form_s3-021203
As filed with the Securities and Exchange Commission on February 12, 2003
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEDIX RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-1123311
(I.R.S. Employer Identification Number)
The Graybar Building
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Mark W. Lerner
The Graybar Building
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With Copies to:
Peter H. Ehrenberg, Esq.
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
(973) 597-2500
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to a dividend or interest reinvestment plans, please check the following box:
[_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registrations statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------
-------------------------------------------------------------------------------------
Title of each Proposed Proposed
class of Amount to be maximum maximum Amount of
securities to be registered offering price aggregate registration fee
registered (2)(3) per unit (1) offering price
(1)
-------------------------------------------------------------------------------------
Shares of common 22,262,708 $.60 $13,357,625 $1,229
stock, par value
$.001 per share
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(1) The offering price is being estimated solely for the purpose of calculating
the registration fee. In accordance with Rule 457(c), the price shown is based
upon the average of the high and low prices of Medix's common stock on February
10, 2003, as reported on the American Stock Exchange.
(2) Includes 12,111,458 shares of common stock covered by warrants issued (i) in
private placements and (ii) as fees to finders in private placements.
(3) Pursuant to Rule 416 under the Securities Act, such number of shares of
common stock registered hereby shall include an indeterminate number of shares
of common stock that may be issued in connection with a stock split, stock
dividend, recapitalization or similar event.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Subject to completion, dated February 12, 2003.
PROSPECTUS
MEDIX RESOURCES, INC.
22,262,708 Shares of Common Stock
The stockholders of Medix Resources, Inc. named herein will have the right to
offer and sell up to an aggregate of 22,262,708 shares of our common stock under
this prospectus. The shares were purchased from Medix in private placements or
are covered by warrants that were issued (i) in private placements or (ii) as
fees to finders in private placements.
Medix will not receive directly any of the proceeds from the sale of these
shares by the selling stockholders. However, Medix will receive the proceeds
from the exercise of warrants to purchase some of the shares to be sold
hereunder. See "Use of Proceeds". Medix will pay the expenses of registration of
these shares.
Medix's common stock is traded on the American Stock Exchange under the symbol
"MXR". On February 10, 2003, the closing price of our common stock was reported
as $0.59.
The securities offered hereby involve a high degree of risk. See "Risk Factors"
beginning on page 3 for certain risks that should be considered by prospective
purchasers of the securities offered hereby.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February [__], 2003
The information in this prospectus is not complete and may be changed. No
dealer, salesman or other person has been authorized to give any information or
to make any representation not contained in or incorporated by reference in this
prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by us, the selling stockholders or any
other person. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such an offer in such
jurisdiction. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in our affairs since such date.
TABLE OF CONTENTS
SUMMARY
RISK FACTORS
FORWARD LOOKING STATEMENTS
THE COMPANY
USE OF PROCEEDS
SELLING STOCKHOLDERS
DESCRIPTION OF THE SECURITIES
PLAN OF DISTRIBUTION
INDEMNIFICATION OF OFFICERS AND DIRECTORS
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
LEGAL MATTERS
EXPERTS
FINANCIAL STATEMENTS
SUMMARY
The following summary highlights some information from this prospectus. It is
not complete and does not contain all of the information that you should
consider before making an investment decision. You should read this entire
prospectus, including the "Risk Factors" section and the financial statements,
related notes and the other more detailed information appearing elsewhere or
incorporated by reference in this prospectus. Unless otherwise indicated, "we",
"us", "our" and similar terms, as well as references to the "Company" and
"Medix", refer to Medix Resources, Inc. and its subsidiaries and not to the
selling stockholders. All industry statistics incorporated by reference in this
prospectus were obtained from data prepared or provided by recognized industry
sources.
This prospectus covers the offering and sale of 22,262,708 shares of our common
stock to the public by certain selling stockholders listed under the heading
selling stockholders in this prospectus, of which 10,151,250 shares are issued
and outstanding and 12,111,458 shares are covered by warrants held by the
selling stockholders. See "Selling Stockholders". The selling stockholders
purchased the shares of common stock and the warrants covering shares of common
stock from us in one or more private placements or received warrants as fees for
serving as finders in private placements. We received aggregate proceeds in
those private placements of $4,060,500. As part of the private placements, we
agreed to register the shares of common stock issued or issuable pursuant to
warrants under the Securities Act of 1933, as amended. We also agreed to
register the shares of common stock covered by warrants issued to finders as
fees in private placements. As of December 31, 2002 we had 77,160,815 shares of
our common stock outstanding, and approximately 33,153,728 shares were issuable
upon the exercise of outstanding options, warrants or other rights, and the
conversion of outstanding preferred stock.
We develop, distribute and deploy connectivity products for Internet-based
communications and information management by medical service providers. We have
nominal revenues from current operations and are funding the development and
deployment of our products through the sales of our securities. See "The
Company" and "Risk Factors".
Because of our continuing losses, and the lack of certain sources of capital to
fund our development of connectivity products, our independent accountants
stated in their audit report on our audited financial statements for the year
ended December 31, 2001 there is substantial doubt about the Company's ability
to continue as a going concern. The "going concern" explanatory paragraph
signifies that significant questions exist about our ability to continue in
business. See "Risk Factors".
On December 23, 2002, we executed a definitive merger agreement with
PocketScript, LLC, a private company developing and marketing software products
similar to our products. Under the agreement, PocketScript will be merged into
our newly formed wholly owned subsidiary. At closing, we will issue 12 million
shares of common stock to PocketScript's owners, subject to a downward
adjustment if a certain closing value is not realized and for any liabilities
paid or assumed by us. In addition, we will issue up to $4 million in additional
common stock if certain business milestones are satisfied within a six-month to
one-year period after the closing of the merger. The sale of any stock that we
issue to PocketScript's owners would be restricted for periods from 3 to 24
months after closing.
Our principal executive office is located at 420 Lexington Avenue, Suite 1830,
New York, New York 10170, and its telephone number is (212) 697-2509.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and other information in this
prospectus before investing in our common stock. The trading price of our common
stock could decline due to any of these risks, and you may lose all or part of
your investment.
Risk Factors Generally Relating to Medix and/or PocketScript:
Our continuing losses endanger our viability as a going-concern and caused our
accountants to issue a "going concern" explanatory paragraph in their
independent auditors' report.
We 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, and a net loss of
$4,718,000 for the nine months ended September 30, 2002. At September 30, 2002,
we had an accumulated deficit of $38,777,000 and a negative working capital of
$1,849,000. Our Cymedix(R) products are in the development and early deployment
stage and have not generated any significant revenue to date. We are funding our
operations through the sale of our securities. Our independent accountants have
included an explanatory paragraph in their indpendent auditors' reports on our
audited December 31, 2000 and 2001 financial statements. See our Form 10-K, as
amended, for the fiscal year ended December 31, 2001. One of the reasons that
PocketScript agreed to enter into the merger agreement was that management of
PocketScript was concerned that if PocketScript continued to operate
independently, its needs for working capital and its failure to reach
profitability were leading to substantial liquidity problems. Thus, the merger
with PocketScript is not expected to ease our financial concerns, at least in
the short term.
Our need for additional financing is acute and failure to obtain it could lead
to the financial failure of our company.
We expect to continue to experience losses, in the near term, until such time as
our Cymedix(R) products and the PocketScript products can be successfully
deployed with physicians and produce revenue. The continuing development,
marketing and deployment of the Cymedix connectivity products and the
PocketScript products will depend upon our ability to obtain additional
financing. Our Cymedix(R) products and the PocketScript products are in the
development and early deployment stage and have not generated any significant
revenue to date. We are funding our operations now, and if we acquire
PocketScript, we will be funding the operations of our combined enterprise,
through the sale of our securities. There can be no assurance that additional
investments or financings will be available to us as needed to support the
development and deployment of Cymedix(R) products and PocketScript products.
Failure to obtain such capital on a timely basis could result in lost business
opportunities, the sale of the Cymedix business or PocketScript business at a
distressed price or the financial failure of our company.
Medix has frequent cash flow problems that often cause us to be delinquent in
making payments to our vendors and other creditors, which may cause damage to
our business relationships and cause us to incur additional expenses in the
payment of late charges and penalties.
During 2002, from time to time, our lack of cash flow caused us to delay payment
of our obligations as they came due in the ordinary of its business. In some
cases, we were delinquent in making payments by the legally required due dates.
At our four office locations, we had 48 monthly rental payments due in the
aggregate during 2002. Two of those payments were late. Such payments were paid
within 30 days of their due date. All payments plus any required penalties were
ultimately paid with respect to our 2002 obligations. We had 26 Federal
withholding and other payment due dates. Of those, three due dates were missed.
The resulting delinquencies ranged from one to ten days before the required
payments were made. We paid the resulting penalties as they were billed. We had
state withholding obligations in five states, Colorado, California, Georgia, New
Jersey and New York. Although we were not late in making withholding payments in
those five states during 2002, we have been late in prior periods. Similarly,
although we were not late in making deposits of our employees' 401(k)
contributions during 2002, we have been late in making such deposits in the
past. During 2003, we may be delinquent from time to time in meeting our
obligations as they become due.
We discontinued active development of our Cymedix(R) products as an independent
product line in anticipation of the acquisition of the PocketScript products,
and the failure to consummate the merger with PocketScript could impair our
ability to compete.
In anticipation of the merger with PocketScript, we discontinued the development
of our Cymedix(R) products as an independent product line because we plan to
incorporate the Cymedix(R) product technology with the PocketScript technology
following its acquisition. We believe that we can market and sell the combined
technology more effectively than the Cymedix(R) products alone. However, if the
Pocketscript merger does not occur, the development of the Cymedix(R) products
for commercial purposes will have been delayed for several months and we may be
unable to then market and develop the Cymedix(R) products by themselves in a
competitive manner.
We are a development stage company, which means our products and services have
not yet proved themselves commercially viable and therefore our future is
uncertain.
o We develop products for Internet-based communications and information
management for medical service providers, through our wholly owned
subsidiary, Cymedix Lynx Corporation. Our Cymedix(R) products, as well as
PocketScript's products, are still in the development and early deployment
stage and have not generated any significant revenue to date. We are
funding our operations through the sale of our securities. Our ability to
continue to sell our securities cannot be assured.
o We are still in the process of gaining experience in marketing physician
connectivity products, providing support services, evaluating demand for
products, financing a technology business and dealing with government
regulation of health information technology 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 rely on healthcare professionals for the quality of the information that is
transmitted through our interconnectivity systems, and we may not be paid for
our services by third-party payors if that quality does not meet certain
standards.
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.
Our market, healthcare services, is rapidly changing and the introduction of
Internet connectivity services and products into that market has been slow,
which may cause us to be unable to develop a profitable market for our services
and products.
o As a developer of connectivity technology products, we will be required to
anticipate and adapt to evolving industry standards and new technological
developments. The market for our products and PocketScript's products 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 that are functional
and meet the evolving needs of our clients and users in the healthcare
information systems market.
o The introduction of physician connectivity products in our market has been
slow due, in part, to the large number of small practitioners who are
resistant to change and the implicit costs associated with change,
particularly in a period of rising pressure to reduce costs in the market.
In addition, the integration of processes and procedures with several
payors and management intermediaries in a market area has taken more time
than anticipated. The resulting delays continue to prevent the receipt of
significant transaction fees and cause us to continue to raise money by the
sale of our securities to finance our operations.
o Our early-stage market approach concentrated product distribution efforts
in a single market (Atlanta, Georgia), thereby amplifying the effect of
localized market restrictions on our prospects, and delaying large-scale
distribution of our products. While we intend to mitigate these local
factors with an aggressive strategy to develop alternate distribution
channels in multiple markets, there can be no assurance of near term
success.
o We cannot assure you that we will successfully complete the development of
the Cymedix(R) products or PocketScript's products in a timely fashion or
that our current or future products will satisfy the needs of the
healthcare information systems market. Further, we cannot assure you that
products or technologies developed by others will not adversely affect our
competitive position or render our products or technologies noncompetitive
or obsolete.
As a provider of medical connectivity products and services, we may become
liable for product liability claims that could have a materially adverse impact
on our financial condition.
Certain of our products and PocketScript's products provide applications that
relate to patient medical 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 are seeking product liability coverage, which may be prohibitive in
cost. There can be no assurance that we will be able to obtain such coverage at
an acceptable cost or that our insurance coverage would adequately cover any
claim asserted against us. Such a claim could be in excess of the limits imposed
by any policy we might be able to obtain. A successful claim brought against us
in excess of any insurance coverage we might have 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.
Our industry, healthcare, continually experiences rapid change and uncertainty
that could result in issues for our business planning or operations that could
severely impact on our ability to become profitable.
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 physician users and customers.
Particularly, the Health Insurance Portability and Accountability Act of 1996,
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
business.
We and PocketScript rely on intellectual property rights, such as copyrights and
trademarks, and unprotected propriety technology in our business operations and
to create value in our companies; however, protecting intellectual property
frequently requires litigation and close legal monitoring and may adversely
impact our ability to become profitable.
o Our wholly owned subsidiary, Cymedix Lynx Corporation, has certain
intellectual property relating to its software business. These rights have
been assigned by our subsidiary to the parent company, Medix Resources. The
intellectual property legal issues for software programs, such as the
Cymedix(R) products and such as PocketScript's technology, 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 the first to file any patent application. In addition,
we cannot assure you 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 or
PocketScript 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. While we have no prospects for marketing or operations
in foreign countries at this time, future opportunities for growth in
foreign markets, for that reason, may be limited. We cannot give any
assurance that the scope of the rights that we have been granted are broad
enough to fully protect our Cymedix(R) software or PocketScript's software
from infringement.
o Litigation or regulatory proceedings may be necessary to protect our
intellectual property rights, such as the scope of our patent rights. In
fact, the information technology and healthcare industries in general are
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. A party has notified us that it believes our pharmacy product
may infringe on patents that it holds. We have retained patent counsel who
has made a preliminary investigation and determined that our product does
not infringe on the identified patents. At this time no legal action has
been instituted.
o We and PocketScript also rely upon unprotected 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 commercial efforts to protect such
information and techniques; however, we cannot assure you 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.
Because our business is highly competitive and there are many competitors who
are financially stronger than we are, we are at risk of being outperformed in
staffing, marketing, product development and customer services, which could
severely limit our ability to become profitable.
o eHealth Services. Competition can be expected to emerge from established
healthcare information vendors and established or new Internet related
vendors. The most likely competitors are companies with a focus on clinical
information systems and enterprises with an Internet commerce or electronic
network focus. Many of these competitors will have access to substantially
greater amounts of capital resources than we have access to, for the
financing of technical, manufacturing and marketing efforts. Frequently,
these competitors will have affiliations with major medical product or
software development companies, who may assist in the financing of such
competitor's product development. We will seek to raise capital to develop
Cymedix(R) products and PocketScript products in a timely manner, however,
so long as our operations remain under-funded, as they now are, we will be
at a competitive disadvantage.
o Personnel. The success of the development, distribution and deployment of
our Cymedix(R) products and the PocketScript products is dependent to a
significant degree on our key management and technical personnel. We
believe that our and PocketScript's success will also depend upon our
ability to attract, motivate and retain highly skilled, managerial, sales
and marketing, and technical personnel, including software programmers and
systems architects skilled in the computer languages in which our
Cymedix(R) products and PocketScript's products operate. Competition for
such personnel in the software and information services industries is
intense. The loss of key personnel, or the inability to hire or retain
qualified personnel, could have a material adverse effect on our results of
operations, financial condition or business and on the success of our
proposed acquisition of PocketScript.
We have relied on the private placement exemption to raise substantial amounts
of capital, and could suffer substantial losses if that exemption was determined
not to have been properly relied upon.
We have raised substantial amounts of capital in private placements from time to
time. The securities offered in such private placements were not registered with
the SEC or any state agency in reliance upon exemptions from such registration
requirements. Such exemptions are highly technical in nature and if we
inadvertently failed to comply with the requirements of any of such exemptive
provisions, investors would have the right to rescind their purchase of our
securities or sue for damages. If one or more investors were to successfully
seek such rescission or institute any such suit, we could face severe financial
demands that could materially and adversely affect our financial position.
The impact of shares of our common stock that may become available for sale in
the future may result in the market price of our stock being depressed.
As of December 31, 2002, we had 77,160,815 shares of common stock outstanding.
As of that date approximately 33,177,353 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 $.25 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 our
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.
Because of dilution to our outstanding common stock from the below market
pricing features of financings that are available to us, the market price of our
stock may be depressed.
Financings that may be available to us under current market conditions,
frequently involve below market current sales, as well as warrants or
convertible debt that require exercise or conversion prices that are calculated
in the future at a discount to the then market price of our common stock. 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. The issuance of our
common stock in connection with such exercise or conversion may result in
substantial dilution to the common stock holdings of other holders of our common
stock.
Because of market volatility in our stock price, investors may find that they
have a loss position if emergency sales become necessary.
Historically, our common stock has experienced significant price fluctuations.
One or more of the following factors influence these fluctuations:
o unfavorable announcements or press releases relating to the technology
sector;
o regulatory, legislative or other developments affecting our Company or the
health care industry generally;
o conversion of our preferred stock and convertible debt into common stock at
conversion rates based on current market prices or discounts to market
prices, of our common stock and exercise of options and warrants at below
current market prices;
o sales by those financing our Company through convertible securities which
have been registered with the SEC and may be sold into the public market
immediately upon receipt; and
o market conditions specific to technology and Internet companies, the health
care industry and general market conditions.
In addition, in recent years the stock market has experienced significant price
and volume fluctuations. These fluctuations, which are often unrelated to the
operating performance of specific companies, have had a substantial effect on
the market price for many health care related technology companies. Factors such
as those cited above, as well as other factors that may be unrelated to our
operating performance may adversely affect the price of our common stock.
The application of the "penny stock" rules to our common stock may depress the
market for our stock.
Trading of our common stock may be subject to the penny stock rules under the
Securities Exchange Act of 1934, as amended, unless an exemption from such rules
is available. Broker-dealers making a market in our common stock will be
required to provide disclosure to their customers regarding the risks associated
with our common stock, the suitability for the customer of an investment in our
common stock, the duties of the broker-dealer to the customer and information
regarding bid and asked prices for our common stock, and the amount and
description of any compensation the broker-dealer would receive in connection
with a transaction in our common stock. The application of these rules may
further result in fewer market makers making a market in our common stock and
further restrict the liquidity of our common stock.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future.
