at least three drugs reduce the number of acute episodes. Each
of the drugs is a protein or mixture of proteins and requires frequent
injections, ranging from daily to weekly. One of these drugs, Betaseron, has
been available in the United States for over one year, and the Company believes
that many individuals using Betaseron are having difficulty with the prescribed
injection regimen due to needle aversion. The Company believes that
administration of these drugs would benefit from needle-free injection systems.
As a result, the Company, in collaboration with Teva Pharmaceutical Industries,
Ltd., is developing a needle-free delivery system for the drug Copaxone, which
is administered by daily injection. Approximately 100,000 individuals in the
United States are candidates for treatment.
Other Target Markets
The Company has targeted other parenteral drugs that are regularly self-
administered. These include narcotic analgesics, the anticoagulant heparin used
to prevent blood clots, hormones used in the treatment of female infertility,
biopharmaceuticals used to treat hepatitis or to elevate red and white blood
cell production following chemotherapy or for the treatment of AIDS.
Although the Company has chosen to focus initially on self-injection
opportunities, similar opportunities exist in hospitals, doctors' offices,
clinics, nursing homes and hospices. Certain opportunities may address the
concern for well being, such as the vaccination of small children, and others
may be prompted by the danger of accidental needle sticks in high risk
environments, such as the emergency room of the hospital.
COLLABORATIVE AGREEMENTS
The Company's business development efforts are focused on entering into
collaborative agreements with pharmaceutical companies. The table below
summarizes certain elements of the Company's current agreements.
COMPANY MARKET VOLUME AND TYPE OF INJECTION
------- ------ ----------------------------
Becton Dickinson and Company (1)..... Insulin 0.5 ml subcutaneous
Ferring NV........................... Growth Hormone 0.5 ml subcutaneous
(Worldwide except United
States, Canada, Japan and
Korea)
JCR Pharmaceuticals Co., Ltd......... Growth Hormone 0.5 ml subcutaneous
(Japan)
Bio-Technology General Corporation... Growth Hormone 0.5 ml subcutaneous
(United States)
Schwarz Pharma AG.................... Prostaglandin E\1\ 1.0 ml intrapenile
(Erectile Dysfunction)
GeneMedicine, Inc.................... Gene Therapy 0.5 ml intramuscular
Teva Pharmaceutical Industries, Ltd.. Copaxone(R) 1.0 ml subcutaneous
(Multiple Sclerosis)
(1) Becton Dickinson has (i) worldwide distribution rights to injectors for use
with insulin and certain other potential future drugs, (ii) an option for
distribution rights for injection systems used by healthcare professionals
and (iii) manufacturing rights to the disposable needle-free syringes for
any indication.
7
PATENTS
The Company actively seeks, when appropriate, protection for its products
and proprietary information by means of United States and foreign patents and
trademarks. In addition, the Company relies on trade secrets and confidential
contractual agreements to protect certain proprietary information and products.
The Company currently holds three United States patents relating to the drug
vial adapter, the disposable syringe and the gas spring injector, one United
States design patent relating to the appearance of the Medi-Jector system and
has eight United States patent applications pending, one Patent Cooperation
Treaty application and one Taiwanese patent application relating to the gas
spring energy source and aspects of its use.
Much of the Company's technology is being developed on its behalf by
independent outside contractors. To protect the rights of its proprietary know-
how and technology, Company policy requires all employees and consultants with
access to proprietary information to execute confidentiality agreements
prohibiting the disclosure of confidential information to anyone outside of the
Company. These agreements also require disclosure and assignment to the Company
of discoveries and inventions made by such individuals while devoted to Company
sponsored activities. Companies with which the Company has entered into
development agreements have the right to certain technology developed in
connection with such agreements.
The Company has obtained the rights to certain technology and has made
milestone payments to the inventors of certain core technology.
MANUFACTURING
The Company operates a manufacturing facility in compliance with current
Good Manufacturing Procedures ("GMP") established by the Food and Drug
Administration ("FDA"). Injector parts are manufactured by third-party suppliers
and assembled at the Company's facility in Plymouth, Minnesota. Disposable vial
adapters are either assembled at the Company's facility or by third parties.
Quality control and final packaging are performed on site. A strong effort has
been directed toward reducing component part costs and accelerating assembly
procedures, and the Company anticipates a need to invest in automated assembly
equipment as volumes increase in the future. Becton Dickinson has the right to
manufacture the disposable plastic components of the gas spring systems for the
Company in exchange for royalty payments and certain profit sharing
arrangements.
MARKETING
The Company's strategy is to leverage off of the marketing strength,
existing distribution systems and expertise of the pharmaceutical and medical
device companies with which it collaborates by relying on them to promote and
sell its needle-free injection systems together with the products they
manufacture. The Company anticipates that under these collaborative
arrangements, it will manufacture and supply the needle-free injection
technology for specific drug applications to the pharmaceutical company which
will market the system for use with its drugs. In some instances pharmaceutical
companies may choose to give the injection systems and disposable components to
users without charge as an inducement to customers to use their products.
The Company currently sells most Medi-Jector systems through a pharmacy
distribution system consisting of approximately 3,100 pharmacies and pharmacy
distributors. Pharmacies marketing the Company's products display sales
literature describing the Medi-Jector system. Often, individuals with diabetes
call the Company directly for additional information regarding the product and
its uses. The Company's sales personnel explain the need for a doctor's
prescription and advise on methods of filing for insurance reimbursement.
Additionally, a small national advertising program in lay journals generates
additional inquiries. Such inquiries are either referred by the Company to local
pharmacies, or may result in mail order sales. The Company also sells a small
number of Medi-Jector systems to exclusive distributors outside the United
States.
Training is supported by a video and manual that accompany each product.
The Company employs two nurses to provide training and support for customers
through this channel. The customer service 800 number is prominently displayed
on each injector. The Company plans to initiate new efforts to enlist diabetes
nurse educators
8
to promote and train prospective users. This program will involve placing
demonstrator injectors in selected clinics with the suggestion that individuals,
especially those just beginning insulin therapy, be presented with the choice of
needle-free drug delivery.
The most common retail price of an injector (which can be used over a
period of several years) is $400, and disposable components for the system cost
approximately $250 annually. This compares to an annual cost of approximately
$140 to use two syringes with needles daily. The Company anticipates that the
retail price of future generation Medi-Jector systems will be less than the
current retail price.
COMPETITION
Competition in the drug delivery market is intensifying. The Company faces
competition from traditional needle syringes, newer pen-like and sheathed needle
syringes and other needle-free injection systems as well as alternative drug
delivery methods including oral, transdermal and pulmonary delivery systems. The
vast majority of injections currently are administered using needles. Because
injection is typically only used when other drug delivery methods are not
feasible, the Company's needle-free injection systems may be made obsolete by
the development or introduction of drugs or drug delivery methods which do not
require injection for the treatment of conditions currently targeted by the
Company. In addition, because the Company intends to enter into collaborative
arrangements with pharmaceutical companies, the Company's competitive position
will depend upon the competitive position of the pharmaceutical company with
which it collaborates for each drug application.
While competition in the needle-free injection market currently is limited
to small companies with modest financial resources, the barriers to entry are
not great and the Company anticipates additional competition from companies with
greater financial, commercial, personnel and development resources in the
future. Two companies, Health-Mor Personal Care Corp. and Vitajet Corporation,
currently sell coil spring injectors to the United States insulin market. The
product sold by Health-Mor resembles an earlier version of the Medi-Jector
system and sells for more than $600. Vitajet has recently introduced a product
which incorporates a disposable needle-free syringe and is similar to the Medi-
Jector Choice.
