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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24768
--------------------------------------------------------
MEDIX RESOURCES, INC.
(Exact name of issuer as specified in its charter)
Colorado 84-1123311
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
420 Lexington Avenue, Suite 1830 New York, New York 10170
(Address of principal executive offices) (Zip Code)
(212) 697-2509
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (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. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 10, 2002.
Common Stock, $0.001 par value 62,923,624
Class Number of Shares
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (Unaudited)and
December 31, 2001
Unaudited Consolidated Statements of Operations - For the Six
Months Ended June 30, 2002 and June 30, 2001
Unaudited Consolidated Statements of Cash Flows - For the Six Months
Ended June 30, 2002 and June 30, 2001
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. Other Information
SIGNATURES
Index to Exhibits
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
June 30, December 31,
2002 2001
------------ -----------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 281,000 $ 8,000
Accounts receivable, trade 80,000 -
Prepaid expenses and other 340,000 344,000
----------- -----------
Total current assets 701,000 352,000
Software development costs, net 876,000 649,000
Property and equipment, net 353,000 365,000
Goodwill, net 1,735,000 1,735,000
----------- -----------
Total assets $ 3,665,000 $ 3,101,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 39,000 $ 158,000
Convertible note payable 1,000,000 -
Accounts payable 353,000 851,000
Accounts payable-related parties - 166,000
Accrued expenses 389,000 450,000
Deferred revenue 150,000 -
Accrued payroll taxes interest and penalties 131,000 131,000
----------- -----------
Total current liabilities 2,062,000 1,756,000
----------- -----------
Stockholders' equity
1996 Preferred stock, 10% cumulative convertible, $1
par value; 488 shares authorized; 155 shares issued;
1 share outstanding. - -
1999 Series B convertible preferred stock, $1 par
value; 2,000 shares authorized; 1,832 shares issued;
50 shares outstanding - -
1999 Series C convertible preferred stock, $1 par
value; 2,000 shares authorized; 1,995 shares issued;
100 and 375 shares outstanding. - -
Common stock, $.001 par value; 100,000,000
authorized; 62,923,624 and 56,651,409 issued and
outstanding. 63,000 56,000
Dividends payable with common stock 8,000 7,000
Additional paid-in capital 38,577,000 35,341,000
Accumulated deficit (37,045,000) (34,059,000)
----------- -----------
Total stockholders' equity 1,603,000 1,345,000
----------- -----------
Total liabilities and stockholders' equity $ 3,665,000 $ 3,101,000
=========== ===========
Unaudited Consolidated Statements of Operations
For the
For the Three
Three Months Months For the Six For the Six
Ended Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------- --------- ----------- -----------
Revenues $ - $ - $ 10,000 $ 30,000
Direct costs of services 178,000 28,000 392,000 34,000
--------- --------- --------- ---------
Gross margin (178,000) (28,000) (382,000) (4,000)
--------- --------- --------- ---------
Software research and
development costs 9,000 320,000 380,000 599,000
Selling, general and
administrative expenses 1,078,000 1,107,000 1,968,000 3,017,000
--------- --------- --------- ---------
Net loss from operations (1,265,000) (1,455,000) (2,730,000) (3,620,000)
Other income 4,000 - 5,000 -
Financing Costs - (167,000) (203,000) (236,000)
Interest expense (48,000) (13,000) (58,000) (38,000)
--------- --------- --------- ---------
Net loss $(1,309,000) $(1,635,000) $(2,986,000) $(3,894,000)
=========== =========== =========== ===========
Net loss per common share $ (0.02) $ (0.03) $ (0.05) $ (.08)
=========== ========== ========== ==========
Weighted average shares
outstanding 60,402,930 49,196,979 59,139,133 48,313,235
========== ========== ========== ==========
Had the Company adopted FAS 142 as of January 1, 2001, the historical
amounts previously reported would have been adjusted to the following:
Net (loss) as reported $(1,635,000) $(3,894,000)
Add back: Goodwill amortization 39,000 78,000
----------- ---------
Adjusted net loss $(1,596,000) $(3,972,000)
=========== ===========
Basic and diluted loss per share
as reported $ (0.03) $ (0.08)
=========== ===========
Goodwill amortization $ - $ -
=========== ===========
Adjusted loss per share $ (0.03) $ (0.08)
=========== ===========
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
---------------------------------
2002 2001
-------------- --------------
Cash flows from operating activities
Net loss $(2,986,000) $(3,894,000)
Adjustments to reconcile net income (loss) to net