We have not had earnings, but if earnings were available, it is our general
policy to retain any earnings for use in our operation. Therefore, we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Any payment of cash dividends on our common stock in the future will be
dependent upon our financial condition, results of operations, current and
anticipated cash requirements, preferred rights of holders of preferred stock,
plans for expansion, as well as other factors that the Board of Directors deems
relevant. We anticipate that our future financing agreements will prohibit the
payment of common stock dividends without the prior written consent of those
providers.
Risks Relating to the PocketScript Merger and the Combination of Medix and
PocketScript:
The merger with PocketScript could affect Medix.
In deciding that the merger with PocketScript is in the best interests of Medix,
our board of directors considered the potential complementary effects of
combining Medix and PocketScript. However, the process of integrating separate
businesses, especially when they are as geographically separated as Medix,
headquartered in New York, and PocketScript, headquartered in Ohio, involves a
number of special risks, including:
o the possibility that the business cultures of the two companies may not
mesh;
o the possibility that management may be distracted from regular business
concerns by the need to integrate operations;
o unforeseen difficulties in integrating operations and systems;
o problems in retaining the employees of PocketScript;
o challenges in attracting customers; and
o potential adverse effects on operating results.
We may incur substantial costs in integrating PocketScript.
We expect to incur restructuring and integration costs from combining
PocketScript's operations with our operations. These costs may be substantial
and may include costs for employee severance, relocation and disposition of
excess equipment and other merger-related costs. We have not yet determined the
total amount of these costs.
There will be dilution to the holdings of our securityholders as a result of the
merger with PocketScript.
After the merger is completed, our existing securityholders will own a smaller
percentage of the combined company and its voting stock than they currently own.
Consequently, existing securityholders may be able to exercise less influence
over the management and policies of the combined company than they currently
exercise over Medix.
If Medix and PocketScript do not integrate their technology and operations
quickly and effectively, the potential benefits of the merger may not occur.
We cannot assure you that we will be able to integrate the two companies'
technology and operations quickly and smoothly. In order to obtain the benefits
of the merger, the companies must make PocketScript's technology and services
operate together with Medix's technology. We may be required to spend additional
time or money on integration, which would otherwise be spent on developing our
business. Our combined companies' business, financial condition and prospects
will be harmed if Medix and PocketScript do not integrate their operations and
technology smoothly or if management spends too much time on integration issues.
The merger may result in a loss of PocketScript employees.
The success of the combined company may depend upon the retention of
PocketScript executives and other key employees who are critical to the
continued design, development and support of PocketScript's products and
services. Despite our efforts to hire and retain quality employees, we might
lose some of PocketScript's key employees following the merger. Competition for
qualified management, engineering and technical employees in our industry is
intense. Medix and PocketScript may have different corporate cultures.
PocketScript employees may be unwilling to work for a larger, publicly traded
company instead of a smaller, start-up company. In addition, competitors may
recruit employees prior to the merger and during integration, as is common in
high technology mergers. As a result, employees of PocketScript or the combined
companies could leave with little or no prior notice. We cannot assure you that
the combined companies will be able to attract, retain and integrate employees
to develop and use the PocketScript technology following the merger.
FORWARD-LOOKING STATEMENTS
Certain information contained in this prospectus and the documents incorporated
by reference into this prospectus include forward-looking statements (as defined
in Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act), which mean that they relate to events or transactions that have not yet
occurred, our expectations or estimates for our future operations, our growth
strategies or business plans or other facts 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 above risk factors contain discussions of important
factors that should be considered by prospective investors for their potential
impact on forward-looking statements included in this prospectus and in the
documents incorporated by reference into this prospectus. 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.
THE COMPANY
General
In 2002, we introduced our next generation of proprietary, point-of-care
products, Cymedix(R) III. This improved suite of connectivity products is based
upon a device-neutral architecture that leverages proven workstation, handheld
and wireless technologies. The marketing and development of the combined
PocketScript-Cymedix(R) suite of products is our sole business at this time, and
a substantial portion of our net operating loss is due to marketing and
development efforts. We are funding such expenses as well as our administrative
expenses through the sale of our securities. We have no significant long-term
debt financing available to us. When we entered into the merger agreement with
PocketScript, we discontinued the development of our Cymedix(R) products as an
independent product line because we plan to incorporate the Cymedix(R) product
technology with the PocketScript technology following its acquisition.
We acquired the Cymedix business in January of 1998. Cymedix has developed
Internet-based communications and information management products, which we have
begun marketing to medical professionals in selected regional markets. Growth of
the medical information management marketplace is being driven by the need to
share significant amounts of clinical and patient information among physicians,
their outpatient service providers, hospitals, insurance companies and managed
care organizations. We believe that this market is one of the fastest-growing
sectors in healthcare today. The Cymedix(R) connectivity products contain
elements that can be used to develop secure medical communications products that
make use of the Internet. Using the Cymedix(R) tools, medical professionals can
order, prescribe and access medical information from participating insurance
companies and managed care organizations, as well as from any participating
outpatient service provider, such as a laboratory. Currently we provide our
products to physician users at no charge, and collect transaction fees from
sponsoring payors whenever our products are used to provide services.
The products' relational database technologies provide user physicians with a
permanent, ongoing record of each patient's name, address, insurance or managed
care affiliation, referral status, medical history and an audit trail of past
encounters. Physicians are able to electronically check patient eligibility,
order medical laboratory procedures, receive and store test results and issue
new and renewal drug prescriptions, make medical referrals and request
authorizations.
Our principal executive office is located at The Graybar Building, 420 Lexington
Ave., Suite 1830, New York, New York 10170, and its telephone number is (212)
697-2509. We also have offices in Georgia and New Jersey.
USE OF PROCEEDS
The selling stockholders will receive the net proceeds from the sale of shares.
We will not receive any of the proceeds from any sale of the shares by the
selling stockholders. However, we will receive the proceeds from the exercise of
warrants to purchase certain of the shares offered hereunder. If all warrants
covered hereby are exercised, we would receive proceeds of $6,055,729. Any such
proceeds will be used for working capital purposes.
SELLING STOCKHOLDERS
The table below sets forth information as of February 11, 2003, with respect to
the selling stockholders, including names, holdings of shares of common stock
prior to the offering of the shares, including shares covered by warrants, the
number of shares being offered for each account, and the number and percentage
of shares of common stock to be owned by the selling stockholders immediately
following the sale of the shares, assuming all of the offered shares are sold.
The selling stockholders acquired the shares of common stock and warrants
covering shares of our common stock in private placement transactions or as fees
for serving as finders in connection with our private placements.
-------------------------------------------------------------------------------
Name of Selling Shares of Shares of Shares of Shares of Percentage
Stockholder Common Stock Common Common Common of Common
Beneficially Stock Stock Stock to Stock to be
Owned Before Covered By Being be Beneficially
the Warrants Offered(1) Beneficially Owned After
Offering(1) Owned the Offering
After the
Offering
-------------------------------------------------------------------------------
Aaron 1,000,000 500,000 1,000,000 0 -
Investments
-------------------------------------------------------------------------------
AIG DKR 500,000 250,000 500,000 0 -
Soundshore
Private
Investors
Holding Fund
Limited
-------------------------------------------------------------------------------
Alpha Capital AG 2,500,000 1,250,000 2,500,000 0 -
-------------------------------------------------------------------------------
Babbah, Kami 150,000 75,000 150,000 0 -
Ofir
-------------------------------------------------------------------------------
Bartran, 125,000 62,500 125,000 0 -
William D.
-------------------------------------------------------------------------------
Berardo, Thomas 20,000 10,000 20,000 0 -
& Patricia
-------------------------------------------------------------------------------
Berrey, Dan and 106,875 71,250 106,875 0 -
Fran
-------------------------------------------------------------------------------
BHNV Holdings 250,000 125,000 250,000 0 -
LLC
-------------------------------------------------------------------------------
Black Hills 1,398,625 623,000 1,148,625 250,000 -
Investment Corp.
-------------------------------------------------------------------------------
Blue Water 500,000 150,000 300,000 200,000 -
Trading, Inc.
-------------------------------------------------------------------------------
Bollander, 168,750 106,250 168,750 0 -
William P.
-------------------------------------------------------------------------------
Brelea 13,125 13,125 13,125 0 -
Ventures, LLC
-------------------------------------------------------------------------------
Brighton 30,625 30,625 30,625 0 -
Capital Ltd.
-------------------------------------------------------------------------------
Brown, Andrew 1,048,000 250,000 500,000 548,000 -
-------------------------------------------------------------------------------
Cavell 1,000,000 500,000 1,000,000 0 -
Investment Ltd.
-------------------------------------------------------------------------------
Eisenberg 500,000 250,000 500,000 0 -
Family
Foundation
-------------------------------------------------------------------------------
Excalibur 500,000 250,000 500,000 0 -
Limited
Partnership
-------------------------------------------------------------------------------
Frankson, Carl 100,000 50,000 100,000 0 -
-------------------------------------------------------------------------------
Geary Partners, 320,000 160,000 320,000 0 -
LP
-------------------------------------------------------------------------------
Intercoastal 152,425 152,425 152,425 0 -
Financial
Services Corp.
-------------------------------------------------------------------------------
Jeffries, 1,755,000 250,000 500,000 1,255,000 1.6%
Patrick
-------------------------------------------------------------------------------
Kassab, Marianne 80,000 40,000 80,000 0 -
-------------------------------------------------------------------------------
Legend Merchant 5,500 5,500 5,500 0 -
Group
-------------------------------------------------------------------------------
Lerner, Claire 25,000 12,500 25,000 0 -
-------------------------------------------------------------------------------
Lerner, Mark 184,375 25,000 50,000 134,375 -
-------------------------------------------------------------------------------
Levine, Beth 250,000 125,000 250,000 0 -
-------------------------------------------------------------------------------
Lousberg, Dean 250,000 62,500 125,000 125,000 -
K.
-------------------------------------------------------------------------------
Marjorie E. 125,000 62,500 125,000 0 -
Goddard TTEE
Marjorie E.
Goddard Rev,
TST DTD
November 5, 1999
-------------------------------------------------------------------------------
Markham 500,000 250,000 500,000 0 -
Holdings Limited
-------------------------------------------------------------------------------
Mayor & 276,500 276,500 276,500 0 -
Associates LLC
-------------------------------------------------------------------------------
McCullogh Jr., 375,000 187,500 375,000 0 -
Robert F.
-------------------------------------------------------------------------------
Meade Jr., 625,000 250,000 500,000 125,000 -
Thomas J.
-------------------------------------------------------------------------------
Merriman, 225,000 112,500 225,000 0 -
Jonathan
-------------------------------------------------------------------------------
Nordic, Gary E. 250,000 125,000 250,000 0 -
-------------------------------------------------------------------------------
Otape, LLC 750,000 375,000 750,000 0 -
-------------------------------------------------------------------------------
Palladino, 125,000 62,500 125,000 0 -
Giampiero
-------------------------------------------------------------------------------
Platinum 2,250,000 625,000 1,250,000 1,000,000 1.3%
Partners LP
-------------------------------------------------------------------------------
Presidio 680,000 340,000 680,000 0 -
Partners, LP
-------------------------------------------------------------------------------
Privet 200,000 100,000 200,000 0 -
Financial, LLC
-------------------------------------------------------------------------------
Prudential 125,000 62,500 125,000 0 -
Securities IRA
Custodian for
Margaret
Galdorise
-------------------------------------------------------------------------------
Puttick, 500,000 250,000 500,000 0 -
Kenneth G.
-------------------------------------------------------------------------------
RoyCap, Inc. 2,555,283 1,930,283 2,555,283 0 -
-------------------------------------------------------------------------------
Rudinsky, Moshe 1,375,000 687,500 1,375,000 0 -
-------------------------------------------------------------------------------
Saker, Wayne 750,000 250,000 500,000 250,000 -
-------------------------------------------------------------------------------
Stephen S. 1,000,000 500,000 1,000,000 0 -
Jamal, SSJ
Enterprises, LLC
-------------------------------------------------------------------------------
Stifel Nicolaus 100,000 50,000 100,000 0 -
& Co. Inc.
Custodian FBO
Barry Ollman
IRA R/O
-------------------------------------------------------------------------------
WEC Asset 375,000 125,000 250,000 125,000 -
Management LLC
-------------------------------------------------------------------------------
Yanowitz, Gerald 180,000 90,000 180,000 0 -
-------------------------------------------------------------------------------
(1) Includes shares of common stock covered by warrants that are included in
this prospectus.
Relationship Between Medix and the Selling Stockholders
The selling stockholders have purchased their shares from us, or will acquire
the shares of common stock indicated above upon the exercise of warrants, in
private placements. None of the persons listed above are affiliates or
controlled by our affiliates, except the following officer and directors who
purchased securities on the same terms as other investors in the private
placement: Patrick Jeffries and Mark Lerner. We have separate contractual
obligations to file this registration with each of the selling stockholders.
DESCRIPTION OF SECURITIES
Our authorized capital consists of 125,000,000 shares of common stock, par value
$.001 per share, and 2,500,000 shares of preferred stock, par value $.001 per
share. As of December 31, 2002, we had outstanding 77,160,815 shares of common
stock, 1 share of 1996 Preferred Stock and 75 shares of 1999 Series C Preferred
Stock. As of such date, our common stock was held of record by approximately 460
persons and beneficially owned by approximately 10,000 persons.
Common Stock
Each share of common stock is entitled to one vote at all meetings of
stockholders. Stockholders are not permitted to cumulate votes in the election
of directors. Currently, the Board of Directors consists of six directors, who
serve for staggered terms of three years, with at least two directors elected at
every annual meeting. All shares of common stock are equal to each other with
respect to liquidation rights and dividend rights. There are no preemptive
rights to purchase any additional shares of common stock. In the event of our
liquidation, dissolution or winding up, holders of the common stock will be
entitled to receive on a pro rata basis all of our assets remaining after
satisfaction of all liabilities and preferences of the outstanding preferred
stock. The outstanding shares of common stock and the shares of common stock
issuable upon conversion or exercise of derivative securities are or will be, as
the case may be, duly and validly issued, fully paid and non-assessable.
Transfer Agent and Registrar
We have retained Computershare Trust Company, Inc., 350 Indiana Street, Suite
800, Golden, Colorado 80401, as Transfer Agent and Registrar, for our common
stock. Computershare Trust Company's telephone number is (303) 262-0600.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded. These sales may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. We
believe, and intend to confirm prior to the effective date of the registration
statement of which this prospectus is a part that the selling stockholders have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their shares other than
ordinary course brokerage arrangements, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by the
selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares. Otherwise, all discounts, commissions or fees incurred in connection
with the sale of the common stock offered hereby will be paid by the selling
stockholders.
Upon our being notified by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such shares were sold, (iv) the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction.
In order to comply with the securities laws of certain states, if applicable,
the shares will be sold in such jurisdictions, if required, only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless the shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and complied with.
We advised the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales of the
shares offered hereby.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article 109 of the Colorado Business Corporation Act generally provides that we
may indemnify our directors, officers, employees and agents against liabilities
in any action, suit or proceeding whether civil, criminal, administrative or
investigative and whether formal or informal (a "Proceeding"), by reason of
being or having been a director, officer, employee, fiduciary or agent of Medix,
if such person acted in good faith and reasonably believed that his conduct, in
his official capacity, was in the best interests of Medix (or, with respect to
employee benefit plans, was in the best interests of the participants of the
plan), and in all other cases that his conduct was at least not opposed to
Medix's best interests. In the case of a criminal proceeding, the director,
officer, employee or agent must have had no reasonable cause to believe that his
conduct was unlawful. Under Colorado Law, we may not indemnify a director,
officer, employee or agent in connection with a proceeding by or in the right of
Medix if the director is adjudged liable to Medix, or in a proceeding in which
the directors, officer employee or agent is adjudged liable for an improper
personal benefit.
Our Articles of Incorporation and Bylaws provide that we shall indemnify our
directors, and officers, employees and agents to the extent and in the manner
permitted by the provisions of the laws of the State of Colorado, as amended
from time to time, subject to any permissible expansion or limitation of such
indemnification, as may be set forth in any stockholders' or directors'
resolution or by contract.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling Medix pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file reports, proxy statements, information statements and other information
with the SEC. You may read and copy this information, for a copying fee, at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information on its public
reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services, from the American Stock Exchange and at
the web site maintained by the SEC at http://www.sec.gov.
We have filed a registration statement under the Securities Act, with respect to
the securities offered pursuant to this prospectus. This prospectus does not
contain all of the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the registration
statement and the exhibits filed as a part thereof, which may be found at the
locations and website referred to above.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission (the "SEC") allows us to "incorporate by
reference" into this prospectus the information we file with the SEC, which
means that we can disclose important information to you by referring to those
documents. The information incorporated by reference is an important part of
this prospectus. We incorporate by reference the following documents we filed
with the SEC:
o Our Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
as amended;
o Our Quarterly Report on Form 10-Q for the period ended March 31, 2002;
o Our Quarterly Report on Form 10-Q for the period ended June 30, 2002;
o Our Quarterly Report on Form 10-Q for the period ended September 30, 2002;
o Our Current Report on Form 8-K, dated April 10, 2002;
o Our Current Report on Form 8-K, dated May 16, 2002;
o Our Current Report on Form 8-K, dated May 30, 2002;
o Our Current Report on Form 8-K, dated June 7, 2002;
o Our Current Report on Form 8-K, dated June 11, 2002;
o Our Current Report on Form 8-K, dated June 26, 2002;
o Our Current Report on Form 8-K, dated July 25, 2002;
o Our Current Report on Form 8-K, dated August 12, 2002;
o Our Current Report on Form 8-K, dated September 10, 2002;
o Our Current Report on Form 8-K, dated September 27, 2002;
o Our Current Report on Form 8-K, dated September 27, 2002;
o Our Current Report on Form 8-K, dated October 9, 2002;
o Our Current Report on Form 8-K, dated October 16, 2002;
o Our Current Report on Form 8-K, dated October 30, 2002;
o Our Current Report on Form 8-K, dated December 20, 2002;
o Our Current Report on Form 8-K, dated January 13, 2003;
o Our Current Report on Form 8-K, dated January 21, 2003; and
o Our Current Report on Form 8-K, dated February 3, 2003.
We are also incorporating by reference additional documents that we may file
with the Commission under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act prior to the termination of this offering.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us or the
Commission. Documents incorporated by reference are available from us without
charge, except exhibits, unless we have specifically incorporated by reference
an exhibit into a document that this prospectus incorporates. Stockholders may
obtain documents incorporated by reference into this prospectus by requesting
them in writing or by telephone from:
Medix Resources, Inc.
Investor Relations Department
The Graybar Building
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, New Jersey.
