MEDIX RESOURCES INC (NASDAQ:MDIX) files SEC Form 10KSB
EDGAR Online, Monday, April 12, 1999 at 18:18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The Company's revenues are provided primarily from its supplemental staffing of
therapy and nursing professionals. The Company intends to dispose of its
supplemental staffing business if an adequate price is offered. Until such a
sale occurs, and if the Company's projections for the supplemental staffing
portion of its business is met, such business should provide adequate cash flow
to fund the operation of such portion of the Company's business for the next
twelve months.
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The Company's medical information software business (Cymedix) will require
adequate funding in order to continue its efforts to bring its products to
market. Such funding is not currently secured. If the Company sells its
supplemental healthcare staffing business, the proceeds of such sale will not be
sufficient to fund the shortfall in the currently budgeted Cymedix operations
for the next twelve months. The Company will attempt to fund Cymedix's
development through raising capital in the private debt or equity markets. The
Company may not be successful in raising such capital. In which case, the
continued operation of the Company as a going concern would be doubtful.
Forward-Looking Statements and Associated Risks
This filing contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements include the plans and objectives of the management for future
operations, including plans and objectives relating to services offered by and
future economic performance of the Company.
Healthcare Services Operations. The forward-looking statements included herein
are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions that
the Company will continue to be able to provide on a cost effective and
competitive basis quality home health care and interim staffing services, that
the regulatory environment governing the Company's industry will not change in
ways that are materially adverse to the Company and its operations, that the
Company will be able to continue to fund operations, that the Company will be
able to raise additional equity or debt capital if required to fund operations,
that the Company will be able to achieve operating efficiencies resulting in
cost reductions, that a sufficient supply of qualified health care personnel
will be available to the Company for deployment in the health care industry on a
competitive and cost effective basis and that there will be no material adverse
change in the demand for the Company's services or in the Company's operations
or business. Additional risks and uncertainties that the Company faces include
the current uncertainty in the health care industry and government health care
reform proposals considered from time to time, which has already and may in the
future adversely affect the regulatory environment in which the Company operates
and the reimbursement rate payable under government programs, resulting in
decreased revenues from home care services; the Company's dependence on customer
relationships, which makes the Company vulnerable to consolidation in the health
care industry, changes in customer personnel and other factors that may impact
customer relationships; the Company's ability to obtain needed licenses, permits
and governmental approvals; the Company's ability to compete in the highly
competitive supplemental staffing services market; hospital budgetary cycles,
increased competition for qualified medical personnel, patient admission
fluctuations and seasonality; the adoption by hospitals and third party payers
of new or revised reimbursement policies; and uninsured risks associated with
providing home care and supplemental staffing services, which the Company will
attempt to minimize, but which can not be entirely eliminated.
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Medical Information Software Operations. The Company, through its subsidiary
Cymedix Lynx Corporation, has only recently begun its medical software line of
business through the acquisition of a development stage medial software
business. The uncertainties and risks that accompany forward- looking statements
are enhanced by the Company's lack of experience in this business. The Company
has no experience in marketing of software products, providing software support
services, evaluating demand for products, financing a software business and
dealing with government regulation of software products. As a developer of
information systems, the Company will be required to anticipate and adapt to
evolving industry standards and new technological developments. The market for
the Company's software products is characterized by continued and rapid
technological advances in both hardware and software development, requiring
ongoing expenditures for research and development and the 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. The Company's future success, if at all, will depend in
part upon its ability to enhance existing products, to respond effectively to
technology changes, and to introduce new products and technologies to meet the
evolving needs of its clients in the health care information systems market. The
Company is currently devoting significant resources toward the development of
products. There can be no assurance that the Company will successfully complete
the development of these products in a timely fashion or that the Company's
current or future products will satisfy the needs of the health care information
systems market. Further, there can be no assurance that products or technologies
developed by others will not adversely affect the Company's competitive position
or render its products or technologies noncompetitive or obsolete.
Certain of the Company's products provide applications that relate to patient
medical histories and treatment plans. Any failure by the Company's products to
provide accurate, secure and timely information could result in product
liability claims against the Company by its clients or their affiliates or
patients. The Company maintains insurance that it believes is adequate to
protect against claims associated with the use of it products, but there can be
no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful claim brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's 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.