Another company, Bioject, Inc., has sold a CO\2\ powered injector since
1993. The injector is designed for and used almost exclusively for vaccinations
in doctors' offices or public clinics.
Even though the Company expects the needle-free injection market to expand,
improvements continue to be made in needle syringes, including syringes with
hidden needles and pen-like needle injectors. The Company expects that it will
compete with existing needle injection methods as well as new needle injection
methods yet to be developed.
GOVERNMENT REGULATION
The Company's products and manufacturing operations are subject to
extensive government regulations, both in the United States and abroad. In the
United States, the FDA administers the FDA Act and has adopted regulations,
including those governing the introduction of new medical devices, the
observation of certain standards and practices with respect to the manufacturing
and labeling of medical devices, the maintenance of certain records and the
reporting of device-related deaths, serious injuries and certain malfunctions to
the FDA. Manufacturing facilities and certain Company records are also subject
to FDA inspections. The FDA has broad discretion in enforcing the FDA Act and
the regulations thereunder, and noncompliance can result in a variety of
regulatory steps ranging from warning letters, product detentions, device alerts
or field corrections to mandatory recalls, seizures, injunctive actions and
civil or criminal actions or penalties.
Drug delivery systems such as the Company's injectors may be approved or
cleared for sale as a medical device or may be evaluated as part of the drug
approval process in connection with a new drug application ("NDA"). To the
extent permitted under the FDA Act and current FDA policy, the Company intends
to seek the required approvals and clearance for the use of its new injectors,
as modified for use in specific drug applications such as gene therapy,
9
the treatment of erectile dysfunction, and the treatment of multiple sclerosis,
under the medical device rather than under the new drug provisions of the FDA
Act.
Products regulated as medical devices may not be commercially distributed
in the United States unless they have been cleared or approved by the FDA,
unless otherwise exempted. There are two methods for obtaining such clearance or
approvals. Certain products qualify for a premarket notification under Section
510(k) of the FDA Act ("510(k) notification") of the manufacturer's intention
to commence marketing the product. The manufacturer must, among other things,
establish in the 510(k) notification that the product to be marketed is
substantially equivalent to another legally marketed product (that is, that it
has the same intended use and that it is as safe and effective as a legally
marketed device and does not raise questions of safety and effectiveness that
are different from those associated with the legally marketed device). Marketing
may commence when the FDA issues a letter finding substantial equivalence to
such a legally marketed device. The FDA may require, in connection with a 510(k)
notification, that it be provided with animal and/or human test results. If a
medical device does not qualify for the 510(k) procedure, the manufacturer must
file a premarket approval ("PMA") application under Section 515 of the FDA
Act. A PMA must show that the device is safe and effective and is generally a
much more complex submission than a 510(k) notification, typically requiring
more extensive prefiling testing and a longer FDA review process. The Company
believes that its Medi-Jector systems regulated as medical devices are eligible
for clearance through the 510(k) notification process, although there can be no
assurance that the FDA will not require a PMA in the future.
In addition to submission when a device is being introduced into the market
for the first time, a 510(k) notification is also required when the manufacturer
makes a change or modification to an already marketed device that could
significantly affect safety or effectiveness, or where there is a major change
or modification in the intended use or in the manufacture of the device. When
any change or modification is made in a device or its intended use, the
manufacturer is expected to make the initial determination as to whether the
change or modification is of a kind that would necessitate the filing of a new
510(k) notification. The FDA's regulations provide only limited guidance in
making this determination.
If the FDA concludes that any or all of the Company's new injectors must be
handled under the new drug provisions of the FDA Act, substantially greater
regulatory requirements and approval times will be imposed. Use of a modified
new product with a previously unapproved new drug will be likely to be handled
as part of the NDA for the new drug itself. Under these circumstances, the
device component will be handled as a drug accessory and will be approved, if
ever, only when the NDA itself is approved. The Company's injector may be
required to be approved as part of the drug delivery system under a supplemental
NDA for use with previously approved drugs. Under these circumstances, the
Company's device could be used with the drug only if and when the supplemental
NDA is approved for this purpose. It is possible that, for some or even all
drugs, the FDA may take the position that a drug-specific approval must be
obtained through a full NDA or supplemental NDA before the device may be labeled
for use with that drug.
To the extent that the Company's modified injectors are handled as drug
accessories or part of a drug delivery system, rather than as medical devices,
they are subject to all of the requirements that apply to new drugs. These
include drug GMP requirements, drug adverse reaction reporting requirements, and
all of the restrictions that apply to drug labeling and advertising. In general,
the drug requirements under the FDA Act are more onerous and strict than medical
device requirements. These requirements could have a substantial adverse impact
on the profitability of the Company. Similar requirements apply to systems
regulated as medical devices.
The Company received 510(k) marketing clearance from the FDA allowing the
Company to market the Medi-Jector EZ system in February 1987, the Medi-Jector V
system in October 1988, the Medi-Jector system to administer Bio-Technology
General's human growth hormone in April 1996, and the Medi-Jector Choice system
in October 1996.
The Company expects in the future to submit 510(k) notifications with
regard to further device design improvements and uses with additional drug
therapies.
10
The FDA Act also regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate current GMP compliance. The FDA's interpretation and enforcement of
these requirements has been increasingly strict in recent years and seems likely
to be even more stringent in the future. The FDA monitors compliance with these
requirements by requiring manufacturers to register with the FDA and by
conducting periodic FDA inspections of manufacturing facilities. If the
inspector observes conditions that might be violative of the GMP, the
manufacturer must correct those conditions or explain them satisfactorily.
Failure to adhere to GMP requirements would cause the devices produced to be
considered in violation of the FDA Act and subject to FDA enforcement action
that might include physical removal of the Company's devices from the
marketplace.
The FDA's Medical Device Reporting Regulation requires that the Company
provide information to the FDA on the occurrence of any death or serious
injuries alleged to have been associated with the use of the Company's products,
as well as any product malfunction that would likely cause or contribute to a
death or serious injury if the malfunction were to recur. In addition, FDA
regulations prohibit a device from being marketed for unapproved or uncleared
indications. If the FDA believed that the Company was not in compliance with
these regulations, it could institute proceedings to detain or seize the
Company's devices, issue a recall, seek injunctive relief or assess civil and
criminal penalties against the Company or its executive officers, directors or
employees.
The Company also is subject to the Occupational Safety and Health Act
("OSHA") and other federal, state and local laws and regulations relating to
such matters as safe working conditions, manufacturing practices, environmental
protection and disposal of hazardous or potentially hazardous substances.
Sales of medical devices outside of the United States are subject to
foreign legal and regulatory requirements. The Company's injection systems have
been approved for sale only in certain foreign jurisdictions. Legal restrictions
on the sale of imported medical devices vary from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may differ. The Company
relies upon the companies marketing its injectors in foreign countries to obtain
the necessary regulatory approvals for sales of its injectors in those
countries. Generally, devices having an effective 510(k) clearance or PMA may be
exported without further FDA authorization. FDA authorization is generally
required in order to export other medical devices.
