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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, 1997
[ ] 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
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 Identification Number)
incorporation or organization
161 CHESHIRE LANE, MINNEAPOLIS, MINNESOTA 55441
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 475-7700
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 [ ]
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 17, 1998 was approximately $6,251,388 (based upon the
last reported sale price of $1-5/8 per share on March 17, 1998 on the Nasdaq
National Market).
The number of shares outstanding of the registrant's common stock as of March
17, 1998: 7,071,589.
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 1997 annual meeting to be filed on or before
April 30, 1998.
1
FORWARD LOOKING STATEMENTS:
Certain statements included in this Form 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 as an
exhibit to Form 10-K, December 31, 1996.
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 161 Cheshire Lane, Minneapolis, Minnesota
55441; telephone (612) 475-7700.
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's marketing efforts are not currently focused on 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
techniques 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, hormone therapy, 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
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.
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 winding grip portion of the
power pack to compress the coil spring. The unit is then filled by placing a
plastic adapter on a drug vial, turning the winding grip 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.
Multi-Use Disposable Needle-Free Syringes. The Company's previous
generations of injector systems contained a steel front-end chamber which
required cleaning every two weeks. The Company believes that one of the reasons
its previous generations of needle-free injection systems did not gain
widespread market acceptance was the inconvenience of cleaning the systems. The
disposable needle-free syringe of the Medi-Jector Choice system has eliminated
the need to perform this cleaning process and has increased the ease of use. In
addition, the disposable needle-free syringe has reduced manufacturing costs by
eliminating one of the most expensive components required in the manufacture of
previous products.
Each needle-free syringe is labeled for use for 14 injections. The retail
price of the Medi-Jector Choice device (excluding the needle-free syringe) is
$399. The total annual cost to the end user of needle-free syringes and related
supplies is approximately $260 per year (based upon an average of two injections
per day).
Single-Use Disposable Needle-Free Syringes. 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 used with any of the Medi-Jector systems do not
require special disposal. Once a needle-free syringe is removed from the device
portion of the system, it cannot pierce the skin, consequently the risk of
cross-infection from discarded needle-free syringes is reduced significantly
over the risk associated with needles.
4
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 CO2 cartridges but these systems do not provide
any advantage in size and are complex and costly to manufacture.
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. 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.
Application Specific Systems. In addition to pen-like injectors for
insulin, the Company, in collaboration with Becton Dickinson and Company
("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
or evaluated for use in gene therapy, the treatment of erectile dysfunction, the
treatment of multiple sclerosis and certain other disease states.
Research and Development Programs. The Company conducts three principal
product development programs relating to the further development of needle-free
injection systems. These are; (i) the gas spring, (ii) improving injection
quality and (iii) miniaturization of its systems. Over the past year, the
Company completed a process which has resulted in the conversion of virtually
all of its development efforts to an internally conducted program. This was
accomplished by hiring additional technical personnel, purchasing laboratory and
prototype development equipment and dedicating facility space to this program.
In previous years, product development was conducted principally through the
efforts of various outside engineering firms. Product development continues to
be the largest single category of Company expenditure, in part supported by fees
under license and development agreements. The Company has expended approximately
$1,195,000, $2,585,000 and $2,574,000 on research and development efforts during
fiscal years 1995, 1996 and 1997, respectively. Of these amounts, approximately
$921,000, $1,854,000 and $2,030,000, 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,
many 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. The Company believes that as it continues to make
improvements in its technology, that its injection systems will be more
attractive to users in this market segment.
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 15 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 E1. 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 E1 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. Two of these drugs, Copaxone and
Betaseron, are available in the United States and the Company believes that many
individuals using them 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. Approximately
100,000 individuals in the United States are candidates for this treatment.
Hepatitis and Cancer
Approximately five million people in the United States suffer from chronic
hepatitis infection, often resulting in permanent liver damage or liver cancer.
The biopharmaceutical drug, alpha interferon, offers a cure to a significant
portion of victims, if administered by injection three times a week for periods
of 12 months or more. Alpha interferon is used to treat several types of cancer
as well. During 1997, the Company began to work with one of the three
manufacturers of alpha interferon to evaluate the role of the Medi-Jector as an
alternative delivery method. The initial results were favorable, and in early
1998, the Company entered into a licensing and supply agreement with the
manufacturer.
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, hormone therapy, osteoporosis, biopharmaceuticals
used 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 a hospital.
7
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.
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COMPANY MARKET
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Becton Dickinson and Company (1).......... Insulin
(worldwide)
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Ferring NV................................ Growth Hormone
(Worldwide except United States, Canada, Japan and Korea)
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JCR Pharmaceuticals Co., Ltd.............. Growth Hormone
(Japan)
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Schering-Plough Corporation............... INTRON-A
(Hepatitis and Cancer)
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Bio-Technology General Corporation (2).... Growth Hormone
(United States)
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Smithkline Beecham........................ Undisclosed
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Organon, a division of Akzo/Nobel......... Undisclosed
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Undisclosed............................... Undisclosed
(Erectile Dysfunction)
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Teva Pharmaceutical Industries, Ltd....... Copaxone(R)
(Multiple Sclerosis)
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(1) Becton Dickinson has (i) worldwide distribution rights to the Company's
injectors for use with insulin and certain other potential future drugs,
(ii) an option for distribution rights for the Company's injection systems
used by healthcare professionals and (iii) manufacturing rights to the
Company's disposable needle-free syringes for any indication.