The success of the Company is dependent to a significant degree on its key
management, sales and marketing, and technical personnel. The Company believes
that its success will also depend upon its 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 the Company'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 the Company's results of operations,
financial condition or business.
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The health care industry in the United States is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of health care organizations. During the past several years, the
health care industry has been subject to increasing levels of governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. The Company cannot predict with any certainty what impact, if any,
such increased regulation might have on its results of operations, financial
condition or business. In addition, Medicare has, from time to time, promulgated
regulations concerning anti-fraud and (physician) inducement that heretofore
have not directly affected the marketing of the Company's software and similar
products. However, these regulations, which are usually later adopted by
state-managed Medicaid plans, have created uncertainty in the industry.
The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
for the regulation of certain computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act (the "FDC Act") and has recently indicated it may modify such draft policy
or create a new policy. To the extent that computer software is a medical device
under the policy, the manufacturers or such products could be required,
depending on the product, to (i) register and list their products with FDA, (ii)
notify the FDA and demonstrate substantial equivalence to other products on the
market before marketing such products, or (iii) obtain FDA approval by
demonstrating safety and effectiveness before marketing a product. In addition,
such products would be subject to the FDC Acts general controls, including those
relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA" policy with
regard to computer software, the Company expects that, whether or not the draft
is finalized or changed, the FDA is likely to become increasingly active in
regulating computer software that is intended for use in health care settings.
The FDA can impose extensive requirements governing pre- and post-market
conditions such as device investigation, approval, labeling and manufacturing.
In addition, the FDA can impose extensive requirements governing development
controls and quality assurance processes. There can be no assurance that actions
taken by the FDA to regulate computer software products will not have a material
adverse effect on the Company's results of operations, financial condition or
business.
Company Specific Factors. Important factors to be considered in connection with
forward-looking statements include, without limitation, (a) the fact that the
Company has reported net losses in the last several years and has an accumulated
deficit and a working capital deficit at the end of its 1998 fiscal year; (b)
the Company's auditors have included a "going concern" exception in their report
on the Company's financial statements; (c) the Company's lack of working capital
and inability to generate positive cash flow from operations will require the
Company to raise additional equity or debt financing in order to fund operations
and the Company may be unable to raise such debt or equity financing; (d) Nasdaq
informed the Company on July 14, 1998 that it was delisted for failing to
maintain tangible net worth of $2.0 million, which significantly impedes the
Company's ability to raise future equity capital; (e) at April 9, 1999, the
Company had substantial delinquent liabilities, which, if the creditors
instituted collection proceedings, could cause the financial failure of the
Company if payment could not be made or extension arrangements could not be
negotiated; and (f) various other factors may cause actual results to vary
materially from the results contemplated in any forward-looking statements
included in this filing. No assurances can be given that the foregoing factors
will not result in a material adverse effect on the Company and its operations.
As of April 6, 1999, the Company does not have a source of funds for the funding
of the development of its Cymedix software products. The Company is currently
pursuing sources of funds, but no assurance can be given that the Company will
be successful.
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Any of these important factors discussed above or elsewhere in this filing could
cause the Company's revenues or net income, or growth in revenues or net income,
to differ materially from prior results. Failure to obtain financing on a timely
basis could result in loss of business opportunities, the sale of the Cymedix
business at a distressed price or the financial failure of the Company. In
addition, growth in absolute amounts of selling, general and administrative
expenses or the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated by the forward-looking statements.
Budgeting and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experience and business developments, the impact of which may cause the Company
to alter its marketing, capital expenditures or other budgets, which may, in
turn, affect the Company's results of operation.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate, and therefore, there
can be no assurance that the results contemplated in the forward-looking
statements will be realized. In addition, the business and operations of the
Company, because of the industries in which operates and its underfunded
operations, are subject to substantial risks which increase the uncertainty
inherent in such forward-looking statements.