The Company is in the process of implementing ISO 9002, a certification
showing that the Company's procedures and manufacturing facilities comply with
standards for quality assurance and manufacturing process control. Such
certification, along with European Medical Device Directive certification would
evidence compliance with the requirements enabling the Company to affix the CE
Mark to its current products. The CE Mark denotes conformity with European
standards for safety and allows certified devices to be placed on the market in
all European Union ("EU") countries. After June 1998, medical devices may not
be sold in EU countries unless they display the CE Mark. The Company is
currently attempting to obtain the right to affix the CE Mark prior to such
time.
EMPLOYEES
As of December 31, 1996, the Company employed 36 full-time employees. None
of the Company's employees are represented by any labor union or other
collective bargaining unit. The Company believes that its relations with its
employees are good.
LIABILITY INSURANCE
The business of the Company entails the risk of product liability claims.
Although the Company has not experienced any material product liability claims
to date, any such claims could have a material adverse impact on the Company.
The Company maintains product liability insurance with coverage of $1 million
per occurrence and an annual aggregate maximum of $5 million. The Company
evaluates its insurance requirements on an ongoing basis.
11
Item 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 9,000 square feet of office, manufacturing
and warehouse space in Plymouth, a suburb of Minneapolis, Minnesota. The lease
will terminate in April 1997. Subsequent to December 31, 1996, the Company
executed a lease for a new facility with 22,968 square feet of office,
manufacturing and warehouse space. The new facility is also located in Plymouth,
Minnesota. The lease expiration date is April 15, 2002. The Company believes its
new facility will be sufficient to meet its requirements through such time.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the quarter
ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Franklin Pass, M.D.... 60 President, Chief Executive Officer and
Chairman of the Board of Directors
Mark S. Derus......... 41 Vice President, Finance, Chief
Financial
Officer and Secretary
Todd Leonard.......... 37 Vice President, Business Development
Peter Sadowski, Ph.D.. 49 Vice President, Product Development
Robert Kreb........... 49 Vice President, Sales and Marketing
Franklin Pass, M.D., joined the Company as a director and consultant in
January 1992, and has served as the Company's President, Chief Executive Officer
and Chairman of the Board of Directors since February 1993. From 1990 to 1992,
Dr. Pass served as President of International Agricultural Investments, Ltd., an
agricultural technology consulting and investment company. Dr. Pass, a physician
and scientist, was Director of the Division of Dermatology at Albert Einstein
College of Medicine from 1967 to 1973, the Secretary and Treasurer of the
American Academy of Dermatology from 1978 to 1981 and the co-founder and Chief
Executive Officer of Molecular Genetics, Inc., now named MGI Pharma, Inc., from
1979 to 1986. He is the author of more than 40 published medical and scientific
articles. Dr. Pass serves on the board of directors of Ringer Corporation, a
producer of lawn and garden care products.
Mark Derus joined the Company in December 1993 as Vice President, Finance,
Chief Financial Officer and Secretary. Mr. Derus served as a director of the
Company from 1992 until he joined the Company as an employee in 1993. From 1986
to December 1993, Mr. Derus was Vice President, Finance of Cherry Tree
Investments, Inc., a venture capital company that invests in early stage
ventures.
Todd Leonard joined the Company in April 1993 as Vice President, Business
Development, and served as Vice President, Sales and Marketing from April 1996
until Robert Kreb joined the Company in October, 1996, at which time he
reassumed the title and exclusive role as Vice President of Business
Development. From 1991 to 1993, Mr. Leonard served as a Senior Licensing
Specialist in the Office of Technology Transfer at the National Institutes of
Health.
12
Peter Sadowski, Ph.D., joined the Company in March 1994 as Vice President,
Product Development. From October 1992 to February 1994, Dr. Sadowski served as
Manager, Product Development for GalaGen, Inc., a biopharmaceutical company.
From 1988 to 1992, he was Vice President, Research and Development for American
Biosystems, Inc., a medical device company. Dr. Sadowski holds a Ph.D. in
microbiology.
Robert Kreb, joined Medi-Ject in October 1996 as Vice President, Sales and
Marketing. Prior to joining the Company, he was with Chiron Diagnostics from
1994 to 1996, most recently as Senior Regional Sales Manager. Prior to that he
spent 20 years in various sales, marketing management, as well as business
development positions with companies such as Hybritech (Eli Lilly), Johnson &
Johnson and Proctor & Gamble.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol: MEDJ. The following table sets forth the
per share high and low sales prices of the Company's common stock for its
initial period of trading, following the initial public offering of its common
stock on October 2, 1996. Sales prices are as reported by the Nasdaq national
market.
HIGH LOW
---- ---
Stock Prices - Fourth Quarter 1996 $6 $3 1/8
HOLDERS.
As of March 19, 1997, there were 158 holders of record of the Company's
common stock, with another estimated 654 shareholders whose stock is held by
nominees or broker dealers.
DIVIDENDS.
The Company has not paid or declared any cash dividends in the past five
years. The Company has no intention of paying cash dividends in the foreseeable
future.
13
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- ------
(unaudited)
STATEMENT OF OPERATIONS DATA:
Sales................................ $ 1,058 $ 1,058 $ 1,518 $ 1,654 $ 1,838
Licensing and product development.... -- 125 470 $ 921 1,854
------- ------- ------- ------- --------
Revenues........................... 1,058 1,183 1,988 2,575 3,692
------- ------- ------- ------- --------
Cost of sales........................ 356 409 631 1,049 1,136
Research and development............. -- 146 401 1,195 2,585
General and administrative........... 462 615 1,118 1,237 1,397
Sales and marketing.................. 349 485 878 887 1,019
------- ------- ------- ------- --------
Operating expenses................. 1,167 1,655 3,028 4,368 6,137
------- ------- ------- ------- --------
Net operating loss................... (109) (472) (1,040) (1,793) (2,446)
Net other income (expense)........... (50) (28) (26) (89) 207
------- ------- ------- ------- --------
Net loss............................. $ (159) $ (500) $(1,066) $(1,882) $ (2,239)
======= ======= ======= ======= ========
Net loss per common share (1), (2)..... $(0.46) $(0.39)
======= ========
Weighted average number of
common shares (1), (2)................. 4,087 5,803
AT DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- ------
(unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 55 $ 649 $ 646 $ 36 $ 11,039
Working capital (deficit)............ (37) 197 108 (650) 11,187
Total assets......................... 267 894 1,361 1,240 12,956
Long-term liabilities, less current
maturities........................... 363 190 299 136 8
Accumulated deficit.................. (5,846) (6,353) (7,419) (9,302) (11,540)
Total shareholders' equity (deficit)... (329) 119 252 (74) 12,120
(1) Net loss per common share and weighted average common shares outstanding for
1995 are computed on the basis described in Note 1 of the Notes to Financial
Statements.