cash flows (used in) provided by operating activities
Depreciation and amortization 206,000 252,000
Amortization of discount and warrants-convertible
debt 70,000 223,000
Options and warrants issued in conjunction with
stock issuance, services and for litigation
settlements, respectively 158,000 366,000
Net changes in current assets and current liabilities (28,000) 290,000
----------- -----------
Net cash flows (used in) provided by operating
activities (2,580,000) (2,763,000)
----------- -----------
Cash flows from investing activities
Software development costs incurred (373,000) (275,000)
Purchase of property and equipment (48,000) (64,000)
----------- -----------
Net cash flows (used in) investing activities (421,000) (339,000)
----------- -----------
Cash flows from financing activities
Advances received on convertible note 1,000,000 1,500,000
Advances (payments) under financing agreement, net - -
Payments on capital leases and debt (186,000) (98,000)
Proceeds from the issuance of common stock, net of
offering costs 2,345,000 550,000
Net proceeds from exercise of options and warrants 115,000 165,000
----------- -----------
Net cash flows provided by (used in) financing
activities 3,274,000 2,117,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 273,000 (985,000)
Cash and cash equivalents at beginning of period 8,000 1,007,000
----------- -----------
Cash and cash equivalents at end of period $ 281,000 $ 22,000
=========== ===========
Non-cash and investing and financing activities for the six months ended
June 30, 2002:
Options and warrants valued at $27,000 for services provided.
Options valued at $132,000 as financing costs issued to an officer
for past financial support.
An accrued liability of $590,000 for warrants earned in 2001 was
satisfied by issuing the warrants.
In-the-money conversion feature on convertible debt valued at $70,000.
Financed insurance policies of $65,000 by issuing a note payable.
Non-cash and investing and financing activities for the six months ended
June 30, 2001:
Conversion of preferred stock into common stock (Note 3).
Conversion of $600,000 note payable into 1,088,534 shares of common
stock (Note 3).
Financed insurance policies of $3,000 by issuing a note payable.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The unaudited consolidated financial
statements as of June 30, 2002 have been derived from audited financial
statements. The unaudited consolidated financial statements contained herein
should be read in conjunction with the financial statements and notes thereto
contained in the Company's Form 10-K for the fiscal year ended December 31,
2001. The results of operations for the three months ended June 30, 2002 are not
necessarily indicative of the results for the entire fiscal year ending December
31, 2002.
Cost of Services Provided
Cost of services provided includes amortization of software development costs on
projects ready for their intended use, license and data service fees.
Note 2 - Goodwill
June 30, 2002
-------------
Goodwill acquired through the Cymedix acquisition $ 2,369,000
Less accumulated amortization (634,000)
-----------
$ 1,735,000
===========
The Company has completed step one, impairment review of FAS 142, effective
January 1, 2002, and has determined that the fair value of that goodwill
associated with its Cymedix reporting unit using a discounted cash flow method
had no impairment.
Note 3 - Equity Transactions
The Company received proceeds of $114,750 from the exercise of stock options
resulting in the issuance of 315,000 shares of common stock during the first two
quarters of 2002.
Equity Line
The Company had entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which provided that the Company could put to the provider, subject to
certain conditions, the purchase of common stock of the Company at prices
calculated from a formula as defined in the agreement. Under the agreement, the
providers of the Equity Line of Credit had committed to advance to the Company
funds in an amount of up to $10,000,000, as requested by the Company, over a
24-month period in return for common stock issued by the Company to the
providers. The Equity Line of Credit Agreement was terminated by the mutual
agreement of the parties on August 6, 2002. In connection with our equity line
of credit financing, we had registered 9,500,000 shares with the SEC for sale by
the providers of the financing, of which 4,796,763 shares remained available for
issuance at the time the equity line of credit financing was terminated. The
Company will de-register those shares from registration with the SEC.
During the period January to April 2002, the Company received $972,000, net of
commissions and escrow fees from eight equity line advances, resulting in the
issuance of 1,954,715 shares of common stock.