(2) Bio-Technology General Corporation is currently barred by a court
injunction from introducing their growth hormone in the U.S. and therefore
marketing of the Company's products in the U.S. for use with human growth
hormone will not occur until this matter is resolved.
PATENTS
The Company, when appropriate, actively seeks protection for its products
and proprietary information by means of United States and foreign patents and
trademarks. The Company currently holds six U.S. patents, one Japanese patent
and one Canadian patent. The Company also has 20 other patent applications being
considered in various countries throughout the world.
Some of the Company's technology is 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.
8
MANUFACTURING
The Company operates a manufacturing facility in compliance with current
Quality System Regulations ("QSR") 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. The Company
anticipates a need to invest in automated assembly equipment as volume increases
in the future. Becton Dickinson has the right to manufacture the disposable
plastic components of the gas spring injector system for the Company in exchange
for royalty payments and certain profit sharing arrangements.
MARKETING
The Company's basic marketing strategy is to leverage off of the 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.
With respect to current selling efforts, the Company's relationship with
Ferring, NV best reflects this basic strategy. Ferring is selling human growth
hormone throughout Europe with a marketing campaign tied exclusively to the
Medi-Ject needle-free delivery system. Ferring has been successful in
establishing a user base of more that 1,000 children for its drug using the
Medi-Jector system, which represents approximately 10% of the targeted markets.
The Company's direct sales effort in the domestic insulin market typically
requires that individuals with diabetes call the Company directly for
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. A modest national advertising program in lay journals
generates inquiries. Training is supported by a video and manual accompanying
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 also sells a small number of Medi-Jector
systems for insulin use to various distributors outside the United States.
In the domestic insulin market, the Company has sold its systems for
insulin using a combination of direct to consumer marketing and a network of
pharmacies and distributors. Until approximately the beginning of the fourth
quarter of 1997, the Company had been increasing its reliance on pharmacies and
distributors in the domestic insulin market. At that time, management assessed
its efforts and results to date with respect to its increased efforts in the
domestic insulin market and determined that the most appropriate approach in the
near term was to focus on selling direct to consumers. This approach reflects
management's assessment that the amount of spending required to produce
meaningful results with a distribution based approach is beyond the Company's
current resources. Management believes that efforts to significantly expand
sales in domestic insulin should be deferred until the availability of its next
generation injector.
The most common retail price of an injector (which can be used over a
period of several years) is approximately $400, and disposable components for
the system cost approximately $260 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.
9
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 Corporation ("Health-Mor") and
Vitajet Corporation ("Vitajet"), 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 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 CO2 powered injector since 1993.
The injector is designed for and used almost exclusively for vaccinations in
doctors' offices or public clinics. Powderject Pharmaceuticals, Plc, a British
research company, is developing a needle-free injection system, as is Weston
Medical Ltd, another U.K. based company.
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 Federal Food Drug and Cosmetic Act (the
"FDC 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 FDC 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") or a Product
License Application ("PLA"). To the extent permitted under the FDC 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, the treatment of erectile dysfunction, and
the treatment of multiple sclerosis, under the medical device provisions, rather
than under the new drug provisions, of the FDC Act.
10
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 from the FDC Act and regulations thereunder. There are
two methods for obtaining such clearance or approvals. Certain products qualify
for a premarket notification under Section 510(k) of the FDC 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 FDC 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, when
indicated for use with drugs or biologicals approved by the agency, will be
regulated as medical devices are eligible for clearance through the 510(k)
notification process. There can be no assurance however 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 FDC Act, substantially greater
regulatory requirements and approval times will be imposed. Use of a modified
new product with a previously unapproved new drug likely will 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 manufacturing 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 FDC Act are more
onerous 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.
11
The FDC Act also regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate compliance with the current Quality System Regulation ("QSR"). 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 QSR, the manufacturer must correct those conditions or explain
them satisfactorily. Failure to adhere to QSR 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. Generally, 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 9001/46001 systems to
obtain 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, 1997, the Company employed 43 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.
12
Item 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 23,000 square feet of office,
manufacturing and warehouse space in Plymouth, a suburb of Minneapolis,
Minnesota. The lease will terminate in April 2002. The Company believes its
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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Franklin Pass, M.D. 61 President, Chief Executive Officer and
Chairman of the Board of Directors
Mark S. Derus 42 Vice President, Finance, Chief Financial
Officer and Secretary
Todd Leonard 38 Vice President, Business Development
Peter Sadowski, Ph.D. 50 Vice President, Product Development
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. From 1991 to 1993, Mr. Leonard served as a Senior Licensing
Specialist in the Office of Technology Transfer at the National Institutes of
Health. From 1985 to 1991, Mr. Leonard was Vice President of MediMorphics, a
biotechnology company focused on AIDS related therapies. Prior to 1985, Mr.
Leonard was in sales and marketing for a division of American Home Products.
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.
13
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 Price Range - Fourth Quarter 1996 $6 $3 1/8
Stock Price Range - First Quarter 1997 $6 3/8 $3 1/2
Stock Price Range - Second Quarter 1997 $4 3/4 $2 15/16
Stock Price Range - Third Quarter 1997 $3 13/16 $2
Stock Price Range - Fourth Quarter 1997 $3 7/8 $1 7/8
HOLDERS.
