<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
JUNE 30, 2000
Commission file number 0-26337
MEDINEX SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 82-0514605
(State or jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
806 West Clearwater Loop, Suite N, Post Falls, ID 83854
(208) 777-4203
(Address and telephone number of principal executive offices and
principal place of business)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
periods that the registrant was required to file such reports ), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Outstanding Shares
Class as of Midnight August 10, 2000
----- --------------------------------
Common Stock, par value $.01 per share 11,339,731
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
Table of Contents
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10QSB
PART I......................................................................2
ITEM 1......................................................................2
Table 2.....................................................................4
Table 3.....................................................................6
Table 4.....................................................................8
Table 5....................................................................11
Table 6....................................................................12
ITEM 2.....................................................................13
PART II....................................................................17
ITEM 1.....................................................................17
Table 7....................................................................17
Table 8....................................................................17
ITEM 4.....................................................................18
ITEM 5.....................................................................18
ITEM 6.....................................................................18
EX-2.1
EX-2.1.....................................................................20
EX-27.1
EX-27.1....................................................................50
EX-99.1
EX-99.1....................................................................51
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Medinex Systems, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000 December 31,1999
------------- ----------------
ASSETS (Unaudited)
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,763 $ 15,504
Accounts receivable, net of allowance for doubtful
accounts of $190 and $169 respectively 1,234 295
Unbilled receivables 301 --
Inventory 293 --
Prepaid expenses and other current assets 452 388
-------- --------
Total current assets 6,043 16,187
Property and equipment, net 1,407 815
Investments 926 918
Intangible assets, net 15,193 15,341
Other assets 245 182
-------- --------
Total assets 23,814 33,443
LIABILITIES & STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable 1,412 1,293
Accrued compensation 211 163
Deferred revenue 1,648 619
Accrued expenses and other 1,640 738
-------- --------
Total current liabilities 4,911 2,813
Other long-term liabilities -- 75
-------- --------
Total liabilities 4,911 2,888
Commitments and contingencies (note 6)
Stockholders' equity:
Common stock, par value $.01 - authorized 1,143 1,089
30,000,000 and 25,000,000 shares respectively:
issued and outstanding, 11,426,918 and
10,890,056 shares, respectively
Additional paid-in capital 41,533 40,098
Accumulated deficit (24,325) (11,025)
Accumulated other comprehensive income 394 393
Warrants outstanding 158 --
-------- --------
Total stockholders' equity 18,903 30,555
Total 23,814 33,443
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------------------------
(In thousands, except share
and per share data)
(Unaudited)
<S> <C> <C>
Revenues:
Product sales 1,563 --
Website development, consulting, and
other services 1,292 129
----------- -----------
Gross revenues: 2,855 129
Sales discounts, returns and allowances (68) --
----------- -----------
Revenues, net 2,787 129
Cost of revenues:
Product sales 1,121
Website development, consulting, and
other services 585 21
----------- -----------
1,706 21
Gross profit 1,081 108
Operating expenses:
Sales and marketing 5,742 780
General and administrative 5,488 664
Product development 609 691
Noncash stock-based compensation -- 