Warrants
As of February 18, 2002, the Company executed a Amended and Restated Common
Stock Purchase Warrant obligating the Company to issue up to 7,000,000 warrants
under an agreement with a pharmacy management company for the Company's
proprietary software to be interfaced with core medical service providers, in
which one of the Company's audit committee members is a related party to the
pharmacy management company. The agreement provides for 3,000,000 warrants with
an exercise price of $.30, 3,000,000 warrants with an exercise price of $.50,
and 1,000,000 warrants with an exercise price of $1.75 all expiring September 8,
2004. The right to exercise the warrants are earned in increments based on
certain performance criteria. At December 31, 1999, 1,000,000 of the warrants
had been earned. In connection with the 1,000,000 warrants earned, the Company
recorded expense of $1,364,000 valued using the Black-Scholes option pricing
model, with assumptions of 132% volatility, no dividend yield and a risk-free
rate of 5.5%. No warrants were earned during 2000. During 2001, 850,000 of the
warrants had been earned. In connection with the obligation to issue the 850,000
warrants earned, the Company recorded expense of $590,000 during the third
quarter of 2001 valued using the Black-Scholes option pricing model, with
assumptions of 132% volatility, no dividend yield and a risk-free rate of 5.5%.
The Company has the obligation to provide 5,150,000 warrants under the Amended
and Restated Common Stock Purchase Warrant in the future if the performance
criteria specified are met.
Under the agreement, the current performance criteria in effect provide for the
issuance of 600,000 warrants. Had the current performance criteria been met at
June 30, 2002, the fair value of the related warrants and resulting expense
would have been approximately $197,000, using the Black-Scholes option pricing
model, with assumptions of 121% volatility, no dividend yield and a risk-free
rate of 5.5%.
Convertible Loan
The Company entered into a secured convertible loan agreement with a Company,
dated February 19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint
Health Networks Inc., in which a member of the Company's audit committee is a
related party. The loan becomes payable on February 19, 2003, if not converted
into our common stock. The loan earns annual interest at a floating rate of 300
basis points over prime, as it is adjusted from time to time, which is also
payable at maturity and may be converted into common stock. Conversion into
common stock is at the option of either WellPoint or Medix at a contingent
conversion price. The conversion price will be either (i) at the price at which
additional shares are sold to other private placement investors if Medix obtains
written commitments for at least an additional $4,000,000 of equity by the close
of business on September 30, 2002, from persons not affiliates of WellPoint, and
if such sales are closed by the maturity date of the loan, or (ii) at a price
equal to 80% of the then-current Fair Market Value (as defined below) if Medix
is unable to obtain a written commitment for the additional equity investment by
the close of business on September 30, 2002 or close the sales by the maturity
date. For this purpose, "Fair Market Value" shall be the average closing price
of Medix common stock for the twenty trading days ending on the day prior to the
day of the conversion. The Company has recorded financing costs during the first
quarter of 2002 associated with this loan agreement as a result of the
in-the-money conversion feature totaling $70,000. The loan is secured by the
grant of a security interest in all Medix's intellectual property, including its
patent, copyrights and trademarks. While Medix can cure a default in the
repayment of the loan at the fixed maturity date by the forced conversion of the
loan into its common stock, a cross default, breach of representation or
warranty, and bankruptcy or similar event of default will trigger the
foreclosure provision of the security agreement.
Private Placement
During April 2002, the Company initiated a private placement of its $.001 par
value common stock. A total of 3,452,500 units were placed, each consisting of
one share of common stock and one warrant. Subscribers purchased each unit for
$0.40 and are entitled to exercise warrant rights to purchase one share of the
common stock of the company at a purchase price of $.0.50 per share for a five
year period on or after September 1, 2002 and prior to September 1, 2007. The
Company received a total of $1,381,000 from this private placement. The Company
has committed to register the above underlying shares in a registration
statement with the Securities and Exchange Commission within 90 days of
completion of the offering.
Note 4 - Stock Options
During the first six months of 2002, the Company granted options to purchase
1,099,500 shares at exercise- prices of $.59 to $.94 per share to current
employees and directors and consultants of the Company, under the Company's 1999
Stock Option Plan. During the first six months of 2002, 315,000 stock options
were exercised.
Note 5 - Related Party Transactions
The Company received advances from a related party in 2001 that totaled $166,000
at December 31, 2001. The entire amount was repaid during February 2002.
The Company has also entered into transactions and agreements with Wellpoint
Health Networks, Inc., in which a member of the Company's audit committee is a
related party. (See Note 3, Warrants and Convertible Loan.)
Note 6 - Litigation
August 7, 2001, a former officer of the Company filed an action, entitled Barry
J. McDonald v. Medix Resources, Inc., f/k/a International Nursing Services,
Inc., and John Yeros, CN 01CV2119, in the District Court of Arapahoe County,
Colorado, against the Company and its former President and CEO. The plaintiff
alleged (1) breach of an employment agreement, a stock option agreement and the
related stock option plan, (2) a duty of good faith and fair dealing, and (3)
violation of the Colorado Wage Claim Act. On August 13, 2002, we reached an
agreement in principal with the plaintiff to settle the litigation by paying
plaintiff $25,000 on or before October 1, 2002, with no admission of liability
on our part. This settlement is subject to the negotiation and execution of a
final settlement agreement.