(2) Due to significant capital structure changes, earnings per common share and
weighted average common shares outstanding for 1992, 1993 and 1994 are not
presented. In addition, the Company has not paid any dividends since inception.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Medi-Ject Corporation designs, manufactures and markets needle-free
injection systems. In 1993, the Company hired a new management team with the
goal of revitalizing and redefining the Company's strategic direction. Since
that time, product development efforts have increased, emphasizing reductions in
the cost of the Company's systems to make them more competitive in the
marketplace. In addition, marketing efforts have been focused on increasing
sales in the domestic insulin market and on expanding the use of needle-free
injection systems for parenteral drugs other than insulin. As part of this
effort to encourage broader use of needle-free injection systems, the Company
began entering into technology and product license agreements to sell the Medi-
Jector system. The licensing and development income from these agreements has
been used primarily to fund increased product development efforts. This
development effort has resulted in a new generation of the Medi-Jector system,
the Medi-Jector VI system, which incorporates molded plastic components rather
than tooled steel components and was introduced in July
14
1995, and an innovative needle-free injection technology that is the subject of
eight United States patent applications.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Revenues increased from approximately $2,575,000 in 1995 to approximately
$3,692,000 in 1996, an increase of approximately 43%. This increase was
primarily due to development and licensing fee income, which increased by
approximately $933,000 or 101% to approximately $1,854,000 in 1996. Sales of
injectors, parts, supplies and repairs increased by 11% from approximately
$1,654,000 in 1995 to approximately $1,838,000 in 1996. This change was
attributable to an increase in the number of injectors sold in 1996 (3,110 in
1995 and 3,338 in 1996) and also from increased sales of parts and supplies and
revenue from repairs. The average price per injector decreased from $397 in
1995 to $385 in 1996 as a result of increased sales through distributors. The
increase in licensing and product development fee income was primarily the
result of the execution of an agreement with Becton Dickinson in January 1996
(the "Becton Dickinson Agreement"). The Company expects that licensing and
development fee income will tend to fluctuate on a quarter to quarter basis,
depending on a number of factors including the timing of the execution of new
development and licensing agreements and the timing, nature and size of fee
payments to be made under existing and new agreements. In addition, since the
Company in general does not 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 increased from approximately $1,049,000 in 1995 to
approximately $1,136,000 in 1996 an increase of 8%. The increase was due to
increased unit sales, partially offset by a decrease in unit manufacturing
costs.
Research and development expenses increased from approximately $1,195,000
in 1995 to approximately $2,585,000 in 1996, an increase of approximately
$1,390,000 or 116%. This increase in spending was caused by a greater number of
development projects that were underway in 1996, including the Company's
collaboration with Becton Dickinson, which is being funded in large part by
Becton Dickinson under the Becton Dickinson Agreement and the Company's initial
public offering.
General and administrative expenses increased from approximately $1,237,000
in 1995 to approximately $1,397,000 in 1996, an increase of approximately 13%.
The principal components of this increase included higher executive
compensation, increased support salaries, and higher legal expenses related to
the negotiation of the Becton Dickinson Agreement.
Sales and marketing expenses increased by 15% from approximately $887,000
in 1995 to approximately $1,019,000 in 1996. This increase is primarily the
result of expenses associated with additional management personnel, higher
travel expenses and increased expenses related to the creation of new sales
literature and other materials.
Interest and other income increased from approximately $16,000 in 1995 to
approximately $239,000 in 1996, an increase of approximately $223,000. This
increase is attributable to increased interest earnings on higher cash reserves
on hand during 1996, following the sale of equity securities to Becton
Dickinson, Ethical Holdings and the Company's initial public offering.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995
Revenues increased from approximately $1,988,000 in 1994 to approximately
$2,575,000 in 1995, an increase of approximately 30%. This increase was
primarily the result of a growth in licensing and product development fees.
Sales of injectors, parts, supplies and repairs increased from approximately
$1,518,000 in 1994 to approximately $1,654,000 in 1995, an increase of
approximately 9%. This increase was attributable to an increase in the number of
injectors sold, from 2,636 in 1994 to 3,110 in 1995, largely for use with human
growth hormone, and
15
an increase of approximately $126,000 in sales of parts, supplies and repairs
offset by a decrease in the average unit selling price of $465 in 1994 to $397
in 1995. Licensing and product development fees increased from $470,000 in 1994
to approximately $921,000 in 1995, an increase of approximately 96%. This
increase was the result of the additional license and development agreements
entered into during 1995 with Bio-Technology General Corporation, JCR
Pharmaceuticals Co., Ltd. and GeneMedicine, Inc., and increased revenue earned
under license and development agreements executed in prior periods.
Cost of sales increased from approximately $631,000 in 1994 to
approximately $1,049,000 in 1995, an increase of approximately 66%. This
increase was due in large part to nonrecurring expenses associated with the
commercial introduction of the Medi-Jector VI system and the fact that a larger
number of units were sold.
Research and development expenses increased from approximately $401,000 in
1994 to approximately $1,195,000 in 1995, an increase of approximately 198%.
This increase was the result of an increased number of research and development
projects at the Company.
General and administrative expenses increased from approximately $1,118,000
in 1994 to approximately $1,237,000 in 1995, an increase of approximately 11%.
This increase related primarily to increased salary and employee benefits
expenses and expenses relating to a larger support staff.
Sales and marketing expenses increased from approximately $878,000 in 1994
to approximately $887,000 in 1995, an increase of approximately 1%.
Interest and other income remained relatively constant at approximately
$16,000 in both 1994 and 1995. Interest and other expense increased from
approximately $42,000 in 1994 to approximately $106,000 in 1995, an increase of
approximately 152%. This increase was largely attributable to a non-cash expense
in 1995 relating to certain modifications to the terms of an investor option
agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short term investments which
totaled approximately $11,039,000 at December 31, 1996, increased from
approximately $36,000 on December 31, 1995. The increase is primarily a result
of two major stock offerings and certain option exercises during the year which
resulted in net proceeds to the the Company of approximately $14,000,000.
During the year ended December 31, 1996, cash used to fund operating
activities was approximately $2,642,000. The major components of this amount
included a net loss of approximately $2,238,000 and an aggregate increase of
approximately $484,000 in receivables, inventories and prepaid expenses, a net
decrease of approximately $91,000 in accounts payable, accruals and deferred
income, offset by depreciation totaling approximately $179,000. Cash used in
investing activities was approximately $1,864,000. The components of this
amount were net purchases of marketable securities totaling approximately
$1,457,000 and additions to fixed assets of approximately $297,000, and an
additional investment in patent rights totaling approximately $110,000. Net
cash provided by financing activities of approximately $14,045,000, resulted
primarily from the Company's initial public offering in October 1996, which
generated net proceeds of approximately $10,600,000. Other significant
financing activities during the year included a private stock offering totaling
$3,125,000 to Becton Dickinson, and an option exercise by Ethical Holdings
totaling $812,500. The Company reduced its indebtedness, under notes and leases
payable by approximately $575,000 during the year.
The Company expects that it will report a net loss for the year ending
December 31, 1997 as it continues to incur marketing and development costs
related to bringing future generations of its products to market. The Company
believes that the capital available to the Company at December 31, 1996 plus the
expected product sales and revenues from various development and licensing
agreements will provide sufficient cash to fund expected losses and meet other
cash usage needs until such time as it generates positive cash flow. The
Company can provide no assurance, however, that it will ever become profitable
or that cash available will be sufficient to meet its needs.
16
Item 8. FINANCIAL STATEMENTS.