EXPERTS
Our consolidated financial statements as of December 31, 2001, and for each of
the three years in the period ended December 31, 2001 and 2000 appearing in our
2001 Form 10-K have been audited by Ehrhardt Keefe Steiner & Hottman PC,
independent auditors, as stated in their report appearing therein, and have been
incorporated herein by reference in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of PocketScript, LLC as of December 31,
2001 and December 31, 2000 as contained in this registration statement of which
this prospectus is a part have been audited by Ehrhardt Keefe Steiner & Hottman
PC, independent auditors, as stated in their report appearing therein, and have
been incorporated herein by reference in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
The following index sets forth the consolidated financial statements of Medix
Resources and the financial statements of PocketScript LLC included in this
prospectus. The consolidated financial statements of Medix Resources are
incorporated in this prospectus by reference. See "Incorporation of Certain
Information by Reference". PocketScript's historical financial statements are
presented in this prospectus on the pages identified in this index.
Medix Resources, Inc. Audited Year-End Consolidated Financial Statements:
(a) Independent Auditors' Report
(b) Consolidated Balance Sheets as of December 31, 2001 and 2000
(c) Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999
(d) Consolidated Statement of Changes in Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
(e) Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
(f) Notes to Consolidated Financial Statements
Medix Resources, Inc. Unaudited Interim Consolidated Financial Statements:
(g) Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
(h) Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001
(i) Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and 2001
(j) Notes to Interim Consolidated Financial Statements
PocketScript LLC Interim Financial Statements:
(k) Independent Auditors' Report
(l) Balance Sheets as of December 31, 2001 and 2000 and September 30, 2002
(unaudited)
(m) Statements of Operations for the Years Ended December 31, 2001 and 2000 and
for the Nine Months Ended September 30, 2002 and 2001 (unaudited)
(n) Statement of Changes in Redeemable Preferred Stock and Stockholders' Equity
(Deficit) for the Years Ended December 31, 2001 and 2000 and Nine Months
Ended September 30, 2002 (unaudited)
(o) Statements of Cash Flows for the Years Ended December 31, 2001 and 2000
Nine Months Ended September 30, 2002 and 2001 (unaudited)
(p) Notes to Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Statements
(q) Introduction
(r) Combined Balance Sheet as of September 30, 2002
(s) Combined Statement of Operations for the Nine Months Ended September 30,
2002
(t) Combined Statement of Operations for the Year Ended December 31, 2001
(u) Notes to Unaudited Pro Forma Balance Sheet and Statements of Operations
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Medix Resources, Inc.
Englewood, CO
We have audited the accompanying consolidated balance sheets of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the years in the three year period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring losses
and has a working capital deficit, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
--------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 19, 2002
Denver, Colorado
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
December 31,
---------------------------
2001 2000
------------- --------------
Assets
Current assets
Cash $ 8,000 $ 1,007,000
Accounts receivable, net - 49,000
Prepaid expenses and other 344,000 225,000
------------- --------------
Total current assets 352,000 1,281,000
------------- --------------
Non-current assets
Software development costs, net 649,000 371,000
Property and equipment, net 365,000 418,000
Intangible assets, net 1,735,000 3,019,000
------------- --------------
Total non-current assets 2,749,000 3,808,000
------------- --------------
Total assets $ 3,101,000 $ 5,089,000
============= ==============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 158,000 $ 137,000
Accounts payable 851,000 159,000
Accounts payable - related parties 166,000 -
Accrued expenses 450,000 391,000
Accrued payroll taxes, interest and penalties 131,000 200,000
------------- --------------
Total current liabilities 1,756,000 887,000
------------- --------------
Commitments and contingencies
Stockholders' equity
1996 Preferred stock, 10% cumulative convertible, $1
par value 488 shares authorized, 155 issued, 1
share outstanding, liquidation preference $17,000 - -
1997 convertible preferred stock, $1 par value 300
shares authorized 167.15 shares issued, zero shares
outstanding - -
1999 Series A convertible preferred stock, $1 par
value, 300 shares authorized, 300 shares issued,
zero shares outstanding - -
1999 Series B convertible preferred stock, $1 par
value, 2,000 shares authorized, 1,832 shares
issued, 50 shares outstanding, liquidation
preference $50,000 - -
1999 Series C convertible stock, $1 par value, 2,000
shares authorized, 1,995 shares issued, 375 and 875
shares outstanding as of December 31, 2001 and
2000, respectively, liquidation preference $375,000
and $875,000 - 1,000
Common stock, $.001 par value, 100,000,000 shares
authorized, 56,651,409 and 46,317,022 issued and
outstanding, respectively 56,000 46,000
Dividends payable with common stock 7,000 5,000
Additional paid-in capital 35,341,000 27,573,000
Accumulated deficit (34,059,000) (23,423,000)
------------- --------------
Total stockholders' equity 1,345,000 4,202,000
------------- --------------
Total liabilities and stockholders' equity $ 3,101,000 $ 5,089,000
============= ==============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Operations
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
-------------- ------------- --------------
Sales
Revenues $ 29,000 $ 326,000 $ 24,000
-------------- ------------- --------------
29,000 326,000 24,000
-------------- ------------- --------------
Cost of goods sold
Direct costs of services 213,000 180,000 2,000
-------------- ------------- --------------
Total cost of goods sold 213,000 180,000 2,000
-------------- ------------- --------------
Gross (loss) profit (184,000) 146,000 22,000
-------------- ------------- --------------
Operating expenses
Software research and development
costs 1,075,000 685,000 596,000
Selling, general and administrative
expenses 5,746,000 5,925,000 3,777,000
Impairment of intangible assets 1,111,000 - -
-------------- ------------- -------------
Total operating expenses 7,932,000 6,610,000 4,373,000
-------------- ------------- --------------
Other income (expense)
Other income 12,000 163,000 7,000
Interest expense (104,000) (43,000) (204,000)
Financing costs (2,428,000) - -
-------------- ------------- -------------
(2,520,000) 120,000 (197,000)
-------------- ------------- --------------
Loss from continuing operations (10,636,000) (6,344,000) (4,548,000)
-------------- ------------- --------------
Discontinued operations
Discontinued operations - 929,000 (299,000)
-------------- ------------- --------------
- 929,000 (299,000)
-------------- ------------- --------------
Net loss (10,636,000) (5,415,000) (4,847,000)
Preferred stock dividends - (1,000) (2,212,000)
-------------- ------------- --------------
Net loss available to common Stockholders $(10,636,000) $ (5,416,000) $ (7,059,000)
============== ============= ==============
Basic and diluted weighted average
common shares outstanding 50,740,356 41,445,345 23,384,737
============== ============= ==============
Basic and diluted (loss) per common share
- continuing operations $ (0.21) $ (0.15) $ (0.29)
Basic and diluted income (loss) per
common share - discontinued operations - 0.02 (0.01)
-------------- ------------- --------------
Basic and diluted loss per common share $ (0.21) $ (0.13) $ (0.30)
============== ============= ==============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
1999 Series A 1999 Series B 1999 Series C Dividend Total
1996 Preferred Stock 1997 Preferred Stock Preferred Stock Preferred Stock Preferred Stock Common Stock Additional Payable Stockholders'
-------------------- -------------------- ------------------ ------------------- ----------------- --------------------- Paid-in with Common Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Stock Deficit (Deficit)
--------- --------- -------- --------- -------- --------- --------- --------- -------- --------- ----------- --------- ------------ ----------- ------------ --------------
Balance - December 31,
1998 8.00 $ - 19.50 $ - - $ - $ - $ - $ - $ - 21,500,724 $ 22,000 $ 12,882,000$ 39,000 $(13,161,000) $ (218,000)
Issuance of warrants
with convertible note
payable - - - - - - - - - - - - 238,000 - - 238,000
1999 preferred stock
issuances (net of
$15,500 of offering
costs) - - - - 300 - 1,832 2,000 1,995 2,000 - - 4,108,000 - - 4,112,000
Preferred stock
conversions (4.50) - (14.50) - (115) - (1,015) (1,000) - - 3,161,342 3,000 10,000 (12,000) - -
Repurchase of 1996
preferred stock (2.50) - - - - - - - - - - - (17,000) (8,000) - (25,000)
Conversion of note
payable into common
stock - - - - - - - - - - 200,000 - 100,000 - - 100,000
Conversion of
redemption payable
into common stock - - - - - - - - - - 2,115,241 2,000 633,000 - - 635,000
Exercise of warrants - - - - - - - - - - 400,000 - 123,000 - - 123,000
Exercise of stock
options - - - - - - - - - - 256,384 - 27,000 - - 27,000
Stock issued for
services - - - - - - - - - - 9,000 - 5,000 - - 5,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 2,226,000 - - 2,226,000
Net loss - - - - - - - - - - - - - - (4,847,000) (4,847,000)
Dividends declared - - - - - - - - - - - - (6,000) 6,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ----------- ---------- ----------- -------------
Balance - December 31,
1999 1.00 - 5.00 - 185 - 817 1,000 1,995 2,000 27,642,691 27,000 20,329,000 25,000 (18,008,000) 2,376,000
Conversion of note
payable into common
stock - - - - - - - - - - 800,000 1,000 399,000 - - 400,000
Warrants issued in
settlement - - - - - - - - - - - - 238,000 - - 238,000
Common stock issued in
connection with ADC
merger - - - - - - - - - - 60,400 - 374,000 - - 374,000
Preferred stock
conversions - - (5.00) - (185) - (767) (1,000) (1,120) (1,000) 4,564,000 5,000 18,000 (21,000) - -
Exercise of warrants - - - - - - - - - - 9,352,620 9,000 4,585,000 - - 4,594,000
Exercise of stock
options - - - - - - - - - - 4,039,734 4,000 1,493,000 - - 1,497,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 138,000 - - 138,000
Cancellation of shares
issued in error - - - - - - - - - - (142,423) - - - - -
Net loss - - - - - - - - - - - - - - (5,415,000) (5,415,000)
Dividends declared - - - - - - - - - - - - (1,000) 1,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2000 1.00 - - - - - 50 - 875 $ 1,000 46,317,022 $ 46,000 $ 27,573,000$ 5,000 $(23,423,000) $ 4,202,000
Exercise of options and
warrants - - - - - - - - - - 1,462,642 1,000 368,000 - - 369,000
Warrants and in the
money conversion
feature issued with
convertible note
payable - - - - - - - - - - - - 581,000 - - 581,000
Stock issued on
conversion of note
payable - - - - - - - - - - 2,618,066 3,000 2,823,000 - - 2,826,000
Stock and warrants
issued in private
placement - - - - - - - - - - 1,872,308 2,000 2,061,000 - - 2,063,000
Preferred stock
conversions - - - - - - - - (500) (1,000) 1,000,000 1,000 - - - -
Stock issued with
equity line - - - - - - - - - - 3,291,369 3,000 1,507,000 - - 1,510,000
Stock issued in legal
settlements - - - - - - - - - - 90,000 - 285,000 - - 285,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 145,000 - - 145,000
Net loss - - - - - - - - - - - - - - (10,636,000) (10,636,000)
Dividends declared - - - - - - - - - - - - (2,000) 2,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2001 1.00 $ - - $ - - $ - 50 $ - 375 $ - 56,651,407 $ 56,000 $ 35,341,000 $ 7,000 $(34,059,000) $ 1,345,000
========= ========= ========= ========= ========= ========= ========= ========= ========= ======== =========== ========= ============ ========== ============ =============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
------------- ------------ -------------
Cash flows from operating activities
Net loss $ (10,636,000) $ (5,415,000) $ (4,847,000)
------------- ------------ -------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 488,000 426,000 243,000
Impairment of intangible assets 1,111,000 - -
Financing costs 2,428,000 - 238,000
Common stock, options and warrants
issued for settlements 149,000 - -
Common stock, options and warrants
issued for services 145,000 376,000 2,231,000
Discontinued operations - - 299,000
Gain on sale of staffing business - (1,102,000) -
Change in net assets of discontinued
operations - 857,000 (1,243,000)
Changes in assets and liabilities
Accounts receivable, net 49,000 (29,000) 2,046,000
Prepaid expenses and other (119,000) (49,000) 5,000
Accounts payable and accrued
liabilities 988,000 (237,000) (2,141,000)
Checks written in excess of bank
balance - - (72,000)
------------- ------------ ------------
5,239,000 242,000 1,606,000
------------- ------------ ------------
Net cash used in operating
activities (5,397,000) (5,173,000) (3,241,000)
------------- ------------ ------------
Cash flows from investing activities
Proceeds from sale of divisions - 500,000 -
Software development costs incurred (434,000) (495,000) -
Purchase of property and equipment (70,000) (400,000) (72,000)
Purchase of software license - (720,000) -
Proceeds from notes receivable - 500,000 563,000
Business acquisition costs, net of
cash acquired - (94,000) -
------------- ------------ ------------
Net cash (used in) provided by
investing activities (504,000) (709,000) 491,000
------------- ------------ ------------
Cash flows from financing activities
Proceeds from issuance of debt and
notes payable 1,824,000 178,000 500,000
Advances under financing agreement - - 11,272,000
Payments under financing agreement - (484,000) (11,781,000)
Principal payments on debt and notes
payable (303,000) (125,000) (289,000)
Issuance of preferred and common
stock, net of offering costs 3,012,000 - 4,112,000
Proceeds from the exercise of options
and warrants 369,000 6,091,000 150,000
Repurchase of preferred stock - - (25,000)
------------- ------------ ------------
Net cash provided by financing
activities 4,902,000 5,660,000 3,939,000
------------- ------------ ------------
Net (decrease) increase in cash (999,000) (222,000) 1,189,000
Cash - beginning of year 1,007,000 1,229,000 40,000
------------- ------------ ------------
Cash - end of year $ 8,000 $ 1,007,000 $ 1,229,000
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid for: Interest
------------
2001 $ 42,000
2000 $ 21,000
1999 $ 324,000
Supplemental disclosure of non-cash activity:
Dividends declared payable in common stock were $2,000, $1,000 and $6,000
for December 31, 2001, 2000 and 1999, respectively.
During 2001, 500 shares of the series C preferred stock was converted into
1,000,000 shares of common stock.
During 2001, $1,500,000 note payable advances under a credit facility and
$40,000 of accrued interest were converted and redeemed into 2,618,066
shares of common stock.
During 2001, the Company issued 90,000 shares of common stock and warrants
valued at $285,000 in connection with settlement of certain legal claims,
of which $137,000 was an adjustment to goodwill related to the Cymedix
acquisition.
During 2001, the Company issued options and warrants valued at $145,000 for
services provided.
During 2001, the Company issued 829,168 warrants valued at $506,000 in
connection with a convertible note payable credit facility. The Company
also recorded $75,000 for the value of the in-the-money conversion feature
on the debt.
During 2001, shares issued in private placements in connection with its note
payable credit facility at below market prices resulted in financing costs of
$448,000.
During 2001, shares issued for conversions and redemptions under the
convertible notes payable credit facility at below market prices resulted
in financing costs of $1,286,000.
During 2001, the Company issued warrants in connection with private
placements of common stock in connection with its note payable credit facility
valued at $415,000.
During 2001, the Company wrote off old payroll tax liabilities of $100,000
assumed in the Cymedix acquisition which reduced goodwill.
During 2000, 5.0 units of the 1997 preferred stock, 185 shares of the 1999
Series A preferred stock, 767 shares of the Series B preferred stock, and
1,120 shares of the series C preferred stock were converted into 3,161,342
shares of common stock.
During 2000, the Company acquired the assets and assumed certain
liabilities of a business from a related party (Note 4).
During 2000, the Company disposed of the remainder of its staffing business
(Note 2).
During 2000, the Company converted a $400,000 note payable into 800,000
shares of common stock.
During 1999, the Company issued a $500,000 convertible note payable with
warrants to purchase common stock, of which $100,000 of principal was
converted into 200,000 shares of common stock. The warrant was valued at
$238,000 and recorded as additional interest expense.
During 1999, the Company converted $635,000 of preferred stock redemption
payable into 2,115,241 shares of common stock.
During 1999, 4.50 units of the 1996 preferred stock, 14.50 units of the
1997 preferred stock, 1,015 shares of the 1999 series A preferred stock, and
1,015 shares of the series B preferred stock were converted into 3,161,342
shares of common stock.
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Medix Resources, Inc. and subsidiary (the Company), main business focus is a
suite of fully secure, patented Internet communication software for the
healthcare industry. The Company divested its remaining healthcare related
staffing businesses in February of 2000 (Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Medix
Resources, Inc. and its subsidiary, Cymedix Lynx Corporation (Cymedix). All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures 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 those estimates.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the
United States. The Company periodically performs credit analysis and monitors the
financial condition of its customers to reduce credit risk.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
value as of December 31, 2001 and 2000 due to the relatively short maturity of
these instruments.
The carrying amounts of notes payable and debt issued approximate their fair
value as of December 31, 2001 and 2000 because interest rates on these instruments
approximate market interest rates.
Revenue Recognition
We earn revenue as transaction services are provided to our customers throught
the use of our suite of communication software, and currently do not generate
any revenue from the licensing, slae or installation of our suite of
communication software.
We recognize revenue is earned when the communication transaction has bee
completed by the customner, persuasive evidence of the terms of the arrangement
exist, our fee is fixed and determinable, and collectibility is reasonably
assured. Delivery takes place electronically when the customer has completed the
exchange (transmission or receipt) of data. Revenue is charged to the customer
on a per transaction basis as each transaction is completed and is billed
monthly.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from capitalized software development costs, depreciation and amortization, and
net operating loss carryforwards.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 7 years.
Software Development Costs
The Company applies the provisions of Statement of Position 98-1, "Accounting for
Costs of Computer Software Developed for Internal Use". The Company accounts for
costs incurred in the development of computer software as software research and
development costs until the preliminary project stage is completed. Direct costs
incurred in the development of software are capitalized once the preliminary
project stage is completed, management has committed to funding the project and
completion and use of the software for its intended purpose are probable. The
Company ceases capitalization of development costs once the software has been
substantially completed and is ready for its intended use. Software development
costs are amortized over their estimated useful lives of five years. Costs
associated with upgrades and enhancements that result in additional functionality
are capitalized.
Financing Costs
The company records as financing costs in its statement of operations
amortization of in-the-money conversion features on convertible debt accounted
for in accordance with EITF 98-5 and 00-27, amortization of discounts from
warrants issued with debt securities in accordance with APB No. 14 and
amortization of discounts resulting from other securities issued in connection
with debt based on their relative fair values, and any value associated with
inducements to convert debt in accordance with FASB 84.
Intangible assets
Intangible assets are stated at cost, and consist of goodwill, which is being
amortized using the straight-line method over fifteen years.
The Company reviews its long-lived asset for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
of its acquisition in its assessment of whether or not goodwill has been
impaired.