On December 17, 2001, Vision Management Consulting, L.L.C., filed suit against
us in the Superior Court of New Jersey, Law Division - Essex County, in an
action entitled Vision Management Consulting, L.L.C. v. Medix Resources, Inc.,
Docket No. ESX-L-11438-01. The complaint filed by Vision alleged breach of
contract, unjust enrichment, breach of the duty of good faith and fair dealing
and misrepresentation on the part of Medix in connection with our performance
under a negotiated settlement agreement which we had entered into to resolve
certain claims that existed between the parties and that arose out of the
termination of operations of our Automated Design Concepts division earlier in
2001. On August 12, 2002, we reached an agreement in principal with Vision to
settle this litigation by payment from us to Vision of $55,000, to be paid over
the next three months, with no admission of liability on our part. This
settlement is subject to the negotiation and execution of a final settlement
agreement.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are an information technology company headquartered in New York City, with
offices in Agoura Hills, California, Greenwood Village, Colorado and Marietta,
Georgia. We specialize in the development, marketing and management of
connectivity solutions for clinical and business transactions within the
healthcare industry Through our wholly owned subsidiary, Cymedix Lynx
Corporation, a Colorado corporation, we have developed Cymedix(R), a unique
healthcare communication technology product. Created by a team of healthcare
professionals, Cymedix software provides healthcare institutions, such as health
plans, insurers and hospitals, as well as practicing physicians, with a set of
non-invasive technology tools to enable Internet-based health care transactions
among all parties.
Implementation of the Cymedix(R)products suite promises to speed and improve the
efficacy of daily interactions between health caregivers and their staffs, other
ancillary providers (such as labs or pharmacy benefit managers), insurance
companies, hospitals, Integrated Delivery Networks (IDNs) and Health Management
Organizations (HMOs). We believe that the market for robust and practical
healthcare solutions will grow rapidly, and that segment growth will continue to
accelerate as the joined emphases of consumer choice, quality, administrative
service and cost containment ratchets up demand for ever more efficient and
user-friendly methods of delivering quality healthcare.
Forward-Looking Statements and Associated Risks
This Report contains forward-looking statements, which mean that such statements
relate to events or transactions that have not yet occurred, our expectations or
estimates for our future operations and economic performance, our growth
strategies or business plans or other events that have not yet occurred. Such
statements can be identified by the use of forward-looking terminology such as
"might," "may," "will," "could," "expect," "anticipate," "estimate," "likely,"
"believe," or "continue" or the negative thereof or other variations thereon or
comparable terminology. The following paragraphs contain discussions of
important factors that should be considered by prospective investors for their
potential impact on forward-looking statements included in this Report. These
important factors, among others, may cause actual results to differ materially
and adversely from the results expressed or implied by the forward-looking
statements.
We have reported net losses of ($10,636,000), ($5,415,000) and ($4,847,000) for
the years ended December 31, 2001, 2000 and 1999, respectively. At June 30, 2002
we had an accumulated deficit of ($36,925,000) and a negative net working
capital deficit of $(1,362,000). These losses and negative operating cash flow
have caused our accountants to include a "going concern" qualification in their
report in connection with their audit of our financial statements for the year
ended December 31, 2001.
We expect to continue to experience losses, in the near term, as our
connectivity products are not yet deployed in full-scale transaction production
and therefore are not generating significant revenue. Working capital is
required to support the ongoing development and marketing of the
Cymedix(R)service products until such time as revenue generation can support the
Company financially. To address this need, we are presently in negotiations with
institutional sources regarding debt and equity instruments to fund the Company.
While there can be no assurance that additional investments or financings will
be available to us as needed, management fully expects to conclude the necessary
financing in the near term. Failure to obtain such capital on a timely basis
could result in lost business opportunities, the sale of the Cymedix(R)business
at a distressed price or the financial failure of our Company.
We have recently entered into a secured financing arrangement. The use of
secured borrowings increases the risk of loss of the assets used to secure the
borrowing. If an event of default occurs under the security agreement, the
lender will be able to foreclose on the assets used to secure the borrowing and
sell those assets to the highest bidder. In addition, it is generally believed
that foreclosure sales, which are "distress sales", will not maximize the
proceeds that are paid for the assets being sold. The loan we entered into is
secured by the grant of a security interest in all Medix's intellectual
property, including its patent, copyrights and trademarks. While Medix can cure
a payment default by the forced conversion of the loan into its common stock, a
bankruptcy or similar event of default will trigger the foreclosure provision of
the security agreement.