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
Going Concern Issues
The Company has suffered recurring losses for the past several years and
incurred net losses for the year ended December 29, 1996 of $858,000, for the
year ended December 29, 1997 of $515,000, and for the year ended December 27,
1998 of $5,442,000. In addition, the Company had a working capital deficit of
$2,612,000 and accumulated deficit of $13,161,000 at December 27, 1998. These
factors, among others, raise a substantial doubt about the ability of the
Company to continue as a going concern. Additionally, the Company has maintained
its existence primarily through equity financing, however, because the Company
currently has outstanding shares, options, and warrants in excess of the
authorized shares the ability of the Company to raise additional equity capital
and the potential to have to repurchase shares to satisfy conversion features
raises substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Results of Operation
Comparison of Years Ended December 27, 1998 and December 28, 1997
Total net revenues decreased approximately 30% from $24,875,000 for the year
ended December 28, 1997 ("fiscal 1997") to $17,412,000 for the year ended
December 27, 1998 ("fiscal 1998"). The decrease was mainly attributable to the
sales of the homecare division in September 1997, Paxxon in October 1997, and
STAT and Ellis in September 1998. Revenue from the divisions sold were
$4,679,000 in fiscal 1998 and $10,913,000 in fiscal 1997. TherAmerica revenues
were down approximately 48% from $8,388,000 in fiscal 1997 to $5,236,000 in
fiscal 1998. These decreases were partially offset by revenue increases in the
Colorado and travel nursing divisions.
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The decrease in TherAmerica revenues has substantially reduced the Company's
revenues. The Company has partially addressed this decrease by implementing
nurse staffing at the two California TherAmerica branches. The sale of the STAT,
Ellis, Paxxon, and the homecare division has and will continue to substantially
reduce the Company's revenues.
The Company's gross margin percentage decreased from 23.5% in fiscal 1997 to
22.7% in fiscal 1998. The decrease was primarily due to the sale of the higher
margin New York divisions, downward marging pressure in the TherAmerica
division, and increased revenues in the lower margin travel nursing division.
Selling, general, and administrative expenses increased approximately $488,000
or 9% from $5,670,000 in the fiscal 1997 to $6,158,000 in fiscal 1998. This
increase includes approximately $1,422,000 of selling, general, and
administrative expenses incurred by Cymedix which was partially offset by a
reduction of $934,000 related to the sale of divisions.
Income(Loss) from operations decreased $5,174,000 from income from operations of
$610,000 in fiscal 1997 to a loss from operations of ($5,422,000) in fiscal
1998. The decrease reflects loss on sale of divisions of $316,000 and impairment
of intangible assets of $2,040,000 in fiscal 1998 compared to a gain on sale of
assets of $422,000 in fiscal 1997 (see Notes [1 and 4] to the Consolidated
Financial Statements). The loss from operations in fiscal 1998 also reflects
increase of selling, general, and administrative expenses related to Cymedix and
the reduction in gross profit discussed in the above paragraphs.
Interest expense decreased approximately 24% from $1,125,000 in fiscal 1997 to
$858,000 in fiscal 1998. The decrease is primarily due to interest paid on a
bridge loan in fiscal 1997 and a reduction in funding costs on accounts
receivable due to the sale of the homecare division, Paxxon, STAT, and Ellis.
The decrease was partially offset by increased accrued interest on late payroll
taxes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --
Liquidity of Capital Resources" and Notes [1, 3, and 6] to the Consolidated
Financial Statements.
Net loss increased from ($515,000) in fiscal 1997 to ($5,422,000) in fiscal
1998.
Liquidity and Capital Resources
The Company's current liabilities at December 27, 1998 aggregated approximately
$5,393,000 and current assets at December 27, 1998 aggregated approximately
$2,781,000. The Company is currently delinquent in the payment of certain of its
current liabilities. Such obligations include federal income tax withholdings
from employees and employer payroll taxes. As of April 9, 1999 the Company was
current on all federal payroll tax deposits. Penalties and inerest due to the
IRS on late payroll tax deposits are still outstanding. The Company is also in
default on a delinquent note payable assume din the Cymedix merger. The note
payable is secured by the intellectual property of Cymedix. If the note holder
were to foreclose its security interest, the ability of Cymedix to generate
future revenues would be adversely affected. See Note 6 to the Consolidated
Financial Statements.
In order for the Company to meet its current obligations, including penalties
and interest on late payroll tax deposits, management anticipates the need to
raise additional debt or equity capital or sell assets (see Forward-Looking
Statements and Associated Risks, including Company Specific Factors). However,
there are no current agreements in place to engage in any such transactions. In
1999, the Company completed a private placement for $300,000. The Company has
received $250,000 through April 7, 1999 under its private placement. See Note 12
to the Consolidated Financial Statements. The Company is currently pursuing
other scenarios to raise additional capital.