MEDI-JECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report......................................................... 18
Balance Sheets as of December 31, 1995 and 1996...................................... 19
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996........ 20
Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994,
1995 and 1996...................................................................... 21
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996....... 22
Notes to Financial Statements........................................................ 23
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Medi-Ject Corporation:
We have audited the accompanying balance sheets of Medi-Ject Corporation
(the Company) as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medi-Ject Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 21, 1997
18
MEDI-JECT CORPORATION
BALANCE SHEETS
DECEMBER 31,
--------------------------
1995 1996
---------- ------------
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 35,817 $ 9,575,240
Marketable securities.......................................... 0 1,464,277
Accounts receivable, less allowances for doubtful accounts of
$4,125 and $12,983, respectively.............................. 176,240 537,755
Inventories.................................................... 280,229 351,330
Prepaid expenses and other assets.............................. 35,508 86,589
----------- ------------
527,794 12,015,191
----------- ------------
Equipment, furniture and fixtures, net.............................. 477,026 595,590
----------- ------------
Patent rights....................................................... 235,288 345,010
----------- ------------
$ 1,240,108 $ 12,955,791
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 243,281 $ 353,456
Accrued expenses and other liabilities......................... 398,232 331,446
Deferred revenue............................................... 148,563 14,019
Capital lease obligations - current maturities................. 45,534 32,747
Notes payable - current maturities............................. 342,457 96,097
----------- ------------
1,178,067 827,765
----------- ------------
Long-term liabilities:
Capital leases, less current maturities........................ 40,109 8,350
Notes payable, less current maturities......................... 96,097 0
----------- ------------
136,206 8,350
----------- ------------
Shareholders' equity (deficit):
Series B convertible preferred stock: $.01 par; authorized
3,046,459 shares: 2,090,633; and 0 issued and outstanding
at December 31, 1995 and 1996, respectively................... 20,906 --
Series A convertible preferred stock: $.01 par; authorized
1,218,584 shares: 1,103,867; and 0 issued and outstanding at
December 31, 1995 and 1996, respectively...................... 11,039 --
Common Stock: $0.01 par; authorized 12,947,449 shares:
218,864 and 6,925,636 issued and outstanding at
December 31, 1995 and 1996, respectively...................... 2,189 69,256
Additional paid-in capital..................................... 9,193,600 23,590,887
Accumulated deficit............................................ (9,301,899) (11,540,467)
----------- ------------
Total shareholders' equity (deficit).......................... (74,165) 12,119,676
----------- ------------
Commitments (Notes 6 and 13)
$ 1,240,108 $ 12,955,791
=========== ============
See accompanying notes to financial statements.
19
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996
---------- ---------- ----------
Revenues:
Sales ......................................... $1,517,660 $1,653,869 $1,837,704
Licensing & product development................ 470,000 920,937 1,854,100
---------- ---------- ----------
1,987,660 2,574,806 3,691,804
---------- ---------- ----------
Operating Expenses:
Cost of sales.................................. 630,628 1,048,937 1,136,272
Research and development....................... 401,382 1,195,435 2,584,806
General and administrative..................... 1,118,326 1,236,681 1,397,338
Sales and marketing............................ 877,522 886,792 1,019,077
---------- ---------- ----------
3,027,858 4,367,845 6,137,493
---------- ---------- ----------
Net operating loss................................ (1,040,198) (1,793,039) (2,445,689)
---------- ---------- -----------
Other income (expense):
Interest and other income...................... 15,916 16,486 239,055
Interest and other expense..................... (42,180) (105,906) (31,934)
---------- ---------- -----------
(26,264) (89,420) 207,121
---------- ---------- -----------
Net loss.......................................... $(1,066,462) $(1,882,459) $(2,238,568)
========== ========== ===========
Net loss per common share......................... -- -- $ (.39)
===========
Weighted average common shares
outstanding.................................... -- -- 5,803,346
Proforma net loss per common share
(unaudited) (Note 1)........................... -- $ (.46) --
===========
Proforma weighted average common shares
outstanding (unaudited) (Note 1................ -- 4,087,360 --
See accompanying Notes to Financial Statements
20
MEDI-JECT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------
SERIES C SERIES B SERIES A
---------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- --------- -------- -------- ---------
Balance, December 31, 1993.......................... -- $ -- 761,615 $ 7,616 1,103,867 $ 11,039
Common stock:
Shares issued as compensation.................. -- --
Shares issued for cash......................... -- -- -- -- -- --
Series B:
Exercise of stock options...................... -- -- 552,171 5,522 --
Shares issued for cash......................... -- -- 175,172 1,752 -- --
Offering costs................................. -- -- -- -- -- --
Net Loss............................................ -- -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1994.......................... -- -- 1,488,958 14,890 1,103,867 11,039
Common stock:
Exercise of stock options...................... -- -- -- -- -- --
Series B:
Exercise of stock options...................... -- -- 228,483 2,284 -- --
Shares issued for cash......................... -- -- 373,192 3,732 -- --
Offering costs................................. -- -- -- -- -- --
Amendments to investor option agreement........ -- -- -- -- -- --
Net Loss............................................ -- -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1995.......................... -- -- 2,090,633 20,906 1,103,867 11,039
Conversion of Series A to common
stock.......................................... -- -- -- -- (1,103,867) (11,039)
Conversion of note payable........................ -- -- -- -- -- --
Shares issued for reverse stock split............. -- -- 43 -- -- --
Series B:
Exercise of stock options and conversion
of note payable................................ -- -- 380,808 3,808 -- --
Series C:
Shares issued for cash......................... 761,615 7,616 -- -- -- --
Offering costs................................. -- -- -- -- -- --
Series E:
Warrant issued for cash....................... -- -- -- -- -- --
Common stock:
Issued common stock pursuant to the
company's initial public offering.............. -- -- -- --
Offering costs.................................... -- -- -- -- -- --
Underwriter's warrant............................. -- -- -- -- -- --
Conversion of Series C to common stock.............. (761,615) (7,616) -- -- -- --
Conversion of Series B to common stock............. -- -- (2,471,484) (24,714) -- --
Issuance of Series B anti-dilution shares........... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- --
-------- --------- --------- --------- ----------- --------
Balance, December 31, 1996.......................... -- $ -- -- $ -- -- $ --
======== ========= ========= ========= =========== ========
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
---------------------------
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ --------- -----------
Balance, December 31, 1993........................ 177,598 $ 1,776 $ 6,451,269 $(6,352,978) $ 118,722
Common stock:
Shares issued as compensation................ 37,310 373 2,029 -- 2,402
Shares issued for cash....................... 2,814 28 200 -- 228
Series B:
Exercise of stock options.................... -- -- 719,478 -- 725,000
Shares issued for cash....................... -- -- 548,248 -- 550,000
Offering costs............................... -- -- (77,863) -- (77,863)
Net Loss.......................................... -- -- -- (1,066,462) (1,066,462)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1994........................ 217,722 2,177 7,643,361 (7,419,440) 252,027
Common stock:
Exercise of stock options.................... 1,142 12 1,548 -- 1,560
Series B:
Exercise of stock options.................... -- -- 347,716 -- 350,000
Shares issued for cash....................... -- -- 1,221,268 -- 1,225,000
Offering costs............................... -- -- (65,383) -- (65,383)
Amendments to investor option agreement...... -- -- 45,090 -- 45,090
Net Loss.......................................... -- -- -- (1,882,459) (1,882,459)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1995........................ 218,864 2,189 9,193,600 (9,301,899) (74,165)
Conversion of Series A to common
stock........................................ 1,103,867 11,039 -- -- --
Conversion of note payable...................... 30,465 305 99,695 -- 100,000
Shares issued for reverse stock split........... 589 5 (5) -- --
Series B:
Exercise of stock options and conversion
of note payable.............................. -- -- 809,822 -- 813,630
Series C:
Shares issued for cash....................... -- -- 2,992,384 -- 3,000,000
Offering costs............................... -- -- (236,022) -- (236,022)
Series E:
Warrant issued for cash..................... -- -- 125,000 -- 125,000
Common stock:
Issued common stock pursuant to the
company's initial public offering............ 2,200,000 22,000 12,078,000 -- 12,100,000
Offering costs.................................. -- -- (1,470,419) -- (1,470,419)
Underwriter's warrant........................... -- -- 220 -- 220
Conversion of Series C to common stock............ 761,615 7,616 -- -- --
Conversion of Series B to common stock........... 2,471,484 24,714 -- -- --
Issuance of Series B anti-dilution shares......... 138,752 1,388 (1,388) -- --
Net loss.......................................... -- -- -- (2,238,568) (2,238,568)
---------- ---------- ----------- ------------ -------------