We are still in the process of gaining experience in marketing technology-based
service products, providing support services, evaluating demand for products,
financing a technology business and dealing with government regulation of
various products. While we are putting together a team of experienced
executives, they have come from different backgrounds and may require some time
to develop an efficient operating structure and corporate culture for our
company. We believe our structure of multiple offices serves our customers well,
but it does present an additional challenge in building our corporate culture
and operating structure.
Our products are in the integration and deployment stages, and have proven their
effectiveness with some sponsors. We have not yet proven our technology with a
significant number of physicians. As a developer of service products, we will be
required to anticipate and adapt to evolving industry standards and new
technological developments. The market for our connectivity products and
services is characterized by continued and rapid technological advances in both
hardware and software development, requiring ongoing expenditures for research
and development, and timely introduction of new products and enhancements to
existing products. The establishment of standards is largely a function of user
acceptance. Therefore, such standards are subject to change. Our future success,
if any, will depend in part upon our ability to enhance existing products, to
respond effectively to technology changes, and to introduce new products and
technologies to meet the evolving needs of its clients in the healthcare
information systems market.
The success of our products and services in generating revenue may be subject to
the quality and completeness of the data that is generated and stored by the
physician or other healthcare professional and entered into our
interconnectivity systems, including the failure to input appropriate or
accurate information. Failure or unwillingness by the healthcare professional to
accommodate the required information quality may result in the payor refusing to
pay Medix for its services.
The introduction of connectivity products in that market has been slow due to
the large number of small practitioners who are resistant to change, as well as
the financial investment or workflow interruptions associated with change,
particularly in a period of rising pressure to reduce costs in the market. We
are currently devoting significant resources toward the development of products.
There can be no assurance that we will successfully complete the development of
these products in a timely fashion or that our current or future products will
satisfy the needs of the healthcare information systems market. Further, there
can be no assurance that products or technologies developed by others will not
adversely affect our competitive position or render our products or technologies
noncompetitive or obsolete.
Certain of our products provide applications that relate to patient medication
histories and treatment plans. Any failure by our products to provide accurate,
secure and timely information could result in product liability claims against
us by our clients or their affiliates or patients. We maintain insurance that we
believe currently is adequate to protect against claims associated with the use
of our products, but there can be no assurance that our insurance coverage would
adequately cover any claim asserted against us. The limits of that coverage are
$2,000,000 in the aggregate and $1,000,000 per occurrence. A successful claim
brought against us in excess of our insurance coverage could have a material
adverse effect on our results of operations, financial condition or business.
Even unsuccessful claims could result in the expenditure of funds in litigation,
as well as diversion of management time and resources.
We have been granted certain patent rights, trademarks and copyrights relating
to its software business. However, patent and intellectual property legal issues
for software programs, such as the Cymedix products, are complex and currently
evolving. Since patent applications are secret until patents are issued, in the
United States, or published, in other countries, we cannot be sure that we are
first to file any patent application. In addition, there can be no assurance
that competitors, many of which have far greater resources than we do, will not
apply for and obtain patents that will interfere with our ability to develop or
market product ideas that we have originated. Further, the laws of certain
foreign countries do not provide the protection to intellectual property that is
provided in the United States, and may limit our ability to market our products
overseas. We cannot give any assurance that the scope of the rights we have are
broad enough to fully protect our Cymedix software from infringement.
Litigation or regulatory proceedings may be necessary to protect our
intellectual property rights, such as the scope of our patent. In fact, the
computer software industry in general is characterized by substantial
litigation. Such litigation and regulatory proceedings are very expensive and
could be a significant drain on our resources and divert resources from product
development. There is no assurance that we will have the financial resources to
defend our patent rights or other intellectual property from infringement or
claims of invalidity. We have been notified by a party that it believes our
pharmacy product may infringe on patents that it holds. We have retained patent
counsel who made an investigation and determined, in its opinion, that our
pharmacy product does not infringe on the identified patent. We have responded
to the initial notice based on our counsel's opinion. At this time, no legal
action has been instituted.
We also rely upon unpatented proprietary technology and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to or disclose
our proprietary technology or that we can meaningfully protect our rights in
such unpatented proprietary technology. We will use our best efforts to protect
such information and techniques, however, no assurance can be given that such
efforts will be successful. The failure to protect our intellectual property
could cause us to lose substantial revenues and to fail to reach our financial
potential over the long term.