As of March 17, 1998, there were 125 holders of record of the Company's
common stock, with another estimated 1,124 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.
CHANGES IN SECURITIES.
Use of proceeds from public offering
The Company's initial Registration Statement on Form S-1, file no.
333-6661, was declared effective by the Securities and Exchange Commission on
October 10, 1996. The offering of the Company's Common Stock covered by such
Registration Statement commenced on October 2, 1996. Rodman & Renshaw and R.J.
Steichen & Company acted as the managing underwriters ("the Representatives")
for the offering. A total of 2,750,000 shares of Common Stock, including 330,000
shares subject to the Representatives over-allotment option and 220,000 shares
subject to the warrants issued to the Representatives were registered. In
addition, warrants to purchase 220,000 shares of Common Stock issued to the
Representatives were also registered. The aggregate offering price of the
registered Common Stock and warrants was $15,367,220. Of this amount,
$12,100,000 representing 2,200,000 shares of Common Stock and warrants to
purchase 220,000 shares of Common Stock have been sold. The underwriter's
over-allotment option has expired and these shares were not sold. The
Representative's warrant has not yet been exercised and consequently the
offering has not yet terminated.
14
The amount of expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered are as follows:
Underwriting discounts and commissions............... $ 907,500
Finder's fees........................................ 0
Expenses paid to or for the underwriters............. 12,786
Other expenses....................................... 549,833
-------------
Total expenses............................. $ 1,470,119
=============
All such expenses were paid directly or indirectly to others.
The net offering proceeds to the Company after deducting expenses were
$10,629,881. The amount of net offering proceeds to the Company used for
the following purposes is as follows:
Purchase and installation of machinery and equipment.......... $ 999,685
Repayment of indebtedness..................................... 178,641
Working capital............................................... 759,589
Temporary investments, marketable securities.................. 3,537,483
Other : -market development expenses................ 1,819,258
-product development expenses............... 3,335,225
-------------
$ 10,629,881
All such payments were made directly or indirectly to others.
The use of proceeds contained herein does not represent a material change
in the use of proceeds described in the prospectus.
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- ------- --------
(unaudited)
STATEMENT OF OPERATIONS DATA:
Sales.................................... $ 1,058 $ 1,518 $ 1,654 $ 1,838 $ 1,687
Licensing and product development........ 125 470 921 1,854 2,030
------- -------- ---------- ------- --------
Revenues............................... 1,183 1,988 2,575 3,692 3,717
------- -------- ---------- ------- --------
Cost of sales............................ 409 631 1,049 1,136 1,221
Research and development................. 146 401 1,195 2,585 2,574
General and administrative............... 615 1,118 1,237 1,397 1,823
Sales and marketing...................... 485 878 887 1,019 1,540
------- -------- ---------- ------- --------
Operating expenses..................... 1,655 3,028 4,368 6,137 7,157
------- -------- ---------- ------- --------
Net operating loss....................... (472) (1,040) (1,793) (2,446) (3,440)
Net other income (expense)............... (28) (26) (89) 207 468
------- -------- ---------- ------- --------
Net loss................................. $ (500) $ (1,066) $ (1,882) $ (2,239) $ (2,972)
======= ======== ========== ========= ========
Net loss per common share (1), (2), (3)....... $ (0.46) $ (0.39) $ (0.42)
========== ========= ========
Weighted average number of
common shares (2), (3)........................ 4,087 5,803 7,011
15
AT DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- ------- --------
(unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 649 $ 646 $ 36 $ 11,039 $ 7,283
Working capital (deficit)............. 197 108 (650) 11,187 7,804
Total assets.......................... 894 1,361 1,240 12,956 10,047
Long-term liabilities,
less current maturities............. 190 299 136 8 2
Accumulated deficit................... (6,353) (7,419) (9,302) (11,540) (14,512)
Total shareholders' equity (deficit).. $ 119 $ 252 $ (74) $ 12,120 $ 9,337
(1) Basic and diluted loss per share amounts are identical as the effect of
potential common shares is anti-dilutive.
(2) 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.
(3) Due to significant capital structure changes, earnings per common share and
weighted average common shares outstanding for 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 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. Development efforts have resulted in a new generation of the
Medi-Jector system, the Medi-Jector Choice system, introduced in December 1996,
which incorporates molded plastic components rather than tooled steel components
and a disposable needle-free syringe. Current development efforts are primarily
oriented toward completion of the gas spring system, improved injection quality
and continued size reduction.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Revenues increased from approximately $3,692,000 in 1996 to approximately
$3,717,000 in 1997, an increase of approximately 1%. This increase was primarily
due to an increase of approximately $176,000 or 10% in development and licensing
fee income, offset by a decrease in product sales of approximately $151,000 or
8%. Product sales include sales of injectors, related parts and disposable
components, repairs and freight. The total number of devices sold was nearly
unchanged at 3,338 and 3,391 in 1996 and 1997, respectively. Total revenue from
injector sales decreased however due to a decline in the average selling price
per injector from $385 in 1996 to $294 in 1997, consistent with the Company's
general strategy as discussed above. Approximately half of the decrease in
revenue from injector sales was offset by increased sales of related supplies,
including disposable components for the Medi-Jector Choice system.