Balance, December 31, 1996........................ 6,925,636 $ 69,256 $23,590,887 $(11,540,467) $12,119,676
========== ========== =========== ============ =============
See accompanying notes to financial statements
21
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996
-------------- ------------- -----------
Cash flows from operating activities:
Net loss................................................. $(1,066,462) $(1,882,459) $(2,238,568)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................................. 36,945 85,960 178,526
Interest on marketable debt securities................... 0 0 (7,417)
Shares issued as compensation............................ 2,402 -- --
Amendments to investor option agreement.................. -- 45,090 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (20,639) (86,937) (361,515)
Inventories............................................. (121,547) (109,368) (71,101)
Prepaid expenses and other assets....................... 3,542 (23,190) (51,081)
Accounts payable........................................ 16,854 83,263 110,175
Accrued liabilities..................................... 90,026 107,193 (66,786)
Deferred revenue........................................ 66,250 38,563 (134,544)
----------- ----------- -----------
Net cash used in operating activities......................... (992,629) (1,741,885) (2,642,311)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities....................... 0 0 (1,456,860)
Purchases of equipment, furniture and fixtures........... (256,622) (120,392) (297,090)
Purchase of patent rights................................ -- (235,288) (109,722)
----------- ----------- -----------
Net cash used in investing activities......................... (256,622) (355,680) (1,863,672)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations.......... (26,729) (42,138) (44,546)
Proceeds from issuance of common stock................... 228 1,560 12,101,130
Proceeds from issuance of convertible preferred stock.... 1,275,000 1,575,000 3,812,500
Warrants issued.......................................... -- -- 125,220
Proceeds from issuance of notes payable.................. 100,000 125,000 187,500
Principal payments on notes payable...................... (24,967) (106,324) (429,957)
Offering costs........................................... (77,863) (65,383) (1,706,441)
----------- ----------- -----------
Net cash provided by financing activities..................... 1,245,669 1,487,715 14,045,406
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... (3,582) (609,850) 9,539,423
Cash and cash equivalents:
Beginning of year........................................ 649,249 645,667 35,817
----------- ----------- -----------
End of year.............................................. $ 645,667 $ 35,817 $ 9,575,240
=========== =========== ===========
See accompanying Notes to Financial Statements.
22
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is primarily a manufacturer and distributor of needle-free
injection devices and disposables for the injection of insulin and human growth
hormone. Products are sold throughout the United States, Europe, the Middle
East, and Asia.
The Company completed an initial public offering ("IPO") of 2,200,000
shares of its common stock on October 2, 1996. Simultaneously with the closing
date of the IPO, all outstanding shares of preferred stock (consisting of
2,471,484 shares Series B, and 761,615 shares Series C) were automatically
converted into an aggregate of 3,371,851 shares of common stock. The conversion
of the Company's preferred stock to common stock, as described herein, has been
reflected in the balance sheet at December 31, 1996.
Reverse Stock Split
In connection with the Company's IPO, the Board of Directors and shareholders
approved a 1-for -1.313 reverse stock split of its common stock, effective
August 6, 1996. The effect of the stock split has been retroactively reflected
in the accompanying financial statements and notes thereto.
Net Loss Per Share
Net loss per common share is computed based upon the weighted average number
of common shares outstanding.
The unaudited pro forma net loss per common share information included in the
statement of operations for the year ended December 31, 1995 reflects the impact
of the conversion of all Preferred Shares retroactively as of the date of
issuance of the Preferred Shares. Also, pursuant to the Securities and Exchange
Commission regulations, all common and Preferred Shares issued and options and
warrants granted by the Company during the 12-month period preceding the initial
filing date of the October 1996 public offering have been included in the year
end and pro forma calculation of weighted average common and common equivalent
shares outstanding as if they were outstanding for all periods presented using
the treasury stock method and an offering price of $5.50 per share.
Cash Equivalents
The Company considers highly liquid debt instruments with original maturities
of ninety days or less to be cash equivalents.
Marketable Securities
The Company accounts for its marketable debt securities in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Company's
marketable debt securities are classified as available-for-sale. However,
because the original maturities of the Company's debt securities are less than
one year, they are reported at amortized cost which approximates fair value.
23
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out basis.
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures are stated at cost and are depreciated
using the straight-line method over their estimated useful lives ranging from 3
to 10 years.
Sales Recognition
Sales and related costs are recognized upon shipment of product to customers.
Sales are recorded net of provisions for returns and discounts.
Licensing and Product Development Revenue Recognition
Licensing and product development revenue is recognized when underlying
performance criteria for payment have been met and the Company has an
unconditional right to such payment. Depending on a license or product
development agreement's terms, recognition criteria may be satisfied upon
achievement of milestones, passage of time, or product sales by the licensee.
Payments received by the Company in excess of amounts earned are classified as
deferred revenue.
Stock-Based Compensation
Compensation expense for stock incentives granted to employees and directors
is recognized in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees." Pro forma effects on net loss and
loss per share are provided as if the fair value based method defined in
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," has been applied.
Product Warranty
The Company recognizes the estimated cost of warranty obligations to its
customers at the time the products are shipped.
Research and Development
Company sponsored research and development expenses related to both present
and future products are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases.
24
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Concentration of Credit Risk
Financial instruments that may subject the Company to concentration of credit
risk consist principally of marketable debt securities investments and trade
accounts receivable. Risks related to marketable securities purchased are
mitigated by the limitations established in the Company's investment policy.
This policy requires strong issuer credit ratings and limits the amount of
credit exposure from any one issuer or industry. For trade accounts receivable,
risks are mitigated by the large number of individual customers, long-standing
credit relationships with major distributors and a satisfactory financial
evaluation of distributors carrying substantial credit balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Fair Value of Financial Instruments
All financial instruments are carried at amounts that approximate estimated
fair value.
2. INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
1995 1996
---------- ----------
Raw material................... $ 145,603 $ 175,251
Work-in-process................ 80,663 119,575
Finished goods................. 53,963 56,504
---------- ----------
$ 280,229 $ 351,330
========== ==========
25
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
3. EQUIPMENT, FURNITURE, FIXTURES
Equipment, furniture and fixtures consisted of the following:
December 31,
----------------------------------
1995 1996
--------------- ---------------
Office equipment.............................................. $ 262,847 $ 404,811
Production equipment.......................................... 753,319 822,477
Displays...................................................... 11,296 11,296
Less Accumulated Depreciation................................. (550,436) (642,994)
--------- ---------
$ 477,026 $ 595,590
========= =========
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
December 31,
---------------------------------
1995 1996
--------------- -----------
Product warranty and returns.................................. $ 71,620 $ 86,436
Payroll....................................................... 29,787 37,828
Patent rights obligation...................................... 96,500 --
Other......................................................... 200,325 207,182
--------- ---------
Other......................................................... $ 398,232 $ 331,446
========= =========
5. NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
Unsecured notes payable, interest at 10%............................... $ 125,000 $ --
Notes payable, due in aggregate monthly payments of $11,127
including interest at 10% through October 1997. Notes are
secured by all assets of the Company.................................. 213,554 96,097
Unsecured note payable to shareholder/director, with interest
at 12% payable monthly, Convertible into
30,465 shares of common stock......................................... 100,000 --
----------- -----------
438,554 96,097
Current maturities..................................................... (342,457) (96,097)
----------- -----------
Notes payable, less current maturities................................. $ 96,097 --
========= ===========
On January 25, 1996, the Company converted an unsecured note payable
totaling $312,500 (of which $125,000 was outstanding at December 31, 1995) into
190,404 shares of common stock. In addition, the holder of the debt purchased
an additional 190,404 shares of common stock for proceeds of $500,000 in
connection with a stock option exercise.