The healthcare and medical services industry in the United States is in a period
of rapid change and uncertainty. Governmental programs have been proposed, and
some adopted, from time to time, to reform various aspects of the U.S.
healthcare delivery system. Some of these programs contain proposals to increase
government involvement in healthcare, lower reimbursement rates and otherwise
change the operating environment for our customers. Particularly, HIPAA and the
regulations that are being promulgated thereunder are causing the healthcare
industry to change its procedures and incur substantial cost in doing so.
Although we expect these regulations to have the beneficial effect of spurring
adoption of our software products, we cannot predict with any certainty what
impact, if any, these and future healthcare reforms might have on our software
business.
As of August 10, 2002, we had 62,923,624 shares of common stock outstanding. As
of that date, approximately 28,928,312 shares were issuable upon the exercise of
outstanding options, warrants or other rights, and the conversion of preferred
stock. Most of these shares will be immediately saleable upon exercise or
conversion under registration statements we have filed with the SEC. The
exercise prices of options, warrants or other rights to acquire common stock
presently outstanding range from $0.19 per share to $4.97 per share. During the
respective terms of the outstanding options, warrants, preferred stock and other
outstanding derivative securities, the holders are given the opportunity to
profit from a rise in the market price of the common stock, and the exercise of
any options, warrants or other rights may dilute the book value per share of the
common stock and put downward pressure on the price of the common stock. The
existence of the options, conversion rights, or any outstanding warrants may
adversely affect the terms on which we may obtain additional equity financing.
Moreover, the holders of such securities are likely to exercise their rights to
acquire common stock at a time when we would otherwise be able to obtain capital
on terms more favorable than could be obtained through the exercise or
conversion of such securities. Any agreement to sell, or convert debt or equity
securities into, common stock at a future date and at a price based on the then
current market price will provide an incentive to the investor or third parties
to sell the common stock short to decrease the price and increase the number of
shares they may receive in a future purchase, whether directly from us or in the
market. Both our equity line of credit was priced and our outstanding $1,000,000
convertible promissory note is priced at a discount to the market price at the
time of a future draw or conversion.
As with any business, growth in absolute amounts of selling, general and
administrative expenses or the occurrence of extraordinary events could cause
actual results to vary materially and adversely from the results contemplated by
the forward-looking statements. Budgeting and other management decisions are
subjective in many respects and thus susceptible to incorrect decisions and
periodic revisions based on actual experience and business developments, the
impact of which may cause us to alter our marketing, capital expenditures or
other budgets, which may, in turn, affect our results of operation. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate, and therefore, there can be no assurance that the
results contemplated in the forward-looking statements will be realized.
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives or
plans for the Company will be achieved.
Results of Operation
Comparison of These Three Months Ended June 30, 2002 and June 30, 2001
Direct costs increased $150,000 from $28,000 at June 30, 2001 to $178,000 at
June 30, 2002. The increase reflects expenses incurred by the company for
licenses and service fees incurred in 2002 related to establishment of
infrastructure necessary to provide connectivity services to our customers.
Research and development costs decreased approximately $311,000 or 97% for the
three months ended June 30, 2001, to the three months ended June 30, 2002. This
decrease represents the Company's capitalization of software development costs
for products where the preliminary project stage has been completed, management
has committed to funding the project and completion and use of the software for
its intended use is probable.
Selling, general, and administrative expenses decreased approximately $29,000
from $1,107,000 for the three months ended June 30, 2001, to $1,078,000 for the
three months ended June 30, 2002.
Net loss from operations decreased approximately $190,000 from $1,455,000 for
the three months ended June 30, 2001, to $1,265,000 for the three months ended
June 30, 2002, due to all of the reasons discussed above.
Financing costs decreased in 2002 due to financing costs incurred in 2001of
$167,000 related to a $2.5 million convertible debt credit facility available
that did not exist in 2002.
Interest expense increased $35,000 from June 30, 2001 to June 30, 2002 due to
interest accrued on the convertible note issued by the company during February
2002.
Total net loss decreased approximately $326,000 from $1,635,000 for the three
months ended June 30, 2001, to $1,309,000 for the three months ended June 30,
2002, also due to the reasons discussed above.
Comparison of The Six Months Ended June 30, 2002 and June 30, 2001
Total revenues for the six months ended June 30, 2002, were $10,000 compared
with $30,000 for the six months ended June 30, 2001.