16
Licensing and development fee income increased as a result of three new
agreements signed with pharmaceutical firms interested in obtaining marketing
rights for injection systems under development. The Company expects that
licensing and development fee income will continue 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.
In September 1997, the Company announced that its customers were
occasionally experiencing certain problems when using the Medi-Jector Choice
system. These problems pertained to the unexpected breakage of the disposable
needle-free syringe portion of the system and the fit of the disposable vial
adapter onto the syringe. As a result, management initiated a product recall and
replacement campaign for the affected disposable components. Management
conducted the recall campaign under the guidance of the FDA. These problems
interrupted production and also caused certain sales delays during the fourth
quarter while a correction to the problem was developed. These issues were
largely resolved prior to the end of the fourth quarter of 1997.
Cost of sales increased from approximately $1,136,000 in 1996 to
approximately $1,221,000 in 1997, an increase of 7%. The increase was primarily
due to higher manufacturing expenses during a period of flat unit volume. The
principal factors contributing to the increase in manufacturing expenses were
outside engineering consulting services, depreciation, rent and personnel.
Product problems relating to the disposable needle-free syringe of the
Medi-Jector Choice (discussed above) also increased manufacturing expense. These
expenses related primarily to scrap, engineering consulting fees and interrupted
production during the fourth quarter of 1997.
Research and development expenses decreased from approximately
$2,585,000 in 1996 to approximately $2,574,000 in 1997, a decrease of less than
1%. This decrease occurred as the Company completed an important transition in
its product research and development program. Prior to 1997, this program was
largely based on the efforts of a few outside engineering firms which handled a
majority of the engineering and development work. During 1997, the Company
purchased certain equipment and hired eight additional engineers and technicians
who are dedicated entirely to design and development of improved needle-free
injection and drug delivery systems. The transition to an internal research and
development program has resulted in an overall increase in the number of person
hours dedicated to such efforts while reducing the associated expense.
General and administrative expenses increased from approximately
$1,397,000 in 1996 to approximately $1,823,000 in 1997, an increase of
approximately $426,000 or 30%. Management estimates that approximately one half
of this increase relates to costs associated with being a publicly traded
company for all of 1997 compared to just three months of 1996. These increased
expenses relate to investor relations efforts, stock transfer and NASDAQ fees,
D&O liability insurance and legal expense. Depreciation and amortization expense
also increased by approximately $106,000 as a result of higher equipment
balances and the start of amortization of capitalized intellectual property
following the issuance of a major patent in early 1997.
Sales and marketing expenses increased from approximately $1,019,000 in
1996 to approximately $1,540,000 in 1997, an increase of approximately of 51%.
This increase is primarily attributable to expenses associated with a
significant sales program directed at the domestic insulin market initiated in
early 1997. In October 1997 the Company announced that it was terminating this
program due to poor results. During the fourth quarter, expenses associated with
this program were reduced by approximately $500,000 on an annual basis.
Management believes that this revised level of spending is appropriate relative
to the current opportunities in the domestic insulin market.
Interest and other income increased from approximately $239,000 in 1996
to approximately $505,000 in 1997, an increase of approximately $266,000. This
increase is attributable to increased interest earnings on higher average cash
reserves on hand during 1997, following the Company's initial public offering in
October 1996.
17
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").
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 from approximately $887,000 in 1995
to approximately $1,019,000 in 1996, an increase of approximately 15%. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short term investments decreased
from approximately $11,040,000 on December 31, 1996 to $7,283,000 at December
31, 1997. The decrease is primarily due to a net loss of approximately
$2,972,000 and fixed asset purchases of approximately $859,000 during 1997.
During the year ended December 31, 1997, cash used to fund operating
activities was approximately $3,122,000. The major components of this amount
included a net loss of approximately $2,972,000 and an aggregate increase of
approximately $269,000 in receivables and inventories, offset by depreciation
and amortization totaling approximately $326,000. Cash used in investing
activities was approximately $2,764,000. The components of this amount were net
purchases of marketable securities totaling approximately $1,826,000, additions
to fixed assets of approximately $859,000, and an additional investment in
patent rights totaling approximately $78,000. Net cash provided by financing
activities of approximately $56,000, resulted from proceeds from stock option
and warrant exercises of approximately $184,000 offset by payments on notes
payable and capital lease obligations totaling approximately $128,000.
18
The Company expects that it will report a net loss for the year ending
December 31, 1998 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, 1997 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 for the next twelve months. The Company can provide no
assurance, however, that it will ever become profitable or that cash available
will be sufficient to meet its needs.
IMPACT OF THE YEAR 2000
The Company has assessed and continues to assess the impact of the Year
2000 issue on its operations and its external relationships. The Year 2000 issue
results from computer programs using two digits rather than four digits to
define the applicable year. Based on existing information and due to recent and
ongoing upgrading of information systems, the Company believes the anticipated
spending necessary to become Year 2000 compliant will not have a material effect
on the financial position, cash flows or results of operations of the Company,
nor will the Year 2000 issues cause any material adverse effect on the future
business operations of the Company.
19
Item 8. FINANCIAL STATEMENTS.