On February 29, 1996 an unsecured note payable to a shareholder totaling
$100,000, which was outstanding at December 31, 1995, was converted into 30,465
shares of common stock.
26
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
6. LEASES
The Company has a noncancelable operating lease for its office and
manufacturing facility that expires in April 1997. This lease requires the
Company to pay all executory costs such as maintenance and insurance. In
February, 1997, the Company executed a five year lease for a new facility, (See
note 13).
Rent expense incurred for the years ended December 31, 1994, 1995 and 1996
was $102,306, $107,616 and $101,139, respectively.
The Company is also obligated under noncancelable leases classified as
capital leases. The leases call for aggregate monthly payments of $4,302 with
various expiration dates through September 1999. Equipment, furniture, and
fixtures include $326,186 and $282,186 of cost and $221,341 and $221,409 of
accumulated amortization as of December 31, 1995 and 1996, respectively, related
to these leases.
Future minimum lease payments are as follows as of December 31, 1996:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
1997............................................................ $ 36,570 $ 27,236
1998............................................................ 7,070 --
1999............................................................ 2,412 --
-------- --------
46,052 $ 27,236
========
Amount representing interest (at rates from 12% to 20.9%)....... (4,955)
--------
Present value of minimum capital lease payments............. 41,097
Current maturities.............................................. (32,747)
--------
Obligations under capital leases less current maturities.... $ 8,350
========
7. INCOME TAXES
The Company incurred losses for both book and tax purposes in each of the
three years in the period ended December 31, 1996 and, accordingly, no income
taxes were provided. Effective tax rates differ from statutory federal income
tax rates in the years ended December 31, 1996, 1995, and 1994 as follows:
1994 1995 1996
------- ------- -------
Statutory federal income tax rate........... (34.0)% (34.0)% (34.0)%
Valuation allowance increase................ 36.0 36.0 39.8
State income taxes, net of federal benefit.. (2.0) (2.0) (2.0)
Research and experimentation credit......... -- -- (1.6)
Other....................................... -- -- (2.2)
------ ------ ------
0.0% 0.0% 0.0%
====== ====== ======
27
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Deferred taxes as of December 31, 1995 and 1994 consist of the following:
1995 1996
---- ----
Deferred tax assets:
Inventory reserve................ $ 72,100 $ 21,000
Net operating loss carryforward.. 3,123,600 4,012,000
Research credit carryforward..... 117,000 152,000
Other............................ 27,300 45,000
----------- -----------
3,340,000 4,230,000
Less valuation allowance........... (3,340,000) (4,230,000)
----------- -----------
$ 0 $ 0
=========== ===========
At December 31, 1996, the Company had net operating loss carryforwards
("NOL") of approximately $11,100,000 for federal income tax purposes, which
begin to expire in 1997. Additionally, the Company had research credit
carryforwards of approximately $152,000, which begin to expire in 1997.
As a result of the 1996 equity changes as described in Note 8, the net
operating loss will be subject to annual limitation as defined by Section 382 of
the Internal Revenue Code. The annual limitation for utilization of the net
operating loss carryforwards is approximately $750,000. Subsequent and future
equity changes could further limit the net operating losses available.
8. SHAREHOLDERS' EQUITY
Initial Public Offering
On October 2, 1996, the Company completed an initial public offering
("IPO") of its common stock. In this offering 2,200,000 common shares were sold
at a price of $5.50 per share. As a consequence of this offering, and in
accordance with the terms of each of the various series of preferred stock that
the Company had outstanding prior to the IPO, all series of preferred shares
then outstanding and rights to acquire preferred shares were automatically
converted into common stock or rights to purchase common stock
Authorized Shares
At December 31, 1996, the total number of shares authorized for all classes
of stock was 13,709,064 shares: 12,947,449 common shares and 761,615 preferred
shares unissued and undesignated as to class.
Series A Preferred
On January 31, 1996, the Company converted its Series A convertible
preferred stock into common stock. Automatic conversion into common stock of the
Series A was precipitated by the Company's net worth exceeding $1.0 million.
Stock Options and Warrants
The Company has issued options and warrants for common stock to various
officers, directors, employees, lenders and others. These options and warrants
have exercise prices ranging from $0.79 to $6.60 per share and expire from
January 1997 to January 2006.
28
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
As of December 31, 1995 the Company had stock options outstanding for
380,808 shares of its Series B convertible preferred stock issued in connection
with a 1993 stock purchase agreement. This option agreement, was exercised in
full on February 29, 1996. The exercise price was $1.64 per share for 190,404
shares and $2.63 for the remaining 190,404 shares, all of which were converted
to shares of common stock in connection with the Company's IPO. Amendments
during 1995 to the Series B preferred option agreement resulted in the
recognition of $45,090 in expense. This expense was associated with decreases in
the exercise price of certain options in exchange for a short-term credit
facility, and the cancellation of a technology license and co-development
agreement.
The Company's stock option plans allow for grant of options to officers,
directors, and employees to purchase up to 995,050 shares of common stock at
exercise prices not less than 100% of fair market value on the dates of grant.
The term of the options may not exceed tens years and vest in varying periods.
Stock option and warrant activity is summarized as follows:
NUMBER WEIGHTED
OF AVERAGE
SHARES PRICES
----------- ----------
Outstanding at December 31, 1993..................................... 1,043,282 $ 1.41
Granted............................................................ 124,995 1.61
Exercised.......................................................... (152,323) 1.31
Canceled........................................................... (7,236) 29.42
----------- ----------
Outstanding at December 31, 1994..................................... 1,008,718 1.43
Granted............................................................ 214,776 3.16
Exercised.......................................................... (229,627) 1.45
Canceled........................................................... (2,057) 3.28
----------- ----------
Outstanding at December 31, 1995..................................... 991,810 1.84
Granted............................................................ 2,942,915 5.61
Exercised.......................................................... (381,380) 1.64
Canceled........................................................... (19,959) 1.75
----------- ----------
Outstanding at December 31, 1996..................................... 3,533,386 $ 5.03
=========== ==========
As of December 31, 1995 and 1996, 406,931 and 828,498 options and 584,879
and 2,704,888 warrants were outstanding, respectively.
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options and warrants was $.79 - $6.60
and 8 years, respectively. At December 31, 1995 and 1996, currently exercisable
options and warrants aggregated 238,240 and 419,875 options and 584,879 and
2,704,888 warrants, respectively and the weighted-average exercise price of
those options and warrants was $1.84 and $5.03, respectively.
The per share weighted-average fair value of stock options granted during
1995 and 1996 is estimated as $.95 and $4.16, respectively on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
1995 and 1996: expected volatility of 0 and 106 for 1995 and 1996, respectively,
risk-free interest rate of 6.0%, expected dividends of $0 and expected lives of
2.5 to 7.5 years for both years.