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements have been
reclassified to conform to the 2001 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were $23,000, $36,000 and $45,000 for the years ended December
31, 2001, 2000 and 1999.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
For the years ended December 31, 2001, 2000 and 1999 total stock options,
warrants and convertible debt and preferred stock of 14,693,254, 13,767,143 and
23,109,003, were not included in the computation of diluted loss per share
because their effect was antidilutive, however, if the company were to achieve
profitable operations in the future, they could potentially dilute such earnings.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS Nos. 141 and 142 " Business Combinations " and
" Goodwill and other Intangible Assets ". Statement 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase
method. Under the guidance of Statement 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill will be subject to
at least an annual assessment for impairment by applying a fair value base test.
Statement 142 is effective for financial statement dates beginning after January
1, 2001. Goodwill will be tested for impairment at the time of adoption and on
an annual basis. As allowed under Statement 142, the Company will complete its
goodwill impairment test within the first six months of the fiscal year. As a
result of Statement 142, the Company will no longer be recognizing approximately
$155,000 in annual amortization expense related to goodwill.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the Company for fiscal years beginning after June
15, 2002. The Company believes the adoption of this statement will have no
material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
Note 2 - Going Concern
The accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and liquidation of liabilities in
the ordinary course of business.
Management's Plan for Continued Existence
The Company has incurred operating losses for the past several years, the
majority of which are related to the development of the Company's healthcare
connectivity technology and were fully anticipated by management. These losses
have produced operating cash flow deficiencies, and negative working capital which
raise substantial doubt about its ability to continue as a going concern.
Management has secured an equity line of credit, as further described in Note 8,
and management is presently in discussions regarding alternative sources of
additional equity capital, which would enable the Company to continue to fund
operations until such time as revenues from the Company's internet communication
products for the healthcare industry will be sufficient to fund operations.
Management reports that progress continues with regard to new strategic alliances
with major healthcare organizations as well as in advancing the Company's
existing alliances from the "pilot program" stage toward the "production contract
stage".
Note 3 - Discontinued Operations
In February 2000, the Company closed on the sale of the assets of its remaining
staffing businesses for $1,000,000. The purchase price was paid with $500,000
cash at closing and the Company receiving a $500,000 subordinated note
receivable. The note provided for interest at prime plus 1% and was due in May
of 2001. The note was repaid on December 29, 2000. This sale was the final step
of a plan approved by the board of directors in December 1999 for the Company to
divest itself of the staffing businesses and focus its efforts on its internet
communication software products for the healthcare industry.
The accompanying financial statements reflect the results of operations of the
remaining staffing businesses as a discontinued business segment. The
discontinued results of operations include those direct revenues and expenses
associated with running the remaining staffing businesses as well as an
allocation of corporate costs.
The results of operations of the Company's discontinued remaining staffing
businesses are as follows:
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Revenue $ 1,128,000 $ 10,812,000
Direct costs of services 927,000 8,472,000
---------------------------
Gross margin 201,000 2,340,000
---------------------------
Selling, general and administrative 219,000 2,193,000
Interest expense 18,000 446,000
Litigation settlement 137,000 -
---------------------------
Net loss $ (173,000) $ (299,000)
===========================
During the fourth quarter of 2000, the Company wrote off unrealizable assets
related to the discontinued operations in the amount of $43,000, and $322,000 in
remaining related liabilities. The net write-off of assets and liabilities
totaling $279,000, less net assets acquired by the purchaser of $77,000, has been
recorded as an increase of $202,000 to the gain from the disposal of the
remaining staffing businesses as of December 31, 2000.
During the first quarter of 2000, the Company reported the following gain on the
disposal of the assets of its remaining staffing businesses:
Sales price $ 1,000,000
Accounts receivable collection costs (100,000)
------------
900,000
Net assets acquired, liabilities assumed and
liabilities written off 202,000
------------
Gain on disposal of the remaining staffing businesses 1,102,000
Loss from operation of the remaining staffing
businesses through the disposal date (173,000)
------------
Net gain on disposal of the remaining staffing
businesses $ 929,000
============
Also as previously noted the purchaser did not acquire the Company's accounts
receivable as part of the sale. However, in connection with the sale, the
purchaser will collect the Company's receivables and remit the proceeds to the
Company net of a 10% collection fee. The $100,000 reflected above represents the
Company's estimate of the collection costs to be paid to purchaser for performing
this function.
Note 4 - Acquisition of Assets
On March 1, 2000, the Company purchased the assets and assumed certain
liabilities of Automated Design Concepts, Inc., an entity owned by a director of
the Company, for the issuance of 60,400 shares of common stock valued at $374,000
and a payment of $100,000. The Company also entered into a two-year lease for
$1,000 per month expiring in February 2002. Assets purchased include cash and
accounts receivable.
The purchase was accounted for under the purchase method. The purchase price was
allocated to the assets purchased and liabilities assumed based on the fair
market values at the date of acquisition as follows:
Cash $ 6,000
Accounts receivable 27,000
Goodwill 487,000
Accounts payable (41,000)
Accrued liabilities (5,000)
------------
$ 474,000
============
The results of operations have been reflected from the date of acquisition
forward. The resulting goodwill is being amortized over 15 years.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts division to focus on its core business and as a cost
saving measure. As a result, $443,000 of impairment expense has been included
in Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of the investment at the time of
discontinuance.
The following table summarizes the unaudited pro forma results of the Company
giving effect to the acquisition as if it had occurred on January 1, 2000. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the Company had this acquisition occurred at the beginning of the
years presented, nor is it necessarily indicative of future results.
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Sales $ 440,000 $ 569,000
===========================
Net income (loss) $ (5,408,000) $ (4,816,000)
===========================
Loss per share $ (0.13) $ (0.20)
===========================
Note 5 - Balance Sheet Disclosures
Software development costs consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Software development costs $ 929,000 $ 495,000
Less accumulated amortization (280,000) (124,000)
---------------------------
$ 649,000 $ 371,000
===========================
Annual amortization expense, which is included in costs of services provided was
$156,000 and $124,000 for the years ended December 31, 2001 and 2000,
respectively.
Property and equipment consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Furniture and fixtures $ 103,000 $ 91,000
Computer hardware and purchased software 609,000 552,000
Leasehold improvements 29,000 28,000
---------------------------
741,000 671,000
Less property, plant and equipment - accumulated
depreciation (376,000) (253,000)
---------------------------
$ 365,000 $ 418,000
===========================
Depreciation expense was $123,000, $97,000 and $86,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Intangible assets consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Goodwill acquired through Cymedix acquisition $ 2,369,000 $ 2,332,000
Goodwill acquired through the Automated Design
Concepts, Inc. acquisition - 487,000
License agreement with ZirMed.com - 720,000
---------------------------
2,369,000 3,539,000
Less accumulated amortization (634,000) (520,000)
---------------------------
$ 1,735,000 $ 3,019,000
===========================
Amortization expense was $209,000, $205,000, and $157,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts, division, and terminated its license agreement with
ZirMed.com. As a result, $1,111,000 of impairment expense has been included in
the Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of each investment at the time of
discontinuance.
Accrued expenses consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Accrued payroll and benefits $ 294,000 $ 310,000
Accrued professional fees 57,000 60,000
Accrued license fees 53,000 -
Other accrued expenses 29,000 21,000
Accrued interest 17,000 -
---------------------------
$ 450,000 $ 391,000
===========================
At various times during 2001, the Company was delinquent with payroll tax
deposits. At December 31, 2001 and 2000, $131,000 and $200,000, respectively was
accrued for estimated taxes, interest and penalties. During 2001, the Company
wrote off $100,000 of previously recorded accrued payroll tax liabilities assumed
in the Cymedix acquisition as management determined the Company was over accrued
and has recorded the write-off as an adjustment to previously recorded goodwill.
Note 6 - Long-Term Debt
Long-term debt consists of:
December 31,
---------------------------
2001 2000
---------------------------
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$23,730 are payable through July 2002. $ 140,000 $ 115,000
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$1,417 are payable through October 2002. 18,000 22,000
---------------------------
158,000 137,000
Less current portion (158,000) (137,000)
---------------------------
$ - $ -
===========================
Convertible Promissory Note
In October 1999, the Company raised approximately $488,000 net of expenses
through the issuance of a $500,000 14% Convertible Promissory Note and warrants
to purchase 500,000 shares of the Company's common stock at $.50 per share. The
$500,000 in principal plus accrued interest was payable on June 28, 2000. The
note was convertible into the Company's common stock at a conversion price of
$.50 per share, for the first 90 days outstanding, and at the lower of $.50 per
share or 80% of the lowest closing bid price for the Common Stock during the last
five trading days prior to conversion, for the remaining life of the note. The
note was secured by the intellectual property of the Company's wholly owned
subsidiary Cymedix Lynx Corporation. The warrants were recorded as a discount on
the debt valued at $238,000 using the Black-Scholes option pricing model using
assumptions of life of 3 years, volatility of 225%, no dividend payment, and a
risk-free rate of 5.5%. The discount was fully amortized at December 31, 1999,
as the remaining debt of $400,000 at December 31, 1999, was converted in January
2000 into 800,000 shares of common stock and the security interest released.
Convertible Note Payable Credit Facility
In December 2000, the Company obtained a credit facility under which it issued a
convertible promissory note and common stock purchase warrants. The credit
facility provided that the Company could draw against this facility in increments
as follows: $750,000 upon closing, which occurred January 10, 2001; $250,000
within 10 days of an effective registration statement, which occurred February
13, 2001; and $500,000 draws at the 60th day, 90th day and the 150th day from the
effective registration statement. These advances could be made only if the
Company's common stock price remained above $1 for five business days prior to
the draw. During the draw down periods, the Company drew $1,500,000 under the
convertible note. Advances under the convertible note bear interest at an annual
rate of 10% and provide for semi-annual payments on July 10, 2001 and January 10,
2002. All outstanding balances under this arrangement were converted or redeemed
during 2001 into common shares. The note payable balance was convertible at $.90
per share for up to the first $750,000 and any remaining balance at $1.00 per
share. The initial $750,000 draw on this arrangement has an imputed discount
recorded, which was valued at $75,000 for the "in-the-money" conversion feature
of the first advance. In addition, the noteholder can force a redemption of the
note or any portion thereof, for either cash or stock at the option of the
Company, but if for stock, at a redemption price of eighty (80%) percent of the
Volume Weighted Market Price (as defined) per common share during the twenty
Trading Days ending on the day of the notice delivered by the holder.
In connection with this credit facility, the Company also agreed to issue
warrants to purchase common stock to the holder of the convertible promissory
note. The Company issued 750,000 warrants in connection with drawdowns under the
convertible note. The warrants have an exercise price of $1.75 and terms of two
years from the date of issuance. The Company also issued 54,167 warrants to
purchase common stock to two finders assisting with the transaction. The finder
warrants also have terms of two years and an exercise price of $1.75.
The Company has imputed values for the 750,000 and 54,168 warrants issued to the
provider of the credit facility and the finders using the Black-Scholes Option
pricing model. The first 500,000 warrants issued to the provider of the credit
facility were valued at $249,000 and have been treated as a discount on the debt
to be amortized over its remaining life. The related 54,168 warrants issued to
finders which have been recorded as debt issue costs and amortized over the
remaining life of the debt. In connection with the final draw under the
credit facility in May, the Company issued 250,000 warrants to the provider of
the credit facility. The 250,000 warrants issued to the provider of the credit
facility were valued at $209,000 using the Black-Scholes pricing model and have
been treated as a discount on the debt to be amortized over its remaining life.
In connection with the final draw under the credit facility, The Company issued
warrants to purchase 25,000 shares issued to the finders. The total finder
warrants have been valued at $48,000 using the Black-Scholes option-pricing
model, and have been treated as a discount on the debt to be amortized over its
remaining life. The values of all warrants issued under this facility were
determined using the following assumptions; lives of two years, exercise prices
of $1.75, volatility of 117%, no dividend payment and a risk-free rate of 5.5%.
During February 2001, $100,000 of the convertible note was converted into 111,111
shares of common stock. During the period April through September, $900,000 of
the note was redeemed. These redemptions were satisfied by the issuance of
1,384,661 shares of common stock. During October 2001, the remaining $500,000
convertible note was redeemed by the issuance of 1,069,368 shares of common
stock. During July 2001, 52,928 shares of common stock was issued as payment of
accrued interest of $40,000 through July 10, 2001. As a result of conversions
and redemptions at modified conversion prices $1,286,000 of financing costs were
recorded reflecting the intrinsic value of the share differences from issuable
shares at the date the advances were received.
During March 2001, the Company, under an amendment to its convertible note
payable credit facility, received $350,000 from the credit facility provider for
the issuance of 636,364 shares of its common stock as a private placement
transaction. As a part of this common stock issuance, the Company issued
warrants to purchase 636,364 shares of common stock at $.80 per share with a term
of two years from the date of issuance. As a result of the warrant issuance, the
Company has recorded financing expense of $262,000 in the accompanying financial
statements, using the Black-Scholes option-pricing model. The company also
issued warrants to purchase 63,636 shares of common stock at $.80 per share with
a term of two years to two finders assisting the transaction. The finders
warrants have been valued at $40,000 using the Black-Scholes pricing model and
have been included as financing costs in the accompanying financial statements.
The calculated values were computed using the following assumptions: lives of 2
years, exercise prices of $.80, volatility of 117%, no dividend payments and a
risk free rate of 5.5%.
During the period May through December 2001, the Company received $850,000, under
a second amendment to the credit facility, for the issuance of 1,235,944 shares
of its common stock, in additional private placement transactions. As a part of
these common stock issuances, the Company issued warrants to purchase 168,919
shares of common stock at $1.00 per share with a term of two years from the date
of issuance. The Company has recorded finanacing expense of $113,000 related to
the warrant issuance in the accompanying financial statements, using the
Black-Scholes option-pricing model. The calculated values were computed using the
following assumptions: lives of 2 years, exercise prices of $.80, volatility of
117%, no dividend payments and a risk free rate of 5.5%.
As a result of shares issued under the private placements at below market prices,
which have been treated as a discount on the debt based on their fair market
values at issuance, financing costs of $448,000 have been recorded.
Note 7 - Commitments and Contingencies
Operating Leases
The Company leases office facilities in New York, New Jersey, Colorado and
California and various equipment under non-cancelable operating leases.
Rent expense for these leases was:
Year Ending December 31,
------------------------
2001 $ 396,000
2000 $ 315,000
1999 $ 293,000
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2002 $ 550,000
2003 413,000
2004 309,000
2005 26,000
-------------
$ 1,298,000
=============
Litigation
In the normal course of business, the Company is party to litigation from time to
time. The Company maintains insurance to cover certain actions and believes that
resolution of such litigation will not have a material adverse effect on the
Company.
During the fourth quarter of 1997, an action was filed against the Company in the
Eastern District of New York under the caption New York Healthcare, Inc. v.
International Nursing Services, Inc., et al. On February 15, 2000, the Company
agreed in principle to settle this claim. In connection with the settlement, the
Company issued a warrant to purchase 35,000 of the Company's common stock at
$3.96 per share. The Company recorded expense of approximately $137,000 related
to the issuance of the warrant, which has been included in the results of
discontinued operations. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On November 12, 1999, an action was filed in California Superior Court, which has
since been removed to the U. S. District Court, Central District of California,
against Medix Resources, Inc. and its wholly owned subsidiary, Cymedix Lynx
Corporation. As of November 3, 2000, a settlement agreement was reached between
the Company and the plaintiff whereby the company paid the plaintiff $66,000
cash, and issued an option to purchase 50,000 of the Company's common stock at
$.25 per share. The Company recorded expense of approximately $102,000 related
to the issuance of the option. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On June 1, 2000, an action was filed in the District Court of the City and County
of Denver, Colorado, against Medix Resources, Inc., and its wholly-owned
subsidiary, Cymedix Lynx Corporation, alleging that a predecessor company of
Cymedix Lynx Corporation had promised to issue stock options to the plaintiff but
had failed to honor that promise. On June 15, 2001, the matter was settled by
paying the plaintiff $35,000 and issuing to him 2 year warrants to purchase
195,000 shares of the Company's common stock at $.50 per share. The settlement
was approved by the court on July 6, 2001. The case has been dismissed with
prejudice. The warrants issued in this settlement have been valued at $137,000
using the Black-Scholes pricing model, using assumptions of volatility of 132%,
no dividend payments and a risk-free rate of 5.5%, and have been included as an
increase to goodwill in the accompanying financial statements, as a result of an
unrecorded liability that existed at the time of the Cymedix merger.
On July 11, 2000, an action was filed in the United States District Court,
Southern District of New York, against Medix Resources, Inc., alleging that the
Company granted to plaintiff the right to purchase preferred stock convertible
into the Company's common stock and warrants to purchase the Company's common
stock in connection with the Company's private financings during 1999, and then
failed to permit plaintiff to exercise that right. On May 2, 2001, the Company
agreed to settle the matter by paying the plaintiff $20,000 and issuing him a
three year warrant (issued over a 18 month period) to purchase 137,500 shares of
the Company's common stock at $.50 per share. The settlement was approved by the
Court on May 3, 2001. The case has been dismissed with prejudice. The warrants
issued in this settlement have been valued at $64,000 using the Black-Scholes
pricing model, using assumptions of volatility of 132%, no dividend payments, and a
risk-free rate of 5.5%, and have been included as an expense in the Consolidated
Statement of Operations.
On September 27, 2000, an action was filed in the United States District Court,
Eastern District of New York, against Medix Resources, Inc. alleging that the
Company failed to properly and fully convert the Company's convertible preferred
stock held by one of the Plaintiffs, and had failed to maintain the registration
for public sale with the Securities and Exchange Commission of shares underlying
warrants held by both Plaintiffs. The Company settled the litigation by issuing
to one plaintiff 90,000 shares of the Company's common stock, valued at $51,000,
and extending the exercise period of the warrants of the other plaintiff until
December 31, 2003, valued at $33,000. The shares and warrants issued in this
settlement have been valued at $84,000 using the Black-Scholes pricing model, for
the modification to the warrant, using assumptions of a life of 2 years, exercise
price of $1.00, volatility of 132%, no dividend payments and a risk-free rate of
5.5%, and have been included as an expense in the Consolidated Statement of
Operations.
On August 7, 2001, a former officer of the Company filed an action in the
District Court of Arapahoe County, Colorado, against the Company and its former
President and CEO. The plaintiff alleges (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.
Plaintiff's seeks unspecified damages to be determined at jury trail, including
interest, punitive damages, plaintiff's attorney fees, and a 50% penalty under
the Colorado Wage Claim Act. The Company and its co-defendants have answered the
plaintiff's complaint, denying any liability. The court set discovery to be
completed by July 31, 2002, and the trial to begin on September 9, 2002.