MEDI-JECT CORPORATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.............................................21
Balance Sheets as of December 31, 1996 and 1997..........................22
Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................................23
Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1995, 1996 and 1997...................24
Statements of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997.................................25
Notes to Financial Statements............................................26
20
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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 25, 1998
21
MEDI-JECT CORPORATION
BALANCE SHEETS
DECEMBER 31,
1996 1997
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 9,575,240 $ 3,745,851
Marketable securities.................................. 1,464,277 3,537,483
Accounts receivable, less allowances
for doubtful accounts of
$12,983 and $22,284, respectively.................... 537,755 760,948
Inventories............................................ 351,330 397,072
Prepaid expenses and other assets...................... 86,589 71,495
-------------- -------------
12,015,191 8,512,849
-------------- -------------
Equipment, furniture and fixtures, net................... 595,590 1,165,213
-------------- -------------
Patent rights, net....................................... 345,010 369,406
-------------- -------------
$12,955,791 $10,047,468
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 353,456 $ 321,758
Accrued expenses and other liabilities................. 331,446 379,776
Deferred revenue....................................... 14,019 0
Capital lease obligations - current maturities......... 32,747 7,083
Notes payable - current maturities..................... 96,097 0
-------------- -------------
827,765 708,617
-------------- -------------
Capital leases, less current maturities.................. 8,350 1,721
Shareholders' equity:
Common Stock: $0.01 par; authorized 17,000,000 shares:
6,925,636 and 7,071,589 issued and outstanding at
December 31, 1996 and 1997, respectively............. 69,256 70,716
Additional paid-in capital............................. 23,590,887 23,778,648
Accumulated deficit.................................... (11,540,467) (14,512,234)
-------------- -------------
12,119,676 9,337,130
-------------- -------------
Commitments (Note 4)
$ 12,955,791 $ 10,047,468
============== =============
See accompanying notes to financial statements.
22
MEDI-JECT CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Revenues:
Sales................................... $ 1,653,869 $ 1,837,704 $ 1,686,588
Licensing & product development......... 920,937 1,854,100 2,030,435
------------- --------------- --------------
2,574,806 3,691,804 3,717,023
------------- --------------- --------------
Operating Expenses:
Cost of sales........................... 1,048,937 1,136,272 1,221,051
Research and development................ 1,195,435 2,584,806 2,573,814
General and administrative.............. 1,236,681 1,397,338 1,822,576
Sales and marketing..................... 886,792 1,019,077 1,539,504
------------- --------------- --------------
4,367,845 6,137,493 7,156,945
------------- --------------- --------------
Net operating loss........................ (1,793,039) (2,445,689) (3,439,922)
------------- --------------- --------------
Other income (expense):
Interest and other income............... 16,486 239,055 505,295
Interest and other expense.............. (105,906) (31,934) (37,140)
------------- --------------- --------------
(89,420) 207,121 468,155
------------- --------------- --------------
Net loss.................................. $ (1,882,459) $ (2,238,568) $ (2,971,767)
============= =============== ==============
Basic and diluted net loss
per common share........................ -- $(.39) $(.42)
=============== ==============
Basic and diluted weighted
average common shares outstanding....... -- 5,803,346 7,010,703
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
23
MEDI-JECT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------------------
SERIES C SERIES B SERIES A COMMON STOCK
------------------ -------------------- ------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- -------- ------- ------- ------- -------- --------
Balance, December 31, 1994....... -- $ -- 1,488,958 $14,890 1,103,867 $ 11,039 217,722 $ 2,177
Common stock:
Exercise of stock options.... -- -- -- -- -- -- 1,142 12
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 11,039 218,864 2,189
Conversion of Series A
to common stock.............. -- -- -- -- (1,103,867) (11,039) 1,103,867 11,039
Conversion of note payable .... -- -- -- -- -- -- 30,465 305
Shares issued for
reverse stock split.......... -- -- 43 -- -- -- 589 5
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.............. -- -- -- -- -- -- 2,200,000 22,000
Offering costs.............. -- -- -- -- -- -- -- --
Conversion of Series C
to common stock ............. (761,615) (7,616) -- -- -- -- 761,615 7,616
Conversion of Series B
to common stock.............. -- -- (2,471,484) (24,714) -- -- 2,471,484 24,714
Issuance of Series B
anti-dilution shares ........ -- -- -- -- -- -- 138,752 1,388
Net loss....................... -- -- -- -- -- -- -- --
--------- --------- ---------- --------- --------- --------- ---------- --------
Balance, December 31, 1996....... -- -- -- -- -- -- 6,925,636 69,256
Exercise of stock options
and warrants ................ -- -- -- -- -- -- 145,953 1,460
Compensation expense,
stock options................ -- -- -- -- -- -- -- --
Net Loss....................... -- -- -- -- -- -- -- --
----------- --------- ---------- ---------- ---------- -------- ---------- --------
Balance, December 31, 1997....... $ $ $ 7,071,589 $ 70,716
=========== ========= ========== ========== ========== ======== ========== ========
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------- ---------- -------
Balance, December 31, 1994....... $7,643,361 $(7,419,440) $ 252,027
Common stock:
Exercise of stock options.... 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....... 9,193,600 (9,301,899) (74,165)
Conversion of Series A
to common stock.............. -- -- --
Conversion of note payable .... 99,695 -- 100,000
Shares issued for
reverse stock split.......... (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.............. 12,078,000 -- 12,100,000
Offering costs.............. (1,470,199) -- (1,470,199)
Conversion of Series C
to common stock.............. -- -- --
Conversion of Series B
to common stock.............. -- -- --
Issuance of Series B
anti-dilution shares......... (1,388) -- --
Net loss....................... -- (2,238,568) (2,238,568)
----------- ---------- ----------
Balance, December 31, 1996....... 23,590,887 (11,540,467) 12,119,676
Exercise of stock options
and warrants................. 182,766 -- 184,226
Compensation expense,
stock options................ 4,995 -- 4,995
Net Loss....................... -- (2,971,767) (2,971,767)
----------- ---------- ----------
Balance, December 31, 1997....... $23,778,648 ($14,512,234) $9,337,130
=========== ============ ==========
See accompanying notes to financial statements
24
MEDI-JECT CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997