29
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, Accounting and Disclosure
of Stock-Based Compensation, the Company's net loss and loss per share would
have increased by approximately $97,000 or $.03 per share in 1995 and $375,000,
or $.08 per share in 1996.
Proforma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the options vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.
9. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan that covers all employees who have
met minimum age and service requirements. Under the plan, eligible employees may
contribute up to 15% of their compensation into the plan. The Company, at the
discretion of the Board of Directors, may contribute elective amounts to the
plan, allocated in proportion to employee contributions to the plan, employee's
salary, or both. No elective contributions have been made for the years ended
December 31, 1994, 1995, and 1996.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1994, the Company entered into capital lease obligations for
equipment of $111,571.
Cash paid for interest during the years ended December 31, 1994, 1995, and
1996 was $67,785, $62,515 and $30,919, respectively.
Cash paid for taxes during the years ended December 31, 1994, 1995 and 1996
was $300 in each year.
During 1996, notes payable of $125,000 and $100,000, respectively, were
converted into 190,404 shares of Series B Preferred Stock and 30,465 shares of
Common Stock, respectively.
11. SALES
The Company had a foreign customer, a distributor of the Company's
products, who accounted for approximately 5%, 18% and 18% of sales for the years
ended December 31, 1994, 1995, and 1996, respectively.
Foreign sales by geography were as follows:
1994 1995 1996
-------- -------- --------
Europe (primarily Germany)...... $ 14,960 $301,277 $356,838
Other........................... 146,469 319,379 221,653
-------- -------- --------
Total....................... $161,429 $620,656 $578,491
======== ======== ========
Other consists mainly of sales to Asia.
30
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
12. BECTON DICKINSON ARRANGEMENT
On January 25, 1996, the Company sold 761,615 shares of common stock to
Becton Dickinson and Company ("Becton Dickinson") for $3,000,000. In addition,
the Company granted Becton Dickinson an option to purchase 380,808 shares of
common stock with an exercise price of $4.60. Warrants for 1,904,037 shares of
common stock were also granted at an exercise price of $5.91 for initial
consideration of $125,000. The Becton Dickinson option and warrant agreements
each expire on the tenth anniversary of the agreement.
In connection with the sale of equity to Becton Dickinson, the Company
entered into a licensing agreement with Becton Dickinson, which provides Becton
Dickinson exclusive worldwide rights to certain Medi-Ject technology. In
exchange for granting this exclusive right, the Company will receive $100,000
per month for 24 months beginning January 1996 to develop the technology.
13. SUBSEQUENT EVENTS
On February 11, 1997, the Company executed a lease for a new office and
manufacturing facility. The new facility consists of a total of 22,968 square
feet of space and is located in Plymouth, Minnesota, near the Company's existing
offices. The lease term is for 60 months at an average of $14,355 per month.
31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 29, 1995, on the recommendation of the Audit Committee and with
the approval of the Board of Directors, the Company engaged KPMG Peat Marwick
LLP to audit the consolidated financial statement of the Company for the year
ended December 31, 1995. KPMG Peat Marwick LLP has also conducted a reaudit of
the financial statements as of December 31, 1994, and for each of the years in
the two-year period ended December 31, 1994. There were no disagreements between
the Company and Stirtz Bernards Boyden Surdel & Larter Professional Association
("Stirtz Bernards"), the Company's prior accountants, (whether resolved to the
satisfaction of Stirtz Bernards or not) on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
The audit opinion of Stirtz Bernards for the years ended December 31, 1993 and
1994 did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified as to uncertainty, audit scope, or accounting principles.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the headings "Election of Directors" and
"Compliance with Section16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held May
15, 1997 is incorporated by reference.
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, information as to executive officers of the Company is
set forth in Part 1 of the Form 10-K under separate caption.
Item 11. EXECUTIVE COMPENSATION
The information included under the heading "Executive Compensation" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held May
15, 1997 is incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 15, 1997 is incorporated by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the heading "Certain Relationships And
Related Transactions" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 15, 1997 is incorporated by reference.
32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements - see Part II
(2) Financial Statement Schedule -
All schedules have been ommitted because they are not applicable or
not required or because the information is included in the financial
statements or the notes thereto.
(3) Management Contracts - see list of Exhibits
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the fourth quarter of 1996.
(c) Exhibits
3.1 Second Amended and Restated Articles of Incorporation of the Company.(a)
3.2 Second Amended and Restated Bylaws of the Company.(a)
4.1 Form of Certificate for Common Stock.(a)
4.2 Stock Warrant, dated January 25, 1996, issued to Becton Dickinson and
Company.(a)
4.3 Stock Option, dated January 25, 1996, issued to Becton Dickinson and
Company.(a)
4.4 Warrant, dated March 24, 1995, issued to Robert Fullerton.(a)
4.5 Warrant, dated March 24, 1995, issued to Michael Trautner.(a)
4.6 Preferred Stock, Option and Warrant Purchase Agreement, dated January 25,
1996, between the Company and Becton Dickinson and Company (filed herewith as
Exhibit 10.7).(a)
10.1 Office/Warehouse/Showroom Lease, dated January 2, 1995, including amendments
thereto.(a)
10.2 Promissory Note, dated August 29, 1994, issued to Fred Shapiro.(a)
10.3 Security Agreement, dated September 30, 1994, by and between the Company and
Kelsey Lake Limited Partnership and Kerry Lake Company, a Limited
Partnership.(a)
10.4 Promissory Note, dated September 30, 1994, issued to Kelsey Lake Limited
Partnership.(a)
10.5 Promissory Note, dated September 30, 1994, issued to Kerry Lake Company, a
Limited Partnership.(a)
33
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 3, 1995, between the Company and
Franklin Pass, MD.(a)
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 nonqualified stock option agreement for use with 1993 Stock Option
Plan.(a)
10.15 * 1996 Stock Option Plan, with form of stock option agreement.(a)
10.16 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and
the Company, dated February 1, 1994, relating to the Company's Non-Voting
Series B Convertible Preferred Stock.(a)
10.17 Preferred Stock Purchase Agreement between Enskilda Kapitalforvaltning and
the Company, dated December 28, 1993, relating to the Company's Series B
Convertible Preferred Stock.(a)
10.18 Preferred Stock Purchase Agreement between Calvert Social Venture Partners,
L.P. and the Company, dated November 29, 1993, relating to the Company's
Series B Convertible Preferred Stock.(a)
10.19 Form of Preferred Stock Purchase Agreement relating to the Company's Series B
Convertible Preferred Stock.(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.
16.1 Letter Regarding Change in Certifying Accountant.(a)
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
99 Cautionary Statement
34
* Indicates management contract or compensatory plan or arrangement.
(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.
+ 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.
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, in the City of Minneapolis, State of
Minnesota, on March 31, 1997.
MEDI-JECT CORPORATION
/s/ Franklin Pass
---------------------
Franklin Pass, MD
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities indicated on March
31, 1997.
SIGNATURE TITLE
--------- -----
President, Chief Executive Officer and Director
________________________
Franklin Pass, M.D. (principal executive officer)
Vice President of Finance, Chief Financial Officer
________________________
Mark S. Derus (principal financial and accounting officer)
Director
________________________
Louis C. Cosentino
Director
________________________
Kenneth Evenstad
Director
________________________
Geoffrey Guy
Director
________________________
Norman Jacobs
Director
________________________
Fred Shapiro, M.D.
Director
________________________
Peter Sjostrand
35