Direct costs increased $358,000 from $34,000 at June 30, 2001 to $392,000 at
June 30, 2002. The increase reflects expenses incurred by the company for
licenses and service fees incurred in 2002 related to establishment of
infrastructure necessary to provide connectivity services to our customers.
Research and development costs decreased approximately $219,000 or 37% for the
six months ended June 30, 2001, to the six months ended June 30, 2002. This
decrease represents the Company's capitalization of software development costs
for products where the preliminary project stage has been completed, management
has committed to funding the project and completion and use of the software for
its intended use is probable.
Selling, general, and administrative expenses decreased approximately $1,049,000
or 35% from $3,017,000 for the six months ended June 30, 2001, to $1,968,000 for
the six months ended June 30, 2002. The decrease is due to cost cutting measures
implemented by the company during 2001, which resulted in the following
decreases at June 30, 2002 compared to June 30, 2001:
o Salaries and wages, $(463,000).
o Travel and entertainment, $(27,000)
o Consulting fees, $(105,000)
o Legal fees, $(11,000)
o Black Scholes expense related to options and warrants granted to
non-employees for services, $(245,000).
o Settlements (of lawsuits), $(119,000)
o Goodwill amortization, $(78,000)
o Shareholder relations, $(58,000)
Those decreases were partially offset by the following increases:
o Rent expense, $151,000, due to terminating the New Jersey lease
with a penalty of $34,000 and increased rent for consolidating our
offices in New York City
o Insurance, $74,000, due to increased rates
Net loss from operations decreased approximately $890,000 from $3,620,000 for
the six months ended June 30, 2001, to $2,730,000 for the six months ended June
30, 2002, due to all of the reasons discussed above.
Financing costs decreased in 2002 due to financing costs incurred in 2001of
$236,000 related to a $2.5 million convertible debt credit facility available
that did not exist in 2002, offset by financing costs of $70,000 incurred in
February 2002 related to a $1,000,000 convertible debt facility, and $133,000 in
financing costs related to warrants issued to an officer of the company for
loans he had made to the company during 2001.
Interest expense increased $20,000 from June 30, 2001 to June 30, 2002 due to
interest accrued on the convertible note issued by the company during February
2002, as compared to interest accrued on the $2.5 million convertible debt
facility in 2001.
Net loss decreased approximately $908,000 from $3,894,000 for the six months
ended June 30, 2001, to $2,986,000 for the six months ended June 30, 2002, due
to the reasons discussed above.
Liquidity and Capital Resources
We have $281,000 in cash as of June 30, 2002 with net working capital deficit of
$(1,362,000) at June 30, 2002. During the six months ended June 30, 2002, net
cash used in operating activities was $2,580,000. During the six months ended
June 30, 2002, we raised $3,460,000 from the exercise of options and warrants,
and the issuance of common stock and issuance of convertible debt. The
additional cash generated allowed us to pay down outstanding accounts payable
outstanding at December 31, 2001. We have been delinquent, from time to time, in
the payment of our current obligations, including payments of withholding and
other tax obligations. From time to time, members of senior management have made
short-term loans to us to meet payroll obligations. However, there is no
commitment to continue that practice. As noted above, we are presently in
negotiations with institutional sources regarding debt and equity instruments to
fund the Company. While there can be no assurance that additional investments or
financings will be available to us as needed, management fully expects to
conclude the necessary financing in the near term. Failure to obtain such
capital on a timely basis could result in lost business opportunities, the sale
of the Cymedix(R)business at a distressed price or the financial failure of
Medix.
The Company entered into a secured convertible loan agreement with a Company,
dated February 19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint
Health Networks Inc. The loan becomes payable on February 19, 2003, if not
converted into our common stock. Interest is at a floating rate of 300 basis
points over prime, as it is adjusted. Conversion into common stock is at the
option of either WellPoint or Medix at a contingent conversion price. The loan
is secured by the grant of a security interest in all Medix's intellectual
property, including its patent, copyrights and trademarks. See footnote 3 to the
Financial Statements.