----------------- --------------- -------------
Cash flows from operating activities:
Net loss.............................................. $ (1,882,459) $ (2,238,568) $ (2,971,767)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......................... 85,960 178,526 326,065
Loss on disposal of assets............................ -- 17,079
Interest on marketable debt securities................ -- (7,417) (246,813)
Other ................................................ 45,090 -- 4,995
Changes in operating assets and liabilities:
Accounts receivable................................. (86,937) (361,515) (223,193)
Inventories......................................... (109,368) (71,101) (45,742)
Prepaid expenses and other assets................... (23,190) (51,081) 15,094
Accounts payable.................................... 83,263 110,175 (31,698)
Accrued liabilities................................. 107,193 (66,786) 48,330
Deferred revenue.................................... 38,563 (134,544) (14,019)
---------------- ---------------- ------------------
Net cash used in operating activities................... (1,741,885) (2,642,311) (3,121,669)
---------------- ---------------- ------------------
Cash flows from investing activities:
Purchases of marketable securities.................... -- (1,456,860) (6,975,059)
Proceeds from sales of marketable securities.......... -- -- 5,148,666
Purchases of equipment, furniture and fixtures........ (120,392) (297,090) (859,373)
Payments for patent rights............................ (235,288) (109,722) (77,790)
---------------- ---------------- ------------------
Net cash used in investing activities................... (355,680) (1,863,672) (2,763,556)
----------------- ---------------- ------------------
Cash flows from financing activities:
Principal payments on capital lease obligations....... (42,138) (44,546) (32,293)
Proceeds from issuance of common stock................ 1,560 12,101,130 184,226
Proceeds from issuance of convertible preferred stock. 1,575,000 3,812,500 --
Warrants issued....................................... -- 125,220 --
Proceeds from issuance of notes payable............... 125,000 187,500 --
Principal payments on notes payable................... (106,324) (429,957) (96,097)
Offering costs........................................ (65,383) (1,706,441) --
---------------- ---------------- -----------------
Net cash provided by financing activities............... 1,487,715 14,045,406 55,836
---------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents.... (609,850) 9,539,423 (5,829,389)
Cash and cash equivalents:
Beginning of year..................................... 645,667 35,817 9,575,240
---------------- ---------------- -----------------
End of year........................................... $ 35,817 $ 9,575,240 $ 3,745,851
================ ================ =================
See accompanying Notes to Financial Statements.
25
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
Reverse Stock Split
In connection with the Company's initial public offering, 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
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," which supersedes APB Opinion No. 15,
"Earnings per Share". SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
Statements of Operations. Basic EPS is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into common stock. For the years ended December 31, 1996 and 1997, the effects
of potential common shares were excluded from the calculation of diluted EPS
because their effect was antidilutive.
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 1996
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 90 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 No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities". The
Company's marketable debt securities are classified as available-for-sale and
are carried at amortized cost, which approximates fair value.
26
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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
three to seven 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, Opinion
25 ("APB 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 No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," had 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.
Patent Rights
The Company capitalizes the cost of obtaining patent rights. These
capitalized costs are amortized on a straight-line basis over seven years
beginning on the earlier of the date the patent is issued or the first
commercial sale of product utilizing such patent rights.
27
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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.
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 debt 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. The Company has not realized
any losses on its investments. 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.
Advertising Costs
Advertising expense (including production and communication costs) for
1995, 1996 and 1997 was $147,613, $168,145 and $333,515, respectively. Prepaid
advertising costs were $0 in each of the years ended December 31, 1996 and 1997.
Production costs related to advertising are expensed as incurred.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," were issued in June 1997. SFAS 130 and SFAS 131 are
effective for fiscal years beginning subsequent to December 15, 1997 and,
therefore, will be adopted by the Company on January 1, 1998. The Company does
not expect the adoption of SFAS 130 or SFAS 131 to result in any substantive
changes in its disclosure.
28
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31,
---------------------------
1996 1997
------------ ----------
Inventories:
Raw material.................................... $ 175,251 $ 196,579
Work-in-process................................. 119,575 78,220
Finished goods.................................. 56,504 122,273
------------ -----------
$ 351,330 $ 397,072
============ ===========
Equipment, furniture and fixtures:
Furniture, fixtures and office equipment........ $ 404,811 $ 805,310
Production equipment............................ 833,773 1,161,803
Less accumulated depreciation................... (642,994) (801,900)
------------ ----------
$ 595,590 $1,165,213
============ ==========
Patent rights:
Patent rights................................... $ 345,010 $ 422,800
Less accumulated amortization................... -- (53,394)
------------ ----------
$ 345,010 $ 369,406
============ ==========
Accrued expenses and other liabilities:
Product warranty and returns.................... $ 86,436 $ 51,436
Payroll......................................... 37,828 59,665
Other........................................... 207,182 268,675
------------ -----------
$ 331,446 $ 379,776
============ ===========
3. NOTES PAYABLE
December 31,
---------------------------
1996 1997
------------ ----------
Notes payable:
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............ $ 96,097 $ --
------------ -----------
Current maturities.............................. (96,097) --
------------ -----------
Notes payable, less current maturities.......... $ -- $ --
============ ===========
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.