Management of the Company intends to vigorously defend this action, and does not
expect any resolution of this matter to have a material adverse effect on the
Company's financial condition or results of operation. Currently an estimate of
possible loss to the Company if unsucessful in defending this action cannot be
made.
On December 17, 2001, Plantiff, Vision Management Consulting, L.L.C., filed suit
against us in the Superior Court of New Jersey, Law Division - Essex County,
entitled Vision Managment Consulting, L.L.C. v. Medix Resources, Inc., Docket No.
ESX-L-11438-01. The complaint alleges breach of contract, unjust enrichment,
breach of duty in good faith and fair dealing and misrepresentations by us in
connection with a negotiated settlement agreement, which had resulted from claims
between the parties arising out of the termination of operations by our Automated
Design Concepts division earlier in 2001. Plaintiff seeks unspecified damages to
be proven at jury trial, together with attorneys fees, costs of suit and interest
on judgement, as well as such further relief as the Court deems just and
equitable. We have answered the plaintiff's complaint, denying any liability and
setting forth a counterclaim seeking the award to us of our costs of defending
this action and such further relief as the Court deems just and proper.
Management intends to vigorously defend this action and does not expect any
resolution of this matter to have a material adverse effect on the Company's
results of operations or financial condition. The Court has appointed a mediator
for the case to try to facilitate a settlement between the parties. Currently an
estimate of possible loss to the Company if unsucessful in defending this action
cannot be made.
Note 8 - Stockholders' Equity
On March 20, 2000, the Company authorized 2,500,000 shares of preferred stock.
1996 Private Placement
In July and September 1996, the Company completed a private placement of 244
units, each unit consisting of a share of convertible preferred stock, $10,000
per unit, $1 par value ("1996 Preferred Stock"), a warrant to purchase 8,000
shares of the Company's common stock at $2.50 per share and a unit purchase
option to purchase an additional unit at $10,000 per unit.
During 1998, 18.25 units were converted resulting in the issuance of an
additional 939,320 shares of common stock in 1998.
During 1999 4.5 units were converted into 241,072 shares of common stock.
Additionally, the Company repurchased from another holder 2.5 units in a
negotiated agreement for $25,000. The Company has 1.0 remaining unit of its 1996
preferred stock outstanding at December 31, 2001 and 2000. The remaining unit
may be converted into the Company's common stock including accrued dividends at
the lesser of $1.25 per common share or 75% of the prior five day trading average
of the Company's common stock.
1997 Private Placement
In January and February 1997, the Company completed a private placement of 167.15
Units, each unit consisting of one share of convertible preferred stock, $10,000
per unit, $1 par value, "1997 Preferred Stock", and a warrant to purchase 10,000
shares of common stock at $1.00 per share.
In 1998, 5.0 units were converted resulting in the issuance of 178,950 shares of
common stock.
During 1999 14.5 units were converted into 572,694 shares of common stock. During
2000, the remaining 5.0 units were converted into 50,000 shares of common stock.
1999 Private Placement
During 1999, the Company initiated three private placement offerings each
consisting of one share of preferred stock (as designated) and warrants to
purchase common stock. There are no dividends payable on the preferred stock if
a registration statement is filed by a certain date as specified in the offering
agreements and remains effective for a two year period. If dividends are
payable, the preferred stock will provide for a 10% dividend per annum for each
day during which the registration statement is not effective. The preferred
shares are also redeemable at the option of the Company after a date as specified
in the offering agreements for $1,000 per share plus any accrued unpaid
dividends. In addition, if a registration statement is not effective by the date
as specified in the offering agreements the shares may be redeemed at the request
of the holder at $1,000 per share plus any accrued unpaid dividends.
The first private placement consisted of 300 shares of Series A preferred stock
each with 1,000 warrants for $1,000 per unit, which raised total proceeds of
$300,000. The warrants included with each unit entitle the holder to purchase
common shares at $1.00 per share, expiring in October 1, 2000. The preferred
shares are currently convertible into common shares at $.25 per common share
through March 1, 2003. During 1999, 115 shares of Series A preferred stock were
converted into 460,000 common shares. During 2000, 185 shares of Series A
preferred stock were converted into 740,000 common shares. All of the warrants
included with the Series A preferred stock were exercised in 2000.
The second private placement consisted of 1,832 shares of Series B preferred
stock each with 2,000 warrants for $1,000 per unit, which raised total proceeds
of $1,816,500 (net of offering costs of $15,500). The Company also issued a
warrant to purchase 50,000 shares of common stock at $.50, which expires in May
2002, for services rendered in connection with the private placement. The
warrants included with each unit entitle the holder to purchase common shares at
$.50 per share, expiring in October 1, 2003. The preferred shares are currently
convertible into common shares at $.50 per common share through October 1, 2003.
During 1999, 1,015 shares of Series B preferred stock were converted into
2,030,000 common shares. During 2000, 767 shares of Series B preferred stock
were converted into 1,534,000 common shares. The warrants are callable by the
Company for $.01 upon thirty days written notice. The Company has not called any
of these warrants as of the date hereof.
The third private placement consisted of 1,995 shares of Series C preferred stock
each with 4,000 warrants for $1,000 per unit, which raised total proceeds of
$1,995,000. The warrants, included with each unit, entitled the holder to
purchase common shares at $.50 per share, expiring in April 1, 2003. The
preferred shares are convertible beginning April 1, 2000 into common shares at
$.50 per common share through April 1, 2003. During 2000, 1,120 shares of Series
C preferred stock were converted into 2,240,000 common shares. During 2001, 500
shares of Series C preferred stock were converted into 1,000,000 shares of common
stock. After April 1, 2000, the warrants are callable by the Company for $.01
upon thirty days written notice. The Company has not called any of these
warrants as of the date hereof.
Equity Line
The Company has entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which provides that the Company can 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 have 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 principal conditions to any such advance, which may be waived,
are as follows:
o There must be thirteen stock market trading days between any two requests
for advances made by the Company.
o The Company can only request an advance if the volume weighted average
price of the common stock as reported by Bloomberg L.P. for the day before the
request is made is equal to or greater than the volume weighted average price as
reported by Bloomberg L.P. for the 22 trading days before a request is made.
o The Company will not be able to receive an advance amount that is greater
than 175% of the average daily volume of its common stock over the 40 trading
days prior to the advance request multiplied by the purchase price.
The purchase price for each advance will be equal to 91% of the three lowest
daily volume weighted average prices during the 22 trading days before a request
is made.
The Company will receive the amount requested as an advance within 10 days of its
request, subject to satisfying standard closing conditions. The issuance of
shares of common stock to the providers in connection with the equity line
financing will be exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof. The Company has agreed to register for
immediate re-sale the shares being issued to the providers of the Equity Line of
Credit before any drawdowns may occur. The Company has registered 9,500,000
shares. The related Registration Statement was declared effective by the SEC on
August 6, 2001. The Company has also agreed that its executive officers and
directors will not sell any shares of its common stock during the ten trading
days following any advance request by the Company.
The Company will pay an aggregate of 7% of each amount advanced under the equity
line financing to two parties affiliated with the providers of the Equity Line of
Credit for their services relating thereto. In addition, upon the effective date
of this Registration Statement registering the securities to be issued under the
Equity Line of Credit, the Company issued to those same two parties an aggregate
of 198,020 shares of common stock, and on December 9, 2001 (180 days after the
date of the Equity Line of Credit Agreement) the Company issued to them an
additional 344,827 shares of our common stock shares. In addition, the Company
has paid legal fees in an aggregate amount of $15,000.
During the period August to December 2001, the company received $1,510,000, net
of commissions and escrow fees from nine equity line advances, resulting in the
issuance of 2,748,522 shares of common stock. The 542,847 shares issued to
finders in connection with the equity line, described above, were valued at
$407,000, additionally the incremental differences of shares issued at below market
prices on the line totaled $391,000, both of which have been presented as a
reduction to net proceeds from the advances received.
Accumulated Deficit
Of the $34,059,000 cumulative deficit at December 31, 2001 and $23,423,000 at
December 31, 2000, the approximate amount relating to the Company's technology
business from inception is $21,112,000 and $10,631,000, respectively. In
addition, a premium of $2,332,000 was paid upon the acquisition of Cymedix Lynx
in 1998, producing a total investment of $23,544,000 at December 31, 2001 and
$12,963,000 at December 31, 2000 in the technology to date.
Stock Options
In May 1988, the Company adopted an incentive stock option plan (ISO), which
provides for the grant of options representing up to 100,000 shares of the
Company's common stock to officers and employees of the Company upon terms and
conditions determined by the Board of Directors. Options granted under the plan
are generally exercisable immediately and expire up to ten years after the date
of grant. Options are granted at a price equal to the market value at the date
of grants, or in the case of a stockholder who owns greater than 10% of the
outstanding stock of the Company, the options are granted at 110% of the fair
market value.
In 1994, the Board of Directors established, the Omnibus Stock Plan of 1994 (1994
Plan) and reserved 500,000 shares of the Company's common stock for grant under
terms, which could extend through January 2004. All options and warrants issued
under this plan are non-qualified. Grants under the 1994 Plan may be to
employees, non-employee directors, and selected consultants to the Company, and
may take the form of non-qualified options, not lower than 50% of fair market
value. To date, the Company has not issued any options below fair market value
at the date of grant.
In 1996, the Board of Directors established the 1996 Stock Option Plan (the "1996
Plan") with terms similar to the 1994 Plan. The Board of Directors of the
Company reserved 4,000,000 shares of common stock for issuance under the 1996
Plan.
In August 1999, the Board of Directors established the 1999 Stock Option Plan
(the "1999 Plan"), which provides for the grant of incentive stock options
("ISOs") to officers and other employees of the Company and non-qualified options
to directors, officers, employees and consultants of the Company. Options
granted under the plan are generally exercisable immediately and expire up to ten
years after the date of grant. Options are granted at a price equal to the
market value at the date of grant. The Board of Directors has reserved
10,000,000 shares of common stock for granting of options under the 1999 Plan.
The following table presents the activity for options outstanding:
Weighted
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
------------ ------------ ------------
Outstanding - December 31, 1998 3,054,065 1,157,050 $ 0.35
Granted 5,050,000 662,500 0.31
Forfeited/canceled (586,188) (930,366) 0.41
Exercised - (256,184) 2.78
------------ ------------ ------------
Outstanding - December 31, 1999 7,517,877 633,000 0.32
Granted 2,255,000 110,000 3.82
Forfeited/canceled (10,000) - 0.25
Exercised (3,900,235) (139,499) 0.28
------------ ------------ ------------
Outstanding - December 31, 2000 5,862,642 603,501 1.62
Granted 2,289,000 - 0.71
Forfeited/canceled (865,000) (65,834) 3.03
Exercised (1,267,142) (173,500) 0.25
------------ ------------ ------------
Outstanding - December 31, 2001 6,019,500 364,167 $ 1.40
============ ============ ============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
----------------------- -----------------------
Range of Exercise Prices Number Price* Life* Number Price*
------------------------ ----------- ----------- ----------- ----------- -----------
$.19 - .55 2,723,667 $ 0.41 7.46 2,601,833 $ 0.40
$.60 - 1.88 2,365,000 0.76 0.54 1,943,750 0.73
$2.25 - 4.97 1,295,000 4.67 6.45 800,000 4.56
----------- ----------- ----------- ----------- -----------
Total - December 31,
2001 6,383,667 $ 1.40 4.69 5,345,583 $ 1.14
=========== =========== =========== =========== ===========
*Price and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.
The Company has issued 110,000 stock options to consultants which have been
valued at $79,000 and recorded as consulting expense, using the Black-Scholes
options pricing model. The assumptions used include lives ranging from 2 to 5
years, exercise prices ranging from $0.67 to $0.92, volatility of 132%, no
dividend payments and a risk free rate of 5.5%.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's option been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and basic loss per common share would
have been changed to the pro forma amounts indicated below:
For the Years Ended
December 31,
-----------------------------------------
2001 2000 1999
-------------- ------------- ------------
Net loss - as reported $(10,636,000) $ (5,415,000) $ (4,847,000)
Net loss - pro forma (12,035,000) (14,256,000) (6,136,000)
Basic loss per common share - as reported (0.21) (0.13) (0.30)
Basic loss per common share - pro forma (0.24) (0.34) (0.36)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
For the Years Ended
December 31,
----------------------------------------
2001 2000 1999
-------------- ------------- -----------
Approximate risk free rate 5.50% 5.50% 5.50%
Average expected life 5 years 10 years 10 years
Dividend yield 0% 0% 0%
Volatility 132% 273% 225%
Estimated fair value of total options
granted $1,399,000 $8,841,000 $1,289,000
Warrants
The Company has an obligation 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 warrants to be issued by the Company are granted in 1,000,000
increments based on certain performance criteria. At December 31, 1999,
1,000,000 of the warrants had been granted but were not issued yet. In
connection with the obligation to issue 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 granted during 2000. During 2001,
850,000 of the warrants had been granted but were not issued by December 31,
2001. 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%.
At December 31, 2001, the Company will have the obligation to grant 5,150,000
warrants under the agreement in the future if the performance criteria specified
are met.
The Company also issued and modified warrant terms in the settlement of certain
litigation (Note 7). These warrants and modifications have been valued at
$234,000 using the Black-Scholes option pricing model. (See assumptions used in
Note 7).
The following table presents the activity for warrants outstanding:
Weighted
Average
Number of Exercise
Warrants Price
---------------------------
Outstanding - December 31, 1998 3,463,954 $ 1.81
Issued 12,721,000 0.51
Forfeited/canceled (993,828) 4.84
Exercised (400,000) 0.31
---------------------------
Outstanding - December 31, 1999 14,791,126 0.53
Issued 35,000 3.96
Forfeited/canceled (32,506) 0.71
Exercised (9,352,620) 0.53
---------------------------
Outstanding - December 31, 2000 5,441,000 0.53
Issued 2,066,587 1.12
Forfeited/canceled (36,000) 0.80
Exercised (22,000) 0.19
---------------------------
Outstanding - December 31, 2001 7,449,587 $ 0.69
===========================
All of the outstanding warrants are exercisable and have a weighted average
remaining contractual life of 2.31 years.
Note 9 - Income Taxes
As of December 31, 2000, the Company has net operating loss (NOL) carryforwards
of approximately $21,800,000, which expire in the years 2000 through 2021. The
utilization of the NOL carryforward is limited to $469,000 on an annual basis for
net operating loss carryforwards generated prior to September 1996, due to an
effective change in control, which occurred as a result of the 1996 private
placement. As a result of the significant sale of securities during 1999, the
Company's net operating loss carryforwards will be further limited in the future
to an annual amount of $231,000 due to those changes in control. The Company
also has a deferred tax liability of approximately $221,000 related to
capitalized software development costs. The Company has concluded it is
currently more likely than not that it will not realize its net deferred tax
asset and accordingly has established a valuation allowance of approximately
$7,400,000 and $5,000,000, respectively. The change in the valuation allowance
for 2001 and 2000 was approximately $2,413,000 and $1,668,000, respectively.
Note 10 - Employee Benefit Plan
Effective March 25, 1997, the Company adopted a defined contribution retirement
savings plan, which covers all employees age 21 or older with one thousand hours
of annual service. Matching contributions are made by the Company at $0.25 for
each $1 that the employee contributes up to 8% of compensation during 1998.
The Company has certain violations under the plan, which are considered
reportable transactions. The Company was delinquent in filing a complete Form
5500, and was notified by the Department of Labor to complete its filing. The
Company has complied in filing the Form 5500 within the specified time period,
however, the Company could be subject to certain penalties as a result.
The Company's matching contributions vest to the participant according to the
following vesting schedule:
Years of Service
----------------
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
Note 11 - Related Party Transactions
Prior to being elected to the board of directors of the Company in 1999, a
company affiliated with one of the Company's directors, entered into agreements
with us to provide executive search services and sales and marketing service to
us. In connection with those agreements, the Company issued a 3-year option to
acquire up to 25,000 shares of the Company's common stock at an exercise price of
$.55 per share. An expense of approximately $13,000 related to the issuance of
the option was recorded. The Company paid the related company approximately
$51,000 and $152,000 during 2001 and 2000, respectively. The Company also
entered into an agreement with the affiliated company for rental space, use of
clerical employees and to pay a portion of utility and telephone costs. Rent
expense for 2001 and 2000 was approximately $111,000 and $93,000, respectively.
During 2000, the Company paid two companies affiliated with another of the
Company's directors $118,000 for services and related expenses and approximately
$66,000 for software development and web-site hosting and development services
and purchase of computer equipment. The Company also acquired a business from a
director of the Company for $474,000 in 2000 (Note 4).
The Company also has an obligation to issue warrants to a pharmacy management
company in which a member of the Company's audit committee is a related party,
if certain performance criterion are met in the future (Note 7).
The Company has a consulting agreement with one of the Company's directors to
assist with marketing of the Company's products. The Company paid the director
$0 and $52,000 for such consulting services in 2001 and 2000, respectively.
During July 2001, the Company received $136,000 as a short- term advance from a
related party, $50,000 of which was repaid during August 2001. An additional
$30,000 and $50,000 was advanced to the company by the related party during
September and December 2001, leaving an outstanding balance of $166,000 at
December 31, 2001. The entire amount was repaid during February 2002.
Note 12 - Subsequent Events
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. 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 will be required to record financing costs
during the first quarter of 2002 associated with this loan agreement as a result
of the in-the-money conversion feature totalling approximately $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.
Note 13 - Summarized Quarterly Results (Unaudited)
The following table presents unaudited operating results for each quarter within
the two most recent years. The Company believes that all necessary adjustments
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full fiscal year.
First Second Third Fourth
Quarter (4) Quarter Quarter (2) Quarter (3),(5)
----------- ----------- ----------- ---------------
December 31, 2000
Revenues $ 64,000 $ 126,000 $ 104,000 $ 32,000
Operating expenses 1,054,000 2,011,000 1,455,000 2,090,000
Gross profit (loss) 61,000 106,000 31,000 (52,000)
Loss from continuing operations (981,000) (1,849,000) (1,380,000) (2,134,000)
Gain (loss) from discontinued
operations 650,000 - - 279,000
Net income (loss) (331,000) (1,849,000) (1,380,000) (1,855,000)
Basic earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
Diluted earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
December 31, 2001
Revenues $ 30,000 $ - $ - $ (1,000)
Operating expenses 2,190,000 1,427,000 3,053,000 1,261,000
Gross profit (loss) 25,000 (28,000) (5,000) (176,000)
Loss from continuing operations (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Net income (loss) (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Basic earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
Diluted earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
(1) Earnings per share are computed independently for each quarter and the full
year based upon respective average shares outstanding. Therefore, the sum
of the quarterly net earnings per share amounts may not equal the annual
amounts reported.