During April 2002, the Company initiated a private placement of its $.001 par
value common stock. A total of 3,452,500 units were placed through May 14, 2002,
each consisting of one share of common stock and one warrant. Subscribers
purchased each unit for $0.40 and are entitled to exercise warrant rights to
purchase one share of the common stock of the company at a purchase price of
$.0.50 per share for a five year period on or after September 1, 2002 and prior
to September 1, 2007. The Company received a total of $1,381,000 from this
private placement. The Company has committed to register the above underlying
shares in a registration statement with the Securities and Exchange Commission
within 90 days of completion of the offering.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 17, 2001, Vision Management Consulting, L.L.C., filed suit against
us in the Superior Court of New Jersey, Law Division - Essex County, in an
action entitled Vision Management Consulting, L.L.C. v. Medix Resources, Inc.,
Docket No. ESX-L-11438-01. The complaint filed by Vision alleged breach of
contract, unjust enrichment, breach of the duty of good faith and fair dealing
and misrepresentation on the part of Medix in connection with our performance
under a negotiated settlement agreement which we had entered into to resolve
certain claims that existed between the parties and that arose out of the
termination of operations of our Automated Design Concepts division earlier in
2001. On August 12, 2002, we reached an agreement in principal with Vision to
settle this litigation by payment from us to Vision of $55,000, to be paid over
the next three months, with no admission of liability on our part. This
settlement is subject to the negotiation and execution of a final settlement
agreement.
From time to time, the Company is involved in claims and litigation that arise
out of the normal course of business. Currently, other than as discussed above,
there are no pending matters that in Management's judgment might be considered
potentially material to us. Management does not believe that any of the
litigation described above will have a material adverse effect on the Company.
Item 2. Changes in Securities and Use of Proceeds
Set forth below are the unregistered sales of securities by the Company for the
quarter reported on. See Note 6 to the unaudited consolidated financial
statements elsewhere herein for a description of the terms of the Units of
Preferred Stock and warrants.
Security Number of Exemption
Issued Date Shares Consideration Purchasers Claimed
- ------------ ---------- --------- ------------- -------------- ------------
Common Stock April 2002 234,608 $88,956 Cornell Section 4(2);
Capital Rule 506 of
partners, LP Regulation D
and Dutchess
Private
Equities Fund,
LP
Common Stock May 2002 3,452,500 $1,381,000 A total of 47 Section 4(2);
individual Rule 506 of
investors Regulation D
Common Stock April 2002 100,000 $25,000 Option exercise Section 4(2)
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Included as exhibits are the items listed on the Exhibit
Index. The Registrant will furnish a copy of any of the
exhibits listed below upon payment of $5.00 per exhibit to
cover the costs to the Registrant of furnishing such exhibit.
10.1 Binding Letter of Intent for Pilot and Production
Programs, dated September 8, 1999 between Cymedix and
Professional Claims Services, Inc. (d/b/a WellPoint Pharmacy
management).
10.2 Pilot Agreement, dated as of December 28, 1999 between
Cymedix and Professional Claims Services, Inc. (d/b/a WellPoint
Pharmacy Management, Inc).
10.3 Employment Agreement between the Company and Mr. Mark W.
Lerner, dated as of July 1, 2002.
10.4 Employment Agreement between the Company and Patricia A.
Minicucci dated as of February 15, 2002.
10.5 Employment Agreement between the Company and Louis E.
Hyman dated as of May 14, 2002.
10.6 Employment Agreement between the Company and Bryan R.
Ellacott dated as of March 1, 2002.
99.1 Certification by John R. Prufeta, President and CEO under
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification by Mark W. Lerner, Executive Vice President
and CFO under Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K during the quarter reported on:
1) Form 8-K, filed with the Commission on April 12, 2002, reporting in Item
5 a press release announcing that its latest version of its Cymedix(R)
product suite, Cymedix III, is now complete, and is available to be
deployed in target markets.
2) Form 8-K, filed with the Commission on May 24, 2002, reporting in Item 5
a press release announcing the completion of a private placement of
securities raising $1,381,000.
3) Form 8-K, filed with the Commission on June 4, 2002, reporting in Item 5
a press release announcing the formal launch of market activities in the
state of Georgia.
4) Form 8-K, filed with the Commission on June 14, 2002, reporting in Item
5 a press release announcing that the Company would provide a telephonic
progress report.
5) Form 8-K, filed with the Commission on June 14, 2002, reporting in Item
5 a press release announcing an agreement to expand its relationship with
Express Scripts, Inc., one of the nation's leading pharmacy benefit
managers.
6) Form 8-K, filed with the Commission on June 26, 2002, reporting in Item
5 a press release announcing that effective July 1, 2002, Mark W. Lerner
will replace Gary L. Smith as the Company's Chief Financial Officer and
Secretary.
SIGNATURES
In accordance with 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.
Dated: August 19, 2002
MEDIX RESOURCES, INC.
(Registrant)
/s/ Mark W. Lerner
Mark W. Lerner
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)