29
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
4. LEASES
The Company has a noncancelable operating lease for its office and
manufacturing facility that expires in April 2002. This lease requires the
Company to pay all executory costs such as maintenance and property taxes.
Rent expense incurred for the years ended December 31, 1995, 1996 and 1997
was $107,616, $101,139 and $161,339, respectively.
The Company is also obligated under noncancelable leases classified as
capital leases. The leases call for aggregate monthly payments of $1,947 with
various expiration dates through September 1999. Equipment, furniture, and
fixtures include $282,186 and $67,380 of cost and $221,409 and $51,524 of
accumulated amortization as of December 31, 1996 and 1997, respectively, related
to these leases.
Future minimum lease payments are as follows as of December 31, 1997:
CAPITAL OPERATING
LEASES LEASES
----------- -----------
1998..................................... $ 7,464 $ 211,995
1999..................................... 1,816 217,737
2000..................................... -- 223,479
2001..................................... -- 229,221
2002..................................... -- 88,111
----------- -----------
9,280 $ 970,543
===========
Amount representing interest
(at rates from 13% to 18%) (476)
-----------
Present value of minimum capital
lease payments....................... 8,804
Current maturities....................... (7,083)
-----------
Obligations under capital leases
less current maturities.............. $ 1,721
===========
5. INCOME TAXES
The Company incurred losses for both book and tax purposes in each of the
years in the three year period ended December 31, 1997 and, accordingly, no
income taxes were provided. Effective tax rates differ from statutory federal
income tax rates in the years ended December 31, 1995, 1996 and 1997 as follows:
1995 1996 1997
---- ---- ----
Statutory federal income tax rate ........... (34.0)% (34.0)% (34.0)%
Valuation allowance increase................. 36.0 39.8 35.7
State income taxes, net of federal benefit... (2.0) (2.0) (2.0)
Research and experimentation credit.......... -- (1.6) --
Other........................................ -- (2.2) 0.3
------ ------ ------
0.0% 0.0% 0.0%
====== ====== ======
30
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Deferred tax assets as of December 31, 1996 and 1997 consist of the following:
1996 1997
---------- -----------
Inventory reserve............................... $ 21,000 $ 20,000
Net operating loss carryforward................. 4,012,000 5,060,000
Research credit carryforward.................... 152,000 165,000
Other........................................... 45,000 45,000
---------- -----------
4,230,000 5,290,000
Less valuation allowance.......................... (4,230,000) (5,290,000)
---------- -----------
$ 0 $ 0
========== ===========
At December 31, 1997, the Company had net operating loss carryforwards
("NOL") of approximately $14,000,000 for federal income tax purposes which if
unused will begin to expire in 2008. Additionally, the Company had research
credit carryforwards of approximately $165,000.
As a result of the 1996 equity changes as described in Note 6, 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 equity
changes could further limit the net operating losses available.
6. 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, 1997, the total number of shares authorized for all classes
of stock was 18,000,000 shares: 17,000,000 common shares and 1,000,000 preferred
shares 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.
31
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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, are fully
exercisable, and expire from March 1998 to January 2006.
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 1,695,050 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 ten 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, 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
Granted..................................... 608,500 4.45
Exercised................................... (145,953) 1.30
Canceled.................................... (95,704) 4.47
----------- -----------
Outstanding at December 31, 1997................ 3,900,229 $ 5.08
=========== ===========
32
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
The following table summarizes information concerning currently outstanding and
exercisable options and warrants by price range:
OUTSTANDING EXERCISABLE
--------------------------------------------------------- --------------------------------------
NUMBER OF SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE RANGE OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------- ------------------ ------------------- ------------------ ------------------ -------------------
PURSUANT TO OPTION
PLANS:
$ .79 to 1.65 169,693 5.4 $1.35 169,693 $1.35
2.19 to 2.94 138,500 9.9 2.43 - -
3.13 to 3.94 333,665 7.4 3.44 253,079 3.49
5.00 to 5.38 661,900 9.0 5.23 152,380 5.25
--------- ---------
1,303,758 575,152
========= =========
WARRANTS:
$ 1.31 to 3.00 84,009 0.5 $1.31 84,009 $1.31
3.28 to 4.60 388,425 7.9 4.57 388,425 4.57
5.91 to 6.60 2,124,037 7.6 5.98 2,124,037 5.98
--------- ---------
2,596,471 2,596,471
========= =========
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 to the pro-forma amounts shown below:
1995 1996 1997
---- ---- ----
Net loss:
As reported.......................... $1,882,459 $2,238,568 $2,971,767
Pro forma............................ $1,980,000 $2,614,000 $3,672,000
Net loss per common share:
As reported.......................... $0.46 $0.39 $0.42
Pro forma............................ $0.49 $0.45 $0.52
The per share weighted-average fair value of stock based awards granted
during 1995, 1996 and 1997 is estimated as $0.95, $4.16 and $3.43, respectively,
on the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1995 1996 1997
---- ---- ----
Risk-free interest rate....................... 6.0% 6.0% 6.0%
Annualized volatility......................... 0.0% 106% 99%
Weighted average expected life, in years...... 4.7 7.5 5.0
Expected dividend yield....................... 0.0% 0.0% 0.0%
Proforma net loss reflects only options granted in 1995, 1996 and 1997.