(2) Included in third quarter 2001 operating expense is $1,111,000 of expenses
related to the impairment of intangible assets. (Note 4)
(3) Included in fourth quarter 2001 operating loss is $1,022,000 in financing
costs. (Notes 6 and 8)
(4) During the first quarter of 2000, the Company closed on the sale of assets
of its remaining staffing business and discontinued these operations.
(Note 3)
(5) During the fourth quarter of 2000, the Company wrote off unrealizable
assets related to the discontinued operations, and adjusted remaining
liabilities settled for less than recorded amounts. (Note 3)
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
September 30, December 31,
2002 2001
(Unaudited)
Assets
Current assets
Cash and cash equivalents ..................... $ 267,000 $ 8,000
Accounts receivable, trade .................... 1,000 --
Prepaid expenses and other .................... 240,000 344,000
----------- -----------
Total current assets ...................... 508,000 352,000
Software development costs, net ................. 1,024,000 649,000
Property and equipment, net ..................... 335,000 365,000
Goodwill, net ................................... 1,735,000 1,735,000
----------- -----------
Total assets .................................... $ 3,602,000 $ 3,101,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable ................................. $ 17,000 $ 158,000
Convertible notes payable ..................... 1,000,000 --
Advance from related party ................... 50,000
Accounts payable .............................. 567,000 851,000
Accounts payable-related parties .............. 130,000 166,000
Accrued expenses .............................. 407,000 450,000
Deferred revenue .............................. 155,000 --
Accrued payroll taxes interest and penalties .. 131,000 131,000
----------- -----------
Total current liabilities ................. 2,457,000 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; 65,842,599 and 56,651,409 issued
and outstanding .............................. 66,000 56,000
Dividends payable with common stock ........... 8,000 7,000
Additional paid-in capital .................... 39,848,000 35,341,000
Accumulated deficit ........................... (38,777,000) (34,059,000)
------------ ------------
Total stockholders' equity ................ 1,145,000 1,345,000
------------ ------------
Total liabilities and stockholders' equity ...... $ 3,602,000 $ 3,101,000
============ ============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Unaudited Consolidated Statements of Operations
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
............. ............. ............. .............
Revenues ...................... $ -- $ -- $ 10,000 $ 30,000
Direct costs of services ...... 103,000 5,000 495,000 38,000
------------ ------------ ------------ ------------
Gross margin .................. (103,000) (5,000) (485,000) (8,000)
------------ ------------ ------------ ------------
Software research and
development costs ............ 153,000 348,000 533,000 947,000
Selling, general and
administrative expenses ...... 1,422,000 1,594,000 3,390,000 4,611,000
Impairment of intangible Assets -- 1,111,000 -- 1,111,000
------------ ------------ ------------ ------------
Net loss from operations ...... (1,678,000) (3,058,000) (4,408,000) (6,677,000)
Other income .................. 2,000 11,000 7,000 11,000
Financing Costs ............... (43,000) (121,000) (246,000) (346,000)
Interest expense .............. (13,000) (15,000) (71,000) (64,000)
------------ ------------ ------------ ------------
Net loss ...................... $ (1,732,000) $ (3,183,000) $ (4,718,000) $ (7,076,000)
============ ============ ============ ============
Net loss per common share ..... $ (0.03) $ (0.06) $ (0.08) $ (0.14)
============ ============ ============ ============
Weighted average shares
outstanding ................... 63,767,646 51,267,407 60,698,928 49,308,780
============ ============ ============ ============
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 $(3,183,000) $(7,076,000)
Add back: Goodwill amortization 39,000 121,000
----------- -----------
Adjusted net loss $(3,144,000) $(6,955,000)
=========== ===========
Basic and diluted loss per share
as reported $ (0.06) $ (0.14)
========== ==========
Goodwill amortization $ -- $ --
=========== ==========
Adjusted loss per share $ (0.06) $ (0.14)
========== ==========
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months
Ended September 30,
---------------------------
2002 2001
------------ -----------
Cash flows from operating activities
Net loss ............................................. $(4,718,000) $(7,076,000)
Adjustments to reconcile net income (loss) to net
cash flows (used in) provided by operating activities
Depreciation and amortization ...................... 238,000 375,000
Amortization of discount and warrants-
convertible debt .................................. 70,000 374,000
Options and warrants issued in conjunction with
stock issuance, services and for litigation
settlements, respectively .......................... 177,000 503,000
Options and warrants issued in for consulting
services ........................................... 92,000 --
Write off of unrecoverable intangible assets, net -- 1,111,000
Write off of leasehold improvements ................. 7,000 --
Net changes in current assets and current liabilities 589,000 1,130,000
----------- -----------
Net cash flows (used in) provided by operating
activities ...................................... (3,545,000) (3,583,000)
----------- -----------
Cash flows from investing activities
Software development costs incurred .................. (522,000) (366,000)
Purchase of property and equipment ................... (69,000) (66,000)
----------- -----------
Net cash flows (used in) investing activities .... (591,000) (432,000)
----------- -----------
Cash flows from financing activities
Advances received on convertible note ................ 1,000,000 1,500,000
Advances from related party .......................... 50,000 --
Proceeds from short term borrowings-related parties .. 155,000 --
Repayment of short term borrowings-related parties ... (191,000) --
Payments on capital leases and debt .................. (208,000) (130,000)
Proceeds from the issuance of common stock, net of
offering costs ...................................... 3,474,000 1,481,000
Net proceeds from exercise of options and warrants ... 115,000 230,000
----------- -----------
Net cash flows provided by (used in) financing
activities ...................................... 4,395,000 3,081,000
----------- -----------
Net increase (decrease) in cash and cash equivalents ... 259,000 (934,000)
Cash and cash equivalents at beginning of period ....... 8,000 1,007,000
----------- -----------
Cash and cash equivalents at end of period ............. $ 267,000 $ 73,000
=========== ===========
Non-cash and investing and financing activities for the nine months ended September 30,
2002:
Options and warrants valued at $92,000 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.
Warrants issued to related party in connection with advances provided valued at
$45,000.
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 nine months ended September 30,
2001:
Conversion of preferred stock into common stock.
Conversion of $1,000,000 note payable into 1,618,477 shares of common stock.
Financed insurance policies of $3,000 by issuing a note payable.
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
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 September 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 nine months ended September 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
September 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
three quarters of 2002.
Equity Line
The Company had entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which was terminated by the mutual agreement of the parties on August
6, 2002. 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 September 30, 2002, 1,850,000 of the warrants
had been earned.
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.
The agreement provides for a total of 5,150,000 remaining warrants under five
performance criteria categories which can be earned in any order or
concurrently. Had all of the remaining performance criteria been met at
September 30, 2002, the fair value of the related warrants and resulting expense
would have been approximately $ $1,691,000, 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 dated February 19,
2002 with WellPoint Health Networks Inc. in which a member of the Company's
audit committee is a related party, pursuant to which we borrowed $1,000,000.
The loan would have become payable on February 19, 2003, if not converted into
our common stock. The loan earned annual interest at a floating rate of 300
basis points over prime, as it is adjusted from time to time, which was also
payable at maturity and may be converted into common stock. Conversion into
common stock was at the option of either WellPoint or Medix at a contingent
conversion price. The Company 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 was secured by the grant of a
security interest in all Medix's intellectual property, including its patent,
copyrights and trademarks. Medix converted the principal of and interest accrued
on the note into 2,405,216 common shares on October 9, 2002. The security
interest in Medix's intellectual property was also released.
The Company received a $50,000 advance from a director of the Company, during
July 2002. The advance allows for conversion into 125,000 shares of the
Company's common stock. The Company also issued 125,000 warrants, exercisable at
$.50 per share in connection with the advance. This advance was converted into
125,000 shares of common stock subsequent to September 30, 2002. The warrants
and number of conversion shares are identical to those offered under the private
placements.
Private Placements
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. Subsequently, some of these subscribers holding
warrants to purchase 1,770,000 shares of common stock, have agreed to amend the
exercise period of their warrants from July 1, 2003 to December 31, 2008
During July 2002, the Company initiated a second private placement of its $.001
par value common stock. A total of 3,600,000 units were placed during the period
July to October 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 January 1,
2003 and prior to January 1, 2008. The Company received a total of $1,440,000
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 nine months of 2002, the Company granted options to purchase
1,918,500 shares at exercise- prices of $.38 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 nine 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. During
July and August 2002, the Company received advances that totaled $130,000 from a
related party.
The Company also received an advance of $50,000 from a member of the board of
directors during July 2002, which was converted subsequent to September 30, 2002
into 125,000 shares of common stock. The Company also issued 125,000 warrants,
exercisable at $.50 per share in connection with the advance. The warrants and
number of conversion shares are identical to those offered under the private
placements.
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 agreement has been signed and the $25,000 was paid
during September 2002.
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. The
settlement agreement has been signed and $32,000 of the settlement amount was
paid during September 2002.
Subsequent Events - Acquisition Letter of Intent
On October 30, 2002, the Company announced that it has entered into a
non-binding Letter of Intent with PocketScript, LLC. Under the Letter of Intent,
Medix would purchase all of the assets of PocketScript and related companies,
subject to the completion of satisfactory due diligence on the part of both
companies and negotiation and execution of definitive documents by December 20,
2002. If consummated, Medix would issue its convertible preferred stock to
PocketScript, convertible into 12 million shares of common stock, subject to a
downward adjustment if a certain closing value is not realized. In addition,
Medix would issue up to $4 million in additional convertible preferred stock if
certain business enhancement events occur within six months of the closing of
the acquisition. The sale of any stock issued by Medix would be restricted for
periods from 3 to 24 months after closing. Medix must also pay to PocketScript
$100,000 on or before October 31, 2002. Medix will also enter into employment or
consulting agreements with key PocketScript employees, and will be required to
raise $1 million prior to closing. Finally, PocketScript will obtain the
termination of a right of first refusal held by a third party.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PocketScript, LLC
Mason, Ohio
We have audited the accompanying balance sheets of PocketScript, LLC (formerly
PocketScript, Inc.) as of December 31, 2001 and 2000, and the related statements
of operations, changes in redeemable preferred stock stockholders' equity and
cash flows for the years ended December 31, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. 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 PocketScript, LLC (formerly
PocketScript, Inc.) as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has experienced recurring losses and has a working
capital deficit, which raise substantial doubt about its ability to continue as
a going concern. Management's plans regarding those matters also are described
in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
--------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
February 5, 2003
Denver, Colorado
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Balance Sheets
December 31,
------------------------- September 30,
2001 2000 2002
---------- ---------- ----------
(unaudited)
Assets
Current assets
Cash $ - $ 153,621 $ 10,027
Accounts receivable, net - 5,055 18,427
Prepaid expenses and other - 11,302 20
---------- ---------- ----------
Total current assets - 169,978 28,474
---------- ---------- ----------
Non-current assets
Property and equipment, net 2,020,057 2,650,818 303,632
Other assets 77,029 59,200 27,029
---------- ---------- ----------
Total non-current assets 2,097,086 2,710,018 330,661
---------- ---------- ----------
Total assets $2,097,086 $2,879,996 $ 359,135
========== ========== ==========
Liabilities and Stockholders' (Members) Deficit
Current liabilities
Convertible debentures $ - $2,131,000 $ -
Notes payable 1,890,400 - 250,000
Bank overdraft 5,643 - -
Accounts payable 2,148,326 1,184,731 20,730
Accounts payable - related parties - - 329,981
Accrued expenses 1,311,873 539,543 208,579
---------- ----------- ----------
Total current liabilities 5,356,242 3,855,274 809,290
---------- ---------- ----------
Notes payable, less current portion - - 1,364,689
---------- ---------- ----------
Total liabilities 5,356,242 3,855,274 2,173,979
---------- ---------- ----------
Commitments and contingencies
Redeemable convertible cumulative
preferred stock, $0.01 par value:
Series A- 0% rate, authorized shares -
8,000,000, issued and outstanding
shares - 3,680,702 and 2,256,023 at
December 31, 2001 and 2000,
respectively, with liquidation
preferences aggregating $5,521,208
(2001) and $3,380,658 (2000) 5,521,208 3,380,658 -
Series B1- 8% rate, authorized shares
- 2,379,795, issued and outstanding
shares - 2,054,795 at December 31,
2001 and 2000 with liquidation
preferences aggregating $3,342,193
(2001) and $3,102,193 (2000) 3,260,000 3,020,000 -
Series B2- 8% rate, authorized shares
- 9,620,205, no shares issued and
outstanding - - -
Equity (deficit)
Members capital, 100 units issued and
outstanding at September 30, 2002 - - 1,000
Common stock, $.001 par value,
50,000,000 shares authorized,
10,000,000 shares issued and
outstanding at September 30, 2002
(unaudited) December 31, 2001 and
2000, respectively 100,000 100,000 -
Additional paid-in capital 999,852 849,852 8,880,060
Accumulated deficit (13,140,216) (8,325,788) (10,695,904)
----------- ---------- -----------
Total stockholders' (members)
deficit (12,040,364) (7,375,936) (1,814,844)
----------- ---------- ----------
Total liabilities and stockholders'
(members) deficit $2,097,086 $2,879,996 $ 359,135
========== ========== ==========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statements of Operations
For the Year Ended For the Nine Months
December 31, Ended September 30,
----------------------- -----------------------
2001 2000 2002 2001
---------- ---------- ---------- ----------
(Unaudited)
Sales
Revenues $ 597,505 $ 81,439 $ 135,159 $ 597,505
---------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative expenses 3,933,270 6,467,412 485,998 3,522,095
Software research and
development costs 1,032,214 1,144,895 45,925 1,032,214
---------- ---------- ---------- ----------
Total operating expenses 4,965,484 7,612,307 531,923 4,554,309
Other income (expense)
Financing costs (150,000) (290,926) - (150,000)
Interest expense (59,976) (121,128) (38,791) (59,676)
Other income 3,527 53,097 - 3,202
---------- ---------- ---------- ----------
Total other income
(expense) (206,449) (358,957) (38,791) (206,474)
---------- ---------- ---------- ----------
Net loss before reorganization
items (4,574,428) (7,889,825) (435,555) (4,163,278)
Reorganization Items
Discharge of liabilities - - 3,915,324 -
Reorganization expenses - - (470,847) -
Write-off of assets - - (564,610) -
---------- ---------- ---------- ---------
Total gain from
reorganization items - - 2,879,867 -
Net income (loss) (4,574,428) (7,889,825) 2,444,312 (4,163,278)
Dividend on preferred stock (240,000) (20,000) - (180,000)
---------- ---------- ---------- ----------
Net income (loss) applicable to
common stockholders (LLC
members) $(4,814,428) $(7,909,825) $2,444,312 $(4,343,278)
=========== =========== ========== ===========
Basic and diluted income (loss)
per share (LLC unit) $ (0.48) $ (0.79) $24,443.12 $ (0.43)
========== =========== ========== ===========
Weighted average shares (LLC
units) outstanding 10,000,000 10,000,000 100 10,000,000
========== ========== ========== ==========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statement of Changes in Redeemable Preferred Stock and Stockholders' Equity(Deficit)
For the Years Ended December 31, 2001, 2000 and 1999
Redeemable Preferred Stock Stockholders' Equity (Deficit)
--------------------------------------------------------------------- --------------------------------------------------------------------------------------
Series A Series B-1 Series B-2 Common Stock Members' Interests Additional Stockholders'
--------------------- --------------------- --------------------- ---------------------- --------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Units Amount Capital Deficit (Deficit)
--------- ---------- --------- --------- --------- --------- ---------- --------- --------- ---------- ---------- ---------- ------------
Balance at December 31, 1999 - $ - - $ - - $ - 10,000,000 $ 100,000 - $ - $ 309,200 $ (315,963) $ 93,237
Issuance of stock options
to consultants - - - - - - - - - - 249,726 - 249,726
Issuance of warrants - - - - - - - - - - 290,926 - 290,926
Issuance of redeemable
convertible preferred stock 1,700,600 2,550,115 2,054,795 3,000,000 - - - - - - - - -
Distribution to stockholder - - - - - - - - - - - (100,000) (100,000)
Dividend on redeemable
convertible preferred stock - - - 20,000 - - - - - - - (20,000) (20,000)
Conversion of debentures 555,423 830,543 - - - - - - - - - - -
Net loss - - - - - - - - - - - (7,889,825) (7,889,825)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------- -----------
Balance at December 31, 2000 2,256,023 3,380,658 2,054,795 3,020,000 - - 10,000,000 100,000 - - 849,852 (8,325,788) (7,375,936)
Conversion of debentures 1,424,679 2,140,550 - - - - - - - - - - -
Dividend on redeemable
convertible preferred stock - - - 240,000 - - - - - - - (240,000) (240,000)
Issuance of warrants - - - - - - - - - - 150,000 - 150,000
Net loss - - - - - - - - - - - (4,574,428) (4,574,428)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------- ------------
Balance at December 31, 2001 3,680,702 5,521,208 2,054,295 3,260,000 - - 10,000,000 100,000 - - 999,852 (13,140,216) (12,040,364)
Retirement of preferred
stock (unaudited) - - (2,054,795) (3,260,000) - - - - - - 2,260,000 - 2,260,000
Net income (unaudited) - - - - - - - - - - - 2,444,312 2,444,312
Bankruptcy reorganization
and Conversion to LLC
(unaudited) (3,680,702) (5,521,208) - - - - (10,000,000) (100,000) 100 1,000 5,620,208 - 5,521,208
---------- ---------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- ---------- ------------
Balance at September 30,
2002 (unaudited) - $ - - $ - - $ - - $ - 100 $ 1,000 $8,880,060 $(10,695,904) $(1,814,844)
========= ========= ========= ========= ========= ========= ========= ========= ========= ========= ========== =========== ===========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statements of Cash Flows
For the Years Ended For the Nine Months
------------------------- Ended
December 31, September 30,
------------------------- ------------------------
2001 2000 2002 2001
----------- ----------- ----------- -----------
(Unaudited)
Cash flows from operating activities
Net loss $(4,574,428) $(7,889,825) $2,444,312 $(4,163,278)
----------- ----------- ---------- -----------
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and amortization 740,798 288,085 151,815 555,598
Issuance of stock options and
warrants for services 150,000 540,652 - 150,000
Interest on convertible debt 9,550 93,543 - 9,550
Reorganization items - - (3,350,614) -
Changes in operating assets and
liabilities
Accounts receivable, net 5,055 (5,055) (18,427) 5,055
Prepaid expenses and other 11,302 (61,302) 49,980 11,302
Accounts payable and accrued
liabilities 1,735,925 1,642,764 559,335 1,617,221
----------- ----------- ---------- -----------
Net cash used in operating
activities (1,921,798) (5,391,138) (163,599) (1,814,552)
----------- ----------- ---------- ----------
Cash flows from investing activities
Purchase of intangible assets (17,829) - - (17,829)
Purchase of property and equipment (110,037) (2,935,278) - (82,076)
----------- ---------- ---------- ----------
Net cash used in investing
activities (127,866) (2,935,278) - (99,905)
----------- ---------- ---------- ----------
Cash flows from financing activities
Bank overdraft 5,643 - (5,643) -
Proceeds from issuance of
convertible debentures - 2,868,000 -
Proceeds from issuance of
preferred stock - 5,550,115 -
Proceeds from notes payable 1,890,400 1,500,000 179,269 1,890,400
Repayment of notes payable - (1,600,000) - -
----------- ---------- ---------- ----------
Net cash provided by
financing activities 1,896,043 8,318,115 173,626 1,890,400
----------- ---------- ---------- ----------
Net (decrease) increase in cash (153,621) (8,301) (10,027) (24,057)
Cash - beginning of year 153,621 161,922 - 153,621
----------- ---------- ---------- ----------
Cash - end of year $ - $ 153,621 $ 10,027 $ 129,564
=========== ========== ========== ==========
Deemed distribution on debt
assumption $ - $ 100,000 $ - $ 100,000
=========== ========== ========== ==========
Dividend on redeemable convertible
preferred stock $ 240,000 $ 20,000 $ - $ 180,000
=========== ========== ========== ==========
Convertible notes payable converted
to redeemable series A preferred
stock $ 2,131,000 $ 818,000 $ - $ 818,000
=========== ========== ========== ==========
Redeemable preferred Series B-1
stock retired $ - $ - $3,260,000 $ -
=========== ========== ========== ==========
Licensed software returned for
repurchase of B-1 preferred stock $ - $ - $1,000,000 $ -
=========== ========== ========== ==========
Debt forgiveness in reorganization
items $ - $ - $ 564,610 $ -
=========== ========== ========== ==========
Equipment write-off in
reorganization items $ - $ - $3,915,224 $ -
=========== ========== ========== ==========
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
PocketScript, LLC (formerly PocketScript, Inc.) (the Company) was incorporated
in Ohio on November 5, 1999. The Company and Way Over The Line, LLC (WOTL) are
related parties as an officer and shareholder of the Company is the owner of
WOTL. The Company provides technology that allows physicians to issue
prescriptions electronically through the use of a handheld computer that is
linked wirelessly to the pharmacist and others involved in the prescription
workflow.
PocketScript, Inc. was originally incorporated as an S Corporation and
subsequently converted into an Ohio C Corporation in 2000 and became a Delaware
C Corporation through a merger with a Delaware Corporation established for the
purpose of the merger. In 2002 after emergence from bankruptcy, PocketScript,
LLC, purchased the assets of PocketScript, Inc. Because the business operations
have remained intact, the accompanying financial statements have been presented
as that of a continuous business enterprise.
Unaudited Interim Financial Statements
The September 30, 2002 and 2001 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, operating results and cash flows for those interim periods. The
results of operations for the nine months ended September 30, 2002 and 2001 are
not necessarily indicative of the results expected for an entire year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures 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 those estimates.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the
United States. The Company periodically performs credit analysis and monitors
the financial condition of its customers to reduce credit risk.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
values due to the relatively short maturity of these instruments.
The carrying amounts of debt issued approximate their fair value because
interest rates on these instruments approximate market interest rates.
Revenue Recognition
The Company defers the recognition of all revenue until collectibility is
probable, persuasive evidence of an arrangement exists, and the price of the
products or services being sold is fixed and determinable. Revenue will be
generated principally through pharmacy benefits managers, pharmacies and
pharmaceutical manufacturers based on a transaction fee for each prescription
processed or based upon a monthly fee in lieu of transaction fees. These fees
will be recognized upon the occurrence of the transaction or ratably over the
service period. Revenue will also be generated from the sale of software
licenses and the sale or lease of hardware. The software licenses and leased
hardware revenue will be recognized ratably over the term of the license or
lease beginning after the software and hardware have been delivered and
installed and the title and risks of ownership have been passed to the customer.
Revenue from the sale of hardware will be recognized upon shipment of the
product. The Company will also earn fees from data compilation and distribution,
which will be recognized as earned. Revenue from Internet advertising contracts
will be recognized ratably over the service period, with incremental revenues
(as determined by customer usage) recognized on a per transaction basis. No
revenue will be recognized that is subject to a refund or the performance of a
future obligation.
Income Taxes
Effective January 1, 2000, the Company changed its status from an S corporation
to a C Corporation for tax purposes. Income taxes are provided based on the
liability method of accounting pursuant to Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income taxes are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Company's net deferred tax assets are fully reserved for by a
valuation allowance.
Subsequent to the purchase of the Company's assets through Chapter 11,
bankruptcy proceedings those assets and secured liabilities were acquired in
2002 by PocketScripts, LLC, accordingly no provision for income taxes has been
included in the accompanying financial statements.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets of 3
years.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company evaluates the fair value of such assets compared to
their carrying values in accordance with SFAS No. 144, to determine whether any
impairment is required.
Financing Costs
The company records as financing costs in its statement of operations
amortization of in-the-money conversion features on convertible debt accounted
for in accordance with EITF 98-5 and 00-27, amortization of discounts from
warrants issued with debt securities in accordance with APB No. 14 and
amortization of discounts resulting from other securities issued in connection
with debt based on their relative fair values, and any value associated with
inducements to convert debt in accordance with FASB 84.
Research and Development Costs
The Company expenses research and development costs as incurred.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were $50,192 and $92,862 for the years ended December 31,
2001 and 2000, and $100 (unaudited) and $50,192 (unaudited), for the nine-months
ended September 30, 2002 and 2001, respectively.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
The weighted average LLC units outstanding as a result of the Company's
emergence from bankruptcy and conversion to an LLC in 2002 has been
retroactively adjusted as if they were outstanding at January 1, 2002.
For the years ended December 31, 2001 and 2000, and the period ended September
30, 2001 (unaudited) total stock options, warrants and convertible debt and
preferred stock of 8,298,946 were not included in the computation of diluted
loss per share because their effect was antidilutive, however, if the Company
were to achieve profitable operations in the future, they could potentially
dilute such earnings. The Company had no dilutive securities outstanding at
September 30, 2002.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for years beginning after June 15,2002. The Company
believes the adoption of this statement will have no material impact on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
Company believes that the adoption of this statement will have no material
impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on the Company's
financial statements.
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating what effect the adoption of this
statement will have the Company's financial statements. The Company does not
expect the adoption of this statement to have a material effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure". This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002. The Company does
not expect the adoption of this statement to have a material effect on the
Company's financial statements.
Note 2 - Chapter 11 Bankruptcy Reorganization and Emergence
In February 2002, the Company filed a voluntary petition for Chapter 11 with the
bankruptcy court. In late February 2002 the Company filed a motion to sell
substantially all of its assets free and clear of liens to an entity represented
by an organized group of secured creditors (the "Secured Creditor Group") for an
amount ($1,600,000), which approximated the balances owed to the secured
creditor group and certain fees associated with the Chapter 11 proceedings. The
court ordered a federally supervised auction of the Company's assets on March
27, 2002. No competing bids were received and the court entered an order to sell
the assets to the Secured Creditor Group. The entity, which purchased the
assets, was PocketScripts, LLC whose members were also stockholders of
PocketScripts, LLC (formerly PocketScript, Inc.)
In connection with the bankruptcy proceedings and the Company's emergence,
assets that were not recovered from off-site locations were written-off totaling
$564,610, professional fees and other associated costs of $470,847 were
incurred, and unsecured liabilities of $3,460,324 and secured liabilities of
$455,000 belonging to creditors outside of the Secured Creditor Group were
discharged.
Note 3 - Management's Plans
The Company has incurred operating losses for the past several years resulting
in a accumulated deficit at September 30, 2002 of $(10,695,904)(unaudited).
These losses have produced operating cash flow deficiencies, and negative
working capital, which raise substantial doubt about its ability to continue as
a going concern.
In December of 2002, the company entered into a definitive merger agreement to
be acquired by Medix Resources, Inc. (Medix) through the issuance of Medix
preferred stock, which is convertible into common shares. Management plans
include the raising of capital once the acquisition is completed. The
acquisition is dependent upon a successful stockholders vote by Medix
stockholders. If the acquisition is not consummated and the subsequent capital
is not raised, the Company may be unable to continue in existence. The
accompanying financial statements do not include any adjustments as a result of
this uncertainty.
Note 4 - Related Party Transactions
In 1999, the Company purchased certain intellectual property, including
trademarks, servicemarks and other intangible assets, from WOTL in which two
shareholders received common stock valued at $9,200 for their development and
assignment of this intellectual property.
In 2000, the Company assumed a note payable from a bank of $100,000, which was
assigned to the Company from WOTL. In connection with this assumption of debt
for a related party the Company has recorded a deemed distribution to owners of
$100,000 due to the common control relationship.
The Company paid WOTL for certain management and programming services provided,
with total expense for the years ended December 31, 2001 and 2000 and the
nine-months ended September 30, 2002 and 2001 of $32,500 and $32,500, $32,500
(unaudited) and $45,925 (unaudited), respectively.
The Company paid a law firm for legal services, in which the Company's general
counsel and CFO have an ownership interest, totaling $14,227, $43,877, $15,000,
and $11,727 for the years ended December 31, 2001, 2000 and the nine months
ended September 30, 2002 (unaudited) and 2001 (unaudited).
Note 5 - Balance Sheet Disclosures
Property and equipment consists of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Furniture and fixtures $ 168,182 $ 165,745 $ 607,262
Computer hardware and purchased software 2,880,758 2,773,158 -
------------ ----------- -----------
3,048,940 2,938,903 607,262
Less property, plant and equipment -
accumulated depreciation (1,028,883) (288,085) (303,630)
------------ ----------- ------------
$ 2,020,057 $ 2,650,818 $ 303,632
============ =========== ============
Depreciation expense was $740,798 and $288,085 for the years ended December 31,
2001 and 2000, and $151,815 and $555,598 for the nine-months ended September 30,
2002 (unaudited) and 2001 (unaudited), respectively.
In January 2002, $1,000,000 of previously purchased software was returned to a
strategic partner in return for the retirement of all Series B-1 preferred
stock.
Accrued expenses consists of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Accrued payroll and benefits $ 713,127 $ 539,543 $ 170,079
Other accrued expenses 598,746 - 38,500
------------ ----------- ------------
$ 1,311,873 $ 539,543 $ 208,579
============ =========== ============
At various times during 2002, the Company was delinquent with payroll tax
deposits. At September 30, 2002, $20,000 was accrued for estimated taxes,
interest and penalties.
Note 6 - Notes Payable
On September 12, 2000, the Company entered into a credit facility with a
strategic partner. The facility allowed the Company to borrow up to $1,500,000
at an interest rate equal to the prime rate plus 2%. The Company borrowed
$1,500,000 and repaid the balance during 2000 from proceeds received under the
Series B-1 preferred stock offering (Note 9). This facility was canceled on
December 19, 2001.
Notes payable consist of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Note payable to a bank, interest at 9%,
due April 2001, currently in default.
Collateralized by substantially all
assets. Guaranteed by certain
shareholders. $ 250,000 $ - $ 250,000
Note payable to a bank, interest at 9%,
due April 2001, in default at December
31, 2001. Collateralized by
substantially all assets. Guaranteed
by certain shareholders. 350,000 - -
Note payable to a bank, interest at
prime plus 5% default rate (9.75% at
December 31, 2001 and September 30,
2002), due June 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. Guaranteed
by certain shareholders. 340,000 - -
Note payable to a corporation, interest
at bank prime plus 5% default rate
(9.75% at December 31, 2001 and
September 30, 2002), due June 2001, in
default at December 31, 2001.
Collateralized by substantially all
assets. 100,000 - -
Notes payable to corporations, interest
at prime plus 2% (6.75% at December
31, 2001), due May 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. 455,000 - -
Notes payable to stockholders, interest
at prime plus 5% default rate (9.75%
at December 31, 2001 and September 30,
2002), due June 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. 395,400 - -
Notes payable to secured creditors,
interest accrues at 10% until January
1, 2004 when the balance of accrued
interest is payable in full and
thereafter interest is payable monthly
until maturity at September 30, 2005.
Collateralized by substantially all
assets. - - 1,364,689
------------ ------------ ------------
1,890,400 - 1,614,669
Less current portion (1,890,400) - (250,000)
------------ ------------ -------------
$ - $ - $ 1,364,689
============ ============ ============
Remaining maturities under notes payable are as follows:
Period Ended September 30, Amount
-------------------------- ----------
2003 $ 250,000
2004 -
2005 1,314,689
----------
$1,614,669
==========
Note 7 - Convertible Debentures
In June 2000, the Company completed a $1,000,000 convertible debenture offering.
Each debenture is automatically convertible into one share of redeemable
convertible preferred stock upon the earliest of (i) the closing of an offering
by the Company of $5,000,000 or more of a new series of preferred stock, (ii)
the sale of the Company or (iii) January 8, 2001. The debentures are initially
convertible at a maximum price of $5.00 per share or 200,000 shares, subject to
a discount based on the timing of future equity issuances escalating from
12.5%-50% through January 8, 2001, with a minimum conversion price of $1.50.
After January 8, 2001, the debentures are convertible at $1.50 per share. The
debentures accrue interest at a rate of 8% per annum, payable monthly in
additional convertible debentures. In January 2001 a total of $1,000,000
representing all convertible debentures plus accrued interest was converted into
694,767 shares of Series A redeemable convertible preferred stock. There was no
in-the money conversion feature associated with the issuance of these
convertible notes payable as the value of the common stock was deemed to be
$1.50 based on conversion rates of recent redeemable convertible preferred stock
issued.
The Company also issued a $1,000,000 convertible debenture to a strategic
partner in June 2000 in conjunction with a services agreement. Each debenture is
automatically convertible into one share of redeemable convertible preferred
stock upon the events described in the preceding paragraph. The debentures are
convertible at a price of $1.50 per share or 666,666 shares. The debentures
accrue interest at a rate of 8% per annum, payable monthly in additional
convertible debentures. In January 2001 a total of $1,000,000 representing the
convertible debenture plus accrued interest was converted into 694,767 shares of
Series A redeemable convertible preferred stock. There was no in-the money
conversion feature associated with the issuance of these convertible notes
payable as the value of the common stock was deemed to be $1.50 based on
conversion rates of recent redeemable convertible preferred stock issued.
On September 15, 2000, the Company completed an $868,000 convertible debenture
offering. Each debenture is automatically convertible into one share of
redeemable convertible preferred stock upon the earliest of (i) the closing of
an offering by the Company of $10,000,000 or more of a new series of preferred
stock, (ii) the sale of the Company or (iii) March 25, 2001. The debentures are
convertible at a price of $1.50 per share, or 578,667 shares, after March 25,
2001 or upon a sale. Upon a qualified offering, the conversion price will be
equal to the per share price of the new stock issuance, less a 25% discount.
Under the terms of the agreement, the discounted conversion price will range
from $1.50-$1.75 per share. Should the per share price of the new stock issuance
be less than $1.50, the conversion price will be equal to the per share price of
the new issuance. The debentures accrue interest at a rate of 8% per annum,
payable monthly in additional convertible notes. A total of $818,000 convertible
debentures plus accrued interest was converted into 555,423 shares of Series A
redeemable convertible preferred stock in accordance with the agreement on
December 19, 2000. In March 2001 a total of $50,000 representing the remaining
convertible debenture plus accrued interest was converted into 35,145 shares of
Series A redeemable convertible preferred stock.
Note 8 - Commitments and Contingencies
Operating Leases
The Company leased office space under non-cancelable operating leases and is
currently renting office space under a month-to-month lease. Rent expense for
these leases was:
Year Ending December 31,
------------------------
2001 $ 214,241
2000 $ 163,873
Nine Months Ending
September 30, (unaudited)
-------------------------
2002 $ 61,500
2001 $ 152,170
Note 9 - Redeemable Convertible Preferred Stock
In February 2000, the Company issued Series A redeemable convertible preferred
stock, which has the same voting rights as the common stock of the Company. Each
share of preferred stock is convertible, at the option of the holder, into
common stock at an initial per share price of $1.50. This price may be adjusted
proportionately to any common stock activity to avoid dilution upon conversion.
The Company has reserved shares of its authorized but unissued common stock for
the full number of shares of common stock issuable on the conversion of all
outstanding preferred shares. At the Company's discretion, preferred shares may
automatically be converted into shares of common stock upon the closing of a
public offering in which the gross proceeds exceed $20,000,000.
In January 2000, the Company issued 1,533,932 shares of Series A preferred stock
for $2,300,115. Under the terms of a separate agreement with a strategic
partner, the Company sold 166,668 shares of Series A redeemable convertible
preferred stock for $250,000 in December 2000.
In December 2000, the Company issued 2,054,795 shares of Series B-1 redeemable
convertible preferred stock for $3,000,000. The preferred stock carries an 8%
cumulative dividend. Each share of preferred stock is convertible, at the option
of the holder, into common stock at an initial per share price of $1.50. This
price may be adjusted proportionately to any common stock activity to avoid
dilution upon conversion. The Company has reserved shares of its authorized but
unissued common stock for the full number of shares of common stock issuable on
the conversion of all outstanding preferred shares. At the Company's discretion,
preferred shares may automatically be converted into shares of common stock upon
the closing of a public offering in which the gross proceeds exceed $30,000,000.
The Company recorded preferred dividends of 240,000, $20,000 and $180,000 for
the years ended December 31, 2001 and 2000 and the nine-months ended September
30, 2002.
After January 2005, the Company shall, at the option of any holder, redeem
shares of preferred stock by paying the shareholder a price calculated in
accordance with the shareholder agreement. In the event of any voluntary or
involuntary liquidation of the Company, before any distribution of payment is
made to the holders of common stock, the holders of preferred stock are entitled
to receive an amount equal to $1.50 per share, plus the amount of any declared
and unpaid dividends. Any assets remaining after such payments to preferred
shareholders shall be distributed pro rata among all shareholders.
Each holder of preferred stock is entitled to such number of votes equal to the
number of shares of common stock into which all of such holder's preferred stock
is convertible.
In January 2002, the Series B-1 redeemable convertible stock was retired by
agreement of the parties. In connection with the retirement, the Company
returned previously purchased software of with a purchased cost of $1,000,000 as
consideration for the return of the preferred shares. The difference between the
carrying value of the purchased software of $1,000,000 and the value of the
preferred stock including cumulative accrued dividends of $3,260,000 was
recorded as an increase to additional paid-in-capital of $2,260,000.
Note 10 - Stockholders' Equity
Common Stock
Effective January 1, 2000, the Company's Articles of Incorporation were amended
resulting in one class of voting common stock. Prior to January 1, 2000, there
were two classes of common stock - voting Class A stock and nonvoting Class B.
Accordingly, all references in the financial statements related to share
amounts, including information concerning stock option plans, have been adjusted
retroactively to reflect this.
Stock Split
The Company declared a 100 for 1 stock split effective January 1, 2000. The
Company subsequently declared a 10-for-1 stock split effective June 8, 2000.
Accordingly, all references in the financial statements related to share
amounts, including information concerning stock option plans, have been adjusted
retroactively to reflect the stock splits.
Effective January 1, 2000, the Board of Directors formalized the Employee Stock
Option Plan (the Plan). The Plan provides for the issuance of up to 3,000,000
common shares in connection with the issuance of nonqualified and incentive
stock options. The Company's Board of Directors determines eligibility. The
exercise price of the options is generally the fair market value at the date of
grant. Options under the plan generally vest over three years, or earlier in the
event of a change in control, as defined.
Stock Options
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
The Company uses the Black-Scholes option-pricing model to estimate fair value
of options and warrants granted. Had compensation cost for the Company's warrant
issuances and stock options issued to employees in 2000 been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
December 31,
-----------------------------
2001 2000
------------- -------------
Net loss - as reported $ (4,574,453) $ (7,889,825)
Net loss - pro forma $ (4,574,453) $ (10,420,090)
Basic loss per share - as reported $ (0.48) $ (0.79)
Basic loss per share - pro forma $ (0.48) $ (1.04)
Employee stock options outstanding were as follows:
Weighted-
Average
Option Exercise
Shares Price
----------- ------------
Balance at January 1, 2000 - $ -
Options Granted 2,038,530 0.69
----------- ------------
Balance at December 31, 2000 and 2001 2,038,530 $ 0.69
=========== ============
During 2000, the Company granted 1,656,530 options at $0.50 per share and
382,000 options at $1.50 per share. Employee options exercisable totaled
1,339,280 at December 31, 2001. The fair value of option grants in 2000 was
$2,530,265 using the Black-Scholes option pricing model, with assumptions of
300% and 100% volatility, expected lives of seven years, no dividend yield and a
risk-free rate of 5.5%.
Stock Options to Consultants
In April 2000, the Company issued 196,500 options to purchase common stock to an
outside consultant at an exercise price of $1.50 per share. These options were
fully vested as of June 30, 2000 and expire June 30, 2007. The fair value of
these options of $249,726 were expensed, with fair value estimated using the
Black-Scholes option pricing model, with assumptions of 100% volatility,
expected lives of seven years, no dividend yield and a risk-free rate of 5.5%.
All outstanding stock options were eliminated as part of the Company's Chapter
11 bankruptcy proceeding (Note 2).
Stock Warrants
During 2000, the Company issued 228,919 warrants to outside consultants in
connection with the convertible debentures and the redeemable convertible
preferred stock issuances. Each warrant entitles the holder to purchase one
share of Series A redeemable convertible preferred stock at a price of $1.50,
subject to adjustments in certain events as defined in the agreement. The
warrants are exercisable immediately. The Company recorded financing charges of
$290,926 related to the issuance of these warrants. The fair value of the
warrants was estimated using the Black-Scholes option-pricing model, with
assumptions of 100% volatility, expected lives of seven years, no dividend yield
and a risk-free rate of 5.5%.
On April 12, 2001, associated with borrowings of $150,000, $150,000 and $100,000
from three shareholders, the Company issued 37,500, 37,500 and 25,000 warrants
to the three shareholders, respectively. Each warrant entitles the holder to
purchase one share of the Company's common stock at a price of $0.01 per share,
subject to adjustments in certain events as defined in the agreement. The
warrants are exercisable immediately and expire 90 days after $5 million in
venture capital financing is raised. These warrants have been valued at
$150,000, or $1.50 per option share which equals the estimated value of the
underlying common stock, based on conversion rates of recent redeemable
preferred stock issued.
The following table presents the activity for stock purchase warrants:
Exercise
Shares Price Expiration Date
---------- ------------ -----------------
Balance at January 1, 1999 - $ - -
February 7, 2007 -
Issuances 228,919 1.50 June 30, 2007
---------- -----------
February 7, 2007 -
Balance at December 31, 2000 228,919 1.50 June 30, 2007
Issuances 100,000 1.50 *
---------- -----------
February 7, 2007 -
Balance at December 31, 2001 328,919 $ 1.50 June 30, 2007 and *
========== ===========
* 90 days after raising $5,000,000 in venture capital.
All warrants were eliminated as part of the Company's Chapter 11 bankruptcy
proceeding (Note 2).
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The following unaudited pro forma condensed consolidated financial information
gives effect to the PocketScript merger under the purchase method of accounting.
These pro forma statements are presented for illustrative purposes only. The pro
forma adjustments are based upon available information and assumptions that we
believe are reasonable. The pro forma condensed consolidated financial
statements do not purport to represent what the consolidated results of
operations or financial position of Medix Resources would actually have been if
the PocketScript merger had in fact occurred on the dates that we refer to
below, nor do they purport to project the results of operations or financial
position of Medix Resources for any future period or as of any date,
respectively.
Under the purchase method of accounting, tangible and identifiable intangible
assets acquired and liabilities assumed are recorded at their estimated fair
market values. The excess of the purchase price, including estimated fees and
expenses related to the merger, over the net assets acquired is classified as
goodwill on the accompanying unaudited pro forma condensed consolidated balance
sheet.
The unaudited pro forma condensed consolidated balance sheet as of September 30,
2002, was prepared by combining the historical cost balance sheet at September
30, 2002 for Medix Resources with the historical cost balance sheet at September
30, 2002, for PocketScript, giving effect to the merger as though it had been
completed on September 30, 2002.
The unaudited pro forma condensed consolidated statements of operations for the
periods presented were prepared by combining Medix Resources' statements of
operations for the nine months ended September 30, 2002 and the year ended
December 31, 2001 with PocketScript's statements of operations for the same
periods, giving effect to the merger as though it had occurred on January 1,
2001. These unaudited pro forma condensed consolidated financial statements do
not give effect to any restructuring costs or to any potential cost savings or
other operating efficiencies that could result from the merger.
The historical financial statements of Medix Resources for the year ended
December 31, 2001 are derived from audited consolidated financial statements and
for the nine months ended September 30, 2002 are derived from unaudited
condensed consolidated financial statements of Medix Resources, all of which are
presented elsewhere in this proxy statement. The historical financial statements
of PocketScript for the year ended December 31, 2001 are derived from audited
consolidated financial statements and for the nine months ended September 30,
2002 are derived from unaudited condensed consolidated financial statements of
PocketScript, all of which are presented elsewhere in this proxy statement.
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2002
Medix(1) PocketScript(2) Total Pro Forma Combined
---------- --------------- ---------- ----------- --------
Assets
Cash and cash equivalents $ 267,000 $ 10,027 $ 277,027 $ (100,000) (3) $ 177,027
Accounts receivable, trade 1,000 18,427 19,427 19,427
Prepaid expenses and other 240,000 20 240,020 - 240,020
---------- ------------ ---------- ----------- -----------
Total current assets 508,000 28,474 536,474 (100,000) 436,474
Software development costs, net 1,024,000 - 1,024,000 (800,000) (4) 224,000
Property and equipment, net 335,000 303,632 638,632 46,368 (3) 685,000
Other assets - 27,029 27,029 (27,029) (3) -
Customer contracts - - - 162,000 162,000
Purchased technology - - - 3,500,000 3,500,000
Goodwill, net 1,735,000 - 1,735,000 5,434,500 (3) 7,169,500
---------- ------------ ---------- ----------- -----------
Total assets $3,602,000 $ 359,135 $3,961,135 $ 8,215,839 $12,176,974
========== ============ ========== =========== ===========
Liabilities and Stockholders' Equity
Notes payable $ 17,000 $ 250,000 $ 267,000 $ - $ 267,000
Convertible notes payable 1,000,000 - 1,000,000 - 1,000,000
Advance from related party 50,000 - 50,000 - 50,000
Accounts payable 567,000 20,730 587,730 995 (3) 588,725
Accounts payable-related parties 130,000 329,981 459,981 - 459,981
Accrued expenses 407,000 170,079 577,079 - 577,079
Deferred revenue 155,000 38,500 193,500 - 193,500
Accrued payroll taxes, interest,
and penalties 131,000 - 131,000 - 131,000
---------- ------------ ---------- ----------- -----------
Total current liabilities 2,457,000 809,290 3,266,290 995 3,267,285
---------- ------------ ---------- ----------- -----------
Long-term debt - 1,364,689 1,364,689 - 1,364,689
---------- ------------ ---------- ----------- -----------
Total liabilities - 2,173,979 4,630,979 995 4,631,974
---------- ------------ ---------- ----------- -----------
Commitments and contingency
Stockholders' equity
Common stock, $.001 par value;
100,000,000 authorized; 65,842,599
issued and outstanding. 66,000 1,000 67,000 (1,000) (3) 66,000
Dividends payable with common stock 8,000 - 8,000 - 8,000
Preferred stock - - - 7,200,000 (3) 7,200,000
Additional paid-in capital 39,848,000 8,880,060 48,728,060 (8,880,060) (3) 39,848,000
Accumulated deficit (38,777,000) (10,695,904) (49,472,904) 9,895,904 (39,577,000)
---------- ------------ ---------- ----------- -----------
Total stockholders' equity 1,145,000 (1,814,844) (669,844) 8,214,844 7,545,000
Total liabilities and stockholders'
equity $3,602,000 $ 359,135 $3,961,135 $ 8,215,839 $12,176,974
========== ============ ========== =========== ===========
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2002
Medix(1) PocketScript(2) Total Pro Forma Ref. Combined
---------- --------------- ---------- ----------- ---- -----------
Sales $ 10,000 $ 135,159 $ 145,159 $ - $ 145,159
---------- ------------ ---------- ----------- -----------
Revenues 10,000 135,159 145,159 - 145,159
---------- ------------ ---------- ----------- -----------
Operating expenses
Amortization of software costs
and license fees 495,000 - 495,000 - 495,000
Software research and development
costs 533,000 45,925 578,925 - 578,925
Selling, general and administrative
expenses 3,390,000 485,998 3,875,998 616,235 (5) 4,492,233
Impairment of assets - - - 151,000 (4) 151,000
---------- ------------ ---------- ----------- -----------
Total operating expenses 4,418,000 531,923 4,949,923 767,235 5,717,158
---------- ------------ ---------- ----------- -----------
Income (loss) from operations (4,408,000) (396,764) (4,804,764) (767,235) (5,571,999)
---------- ------------ ---------- ----------- -----------
Other income (expense)
Other income 7,000 7,000 - 7,000
Interest expense (71,000) (38,791) (109,791) - (109,791)
Financing costs (246,000) - (246,000) - (246,000)
Reorganization gain - 2,879,867 2,879,867 2,879,867 (7) -
---------- ------------ ---------- ----------- -----------
Net (loss) income $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Extraordinary item - forgiveness
of debt income - - - - -
---------- ------------ ---------- ----------- -----------
Net loss after extraordinary item $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Dividend on preferred stock - - - - -
---------- ------------ ---------- ----------- -----------
Net (loss) income applicable to
common stockholders $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Basic and diluted loss per common share $ (0.08) $ (0.08)
========== ===========
Weighted average pro forma shares
outstanding - basic and diluted 60,698,928 12,000,000 (6) 72,698,928
========== =========== ===========
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2001
Medix(1) PocketScript(2) Total Pro Forma Ref. Combined
---------- --------------- ---------- ----------- ---- -----------
Sales $ 29,000 $ 597,505 $ 626,505 $ - $ 626,505
---------- ------------ ---------- ----------- -----------
Revenues 29,000 597,505 626,505 - 626,505
---------- ------------ ---------- ----------- -----------
Operating expenses
Amortization of software costs
and licensefees 213,000 - 213,000 - 213,000
Software research and development
costs 1,075,000 1,032,214 2,107,214 - 2,107,214
Selling, general and administrative
expenses 5,746,000 3,933,270 9,679,270 283,103 (5) 9,962,373
Impairment of assets 1,111,000 - 1,111,000 649,000 (4) 1,760,000
---------- ------------ ---------- ----------- -----------
Total operating expenses 8,145,000 4,965,484 13,110,484 932,103 14,042,587
---------- ------------ ---------- ----------- -----------
Income (loss) from operations (8,116,000) (4,367,979) (12,483,979) (932,103) (13,416,082)
---------- ------------ ---------- ----------- -----------
Other income (expense)
Other income 12,000 3,202 15,202 - 15,202
Interest expense (104,000) (59,676) (163,676) - (163,676)
Financing costs (2,428,000) (150,000) (2,578,000) - (2,578,000)
---------- ------------ ---------- ----------- -----------
Net loss $(10,636,000) $ (4,574,453) $(15,210,453) $ (932,103) $(16,142,556)
============ ============ ============ =========== ============
Extraordinary item - - - - -
------------ ------------ ----------- ----------- ------------
Net loss after extraordinary item $(10,636,000) $ (4,574,453) $(15,210,453) $ (932,103) $(16,142,556)
============ ============ ============ =========== ============
Dividend on preferred stock - (240,000) (240,000) - (240,000)
------------ ------------ ----------- ----------- -----------
Net loss applicable to common stockholders $(10,636,000) $ (4,814,453) $(15,450,453) $ (932,103) $(16,382,556)
============ ============ ============ =========== ============
Basic and diluted loss per common share $ (0.21) $ (0.26)
============ ============
Weighted average pro forma shares
outstanding - basic and diluted 50,740,356 12,000,000 (6) 62,740,356
============ =========== ============
Notes to Unaudited Pro Forma Balance Sheet and Statements of Operations
1. Reflects the September 30, 2002 and December 31, 2001 balances filed by
Medix Resources, Inc. (Medix) on Forms 10-K and 10-Q.
2. Reflects the balances from the historical financial statements of the
acquiree, PocketScript, LLC (PocketScript) at September 30, 2002 and
December 31, 2001.
3. To record the merger consideration and purchase price allocation in
connection with the acquisition. Medix paid an initial deposit of $100,000
in connection with the merger; additionally Medix is to issue 12,000,000
shares of preferred stock subject to certain adjustments and additional
contingent payment consideration of up to $4,000,000 in common stock for
future performance criteria being satisfied. The preliminary purchase price
allocation below does not include any contingent consideration or
transaction fees and expenses. The value of the preferred stock is based
upon the 12,000,000 initial shares being issued which are convertible into
one share of Medix common stock, using a common share price of $.60 for
Medix common stock. The purchase price allocation is as follows:
Consideration:
Cash $ 100,000
Preferred Stock 7,200,000
Assumed Liabilities 2,175,000
----------
Total consideration $9,475,000
----------
Purchase Price Allocation:
Current Assets $ 28,500
Fixed Assets 350,000
Customer Contracts 162,000
Purchased Technology 3,500,000
Goodwill 5,434,500
----------
Total assets acquired $9,475,000
----------
The acquired intangible assets are amortized over their estimated useful
lives of five years for Customer Contracts and four years for Purchased
Technology. The purchase price allocation is based on preliminary
information obtained from an outside valuation being performed and is
subject to finalization and adjustment.
4. To adjust the balance of capitalized software development costs abandoned
at September 30, 2002, and recorded the related impairment balances for the
nine-month period ended September 30, 2002 and the year ended December 31,
2001.
5. To remove the historical depreciation and amortization and record the
depreciation
6. and amortization for the assets acquired based on the purchase price
allocation described in note 3 above.
7. To remove the gain from PocketScript Chapter 11 bankruptcy reorganization.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the issuance and distribution of the shares being
registered hereby.
Securities and Exchange Commission registration fee. $1,229
Printing and engraving expenses.................... 1,000
Legal fees and expenses............................ 15,000
Accounting fees and expenses....................... 50,000
Transfer Agent and Trustee fees and expenses....... 1,000
Miscellaneous...................................... 20,000
Total.............................................. $88,229
=======
Item 15. Indemnification of Directors and Officers.
See "INDEMNIFICATION OF OFFICERS AND DIRECTORS" in the prospectus.
Item 16. Exhibits.
Exhibit
Number Description
5.1* Opinion of Lowenstein Sandler PC
23.1 Consent of Ehrhardt Keefe Steiner & Hottman P.C.
23.2* Consent of Lowenstein Sandler PC (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
* To be filed by amendment.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933,
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement,
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that clauses (a) and (b) do not apply if the information
required to be included in a post-effective amendment by such clauses is
contained in periodic reports filed with or furnished to the Securities and
Exchange Commission by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on February 11,
2003.
MEDIX RESOURCES, INC.
By: /s/Darryl R. Cohen
-----------------------
Darryl R. Cohen
President and CEO
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
in so signing also makes, constitutes and appoints Darryl R. Cohen and Mark W.
Lerner, and each of them, his or her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign and file
Registration Statement(s) and any and all pre- or post-effective amendments to
such Registration Statement(s), with all exhibits thereto and hereto, and other
documents with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of them, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
Signature Title Date
/s/Darryl R. Cohen President, Chief Executive February 11, 2003
------------------ Officer and Director
Darryl R. Cohen (Principal Executive
Officer)
/s/Mark W. Lerner Executive Vice President, February 11, 2003
----------------- Chief Financial Officer and
Mark W. Lerner Secretary (Principal
Financial and Accounting
Officer)
/s/Patrick W. Jeffries Director February 11, 2003
----------------------
Patrick W. Jeffries
/s/Samuel H. Havens Director February 11, 2003
-------------------
Samuel H. Havens
/s/John T. Lane Director February 12, 2003
---------------
John T. Lane
/s/Joan E. Herman Director February 11, 2003
-----------------
Joan E. Herman
Director February __, 2003
----------------
Guy L. Scalzi
EXHIBIT INDEX
Exhibit
Number Description
5.1* Opinion of Lowenstein Sandler PC
23.1 Consent of Ehrhardt Keefe Steiner & Hottman P.C.
23.2* Consent of Lowenstein Sandler PC (included in Exhibit 5.1)
24.1 Power of Attorney (Included on signature page)
* To be filed by amendment.