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On September 14, 1998, the Company sold its two remaining two New York
operations for approximately $1,463,000 payable with $1,000,000 in cash and
approximately $463,000 in notes. The cash proceeds from the sale were primarily
used to reduce the balance on the Company's line-of-credit. In February 1999,
the Company accepted a prepayment on the notes of approximately $463,000.
Proceeds from the prepayment were used to pay dilinquent IRS payroll tax
deposits. In the three and a half months subsequent to the sale, the Company
received approximately $1,600,000 in cash receipts from the collection of New
York accounts receivable. During 1999, the Company expects to receive $500,000
from the same source. These cash receipts will not provide adequate funds to
support the projected development and marketing costs of the Cymedix software
products.
Sales of Cymedix software products have not met, and on-site testing of
installed products has taken longer than, the Company's initial expectations.
See "Forward-Looking Statements and Associated Risks - Medical Information
Software Operations" and "Company Specific Factors" above.
The two New York operations that were sold, provided $7,090,000 in revenues for
the 1997 fiscal year and $4,679,000 in revenues for the first nine months of
1998 prior to their sale. The sale of these operations will significantly reduce
the Company's revenues. The Company will need to obtain additional financing or
sell additional assets in order to generate sufficient cash to support its
operations, including the development of a marketing of Cymedix software
products, for the next twelve months. In 1999, the Company completed a private
placement for $300,000. The Company has received $250,000 through April 7, 1999
under its private placement. See Note 12 to the Consolidated Financial
Statements. The Company is currently pursuing other scenarios to raise
additional capital.
The Company has historically released certain of its checks in anticipation of
receiving cash proceeds from its line of credit agreement. The Company does not
have an arrangement with its banks to cover checks presented in excess of its
collected cash balance; however, this situation has not occurred as the Company
releases its checks as close as possible to its funding date.
The Nasdaq Stock Market, Inc. delisted the Company's common stock from trading
on the Nasdaq SmallCap Market, effective at the close of business on July 14,
1998, for failure to satisfy the revised listing maintenance standards adopted
by The Nasdaq Stock Market, Inc. last year. The Company's common stock is
eligible to trade on the OTC Bulletin Board. Information about the OTCBB can be
found on the Internet at www.OTCBB.com. However, quotes for stock traded on the
OTC Bulletin Board are not published in major newspapers, and can only be found
in specialized publications or on the Internet. Being delisted from the Nasdaq
SmallCap Market significantly impedes the Company's ability to raise equity
capital.
In the light of such delisting, the Company determined that it would not be in
the best interests of its shareholders to complete the reverse stock split that
had been approved by its shareholders at its Annual Meeting of Shareholders held
on May 29, 1998, and the Board of Directors exercised its authority to abandon
the reverse stock split.
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Year 2000 Disclosure
The Company currently utilizes an external vendor for hardware and packaged
software support. The external vendor has tested all hardware, operating
systems, and software for year 2000 compliance. The external vendor identified
13 PC's that are not compliant and would require replacement or upgrades. The
Company uses current versions of widely used, publicly available software for
its accounting and other data processing requirements. The Company has obtained
year 2000 certification from these software vendors. The certification for the
Company's accounting software involves an upgrade to the version currently in
use. Cymedix Lynx was designed to be year 2000 compliant. The Cymedix software
products have been tested internally and have been found to be compliant. The
Company does not anticipate the need to have the Cymedix software products
independantly certified due to it's recent development and Y2K compliant
operating system. The Company's relations with banks, lending institutions,
current and future customers and vendors may be impacted by their ability to
become year 2000 compliant.
Hardware upgrades or replacements are scheduled to be completed by August 31,
1999. The upgraded and replaced systems are scheduled to be tested by September
30, 1999. The Company intends to obtain documentation of year 2000 compliance
from its banks, lending institutions, and significant customers and vendors by
June 30, 1999.
The Company does not feel costs relating to year 2000 will have a material
effect on the Company's financial statements. Hardware replacements or upgrades
related to year 2000 should be less than $15,000 and software upgrades should be
less than $10,000. If required, an independent certification of the Cymedix
software products would cost approximately $20,000.
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