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 option vesting periods
and compensation cost for options granted prior to January 1, 1995 is not
considered.
33
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
7. 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, 1995, 1996 and 1997.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the years ended December 31, 1995, 1996 and
1997 was $62,515, $30,919 and $9,339, respectively.
Cash paid for taxes during the years ended December 31, 1995, 1996 and 1997
was $300 in each year.
During 1996, notes payable of $312,500 and $100,000, respectively, were
converted into 190,404 shares of Series B Preferred Stock and 30,465 shares of
Common Stock, respectively.
9. SALES
The Company had a foreign customer, a distributor of the Company's
products, who accounted for approximately 18%, 18% and 37% of sales for the
years ended December 31, 1995, 1996 and 1997, respectively.
Foreign sales by geography were as follows:
1995 1996 1997
------------- ------------- ------------
Europe (primarily Germany)...... $ 301,277 $ 356,838 $ 759,168
Other........................... 319,379 221,653 113,044
------------- ------------- ------------
Total....................... $ 620,656 $ 578,491 $ 872,212
============= ============= ============
Other consists mainly of sales to Asia.
34
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
10. 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 received $100,000 per
month for 24 months beginning January 1996 to develop the technology.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1996:
Total revenues $ 769,148 $ 731,134 $ 949,219 $ 1,242,303
Net loss (553,016) (631,162) (551,616) (502,774)
Loss per common share (.14) (.12) (.10) (.07)
Weighted average shares 4,087,360 5,260,880 5,260,880 6,925,636
1997:
Total revenues $ 971,025 $ 881,379 $ 609,828 $ 1,254,791
Net loss (582,290) (818,063) (926,787) (644,627)
Loss per common share (.08) (.12) (.13) (.09)
Weighted average shares 6,947,245 6,991,969 7,057,035 7,066,497
Loss per common share is computed based upon the weighted average number of
shares outstanding during each period. Basic and diluted loss per share amounts
are identical as the effect of potential common shares is antidilutive.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
35
MEDI-JECT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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
19, 1998 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
19, 1998 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 19, 1998 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 19, 1998 is incorporated by reference.
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 omitted because
they are not applicable or not required or because the information is
included in the financial statements or the notes thereto.
(3) Item 601 Exhibits- see list of Exhibits below
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the fourth quarter of 1997.
36
(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)
10.3 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)
10.6 Loan Agreement, dated as of December 22, 1995, by and between
Ethical Holdings plc and the Company, including the related
Promissory Note, dated December 22, 1995, issued to Ethical
Holdings plc.(a)
10.7 Preferred Stock, Option and Warrant Purchase Agreement, dated
January 25, 1996, between the Company and Becton Dickinson and
Company.(a)
10.8* Employment Agreement, dated as of January 1, 1997, between the
Company and Franklin Pass, MD.(c)
10.9* 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)
37
10.14* Form of non-qualified stock option agreement for use with 1993
Stock Option Plan.(a)
10.15* 1996 Stock Option Plan, with form of stock option agreement.(a)
10.20+ Development and License Agreement between Becton Dickinson and
Company and the Company, effective January 1, 1996.(a)
10.21 Office-Warehouse lease with Carlson Real Estate Company, dated
February 11, 1997. (b)
10.22* 1998 Stock Option Plan for Non-Employee Directors. (d)
10.23* Letter consulting agreement dated February 20, 1998 between the
Company and Geoffrey W. Guy. (d)
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99 Cautionary Statement (b)
* Indicates management contract or compensatory plan or arrangement.
+ Pursuantto Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibit 10.20 were deleted and filed
separately with the Securities and Exchange Commission pursuant to
a request for confidential treatment, which was subsequently
granted by the Securities and Exchange Commission.
(a) Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-6661), filed with the Securities and
Exchange Commission on October 1, 1996.
(b) Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1996.
(c) Incorporated by reference to the Company's Form 10-Q for the
quarter ended March 31, 1997.
(d) Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1997.
38
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 25, 1998.
MEDI-JECT CORPORATION
/s/Franklin Pass, M.D.
-------------------------------------
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
25, 1998.
SIGNATURE TITLE
/s/Franklin Pass, M.D. President, Chief Executive Officer and Director
- ----------------------------
Franklin Pass, M.D. (principal executive officer)
/s/Mark S. Derus Vice President of Finance, Chief Financial Officer
- ----------------------------
Mark S. Derus (principal financial and accounting officer)
/s/Kenneth Evenstad Director
- ----------------------------
Kenneth Evenstad
/s/Geoffrey Guy Director
- ----------------------------
Geoffrey Guy
/s/Norman Jacobs Director
- ----------------------------
Norman Jacobs
/s/Fred Shapiro, M.D. Director
- ----------------------------
Fred Shapiro, M.D.
/s/Stanley Goldberg Director
- ----------------------------
Stanley Goldberg
/s/Karl Groth Director
- ----------------------------
Karl Groth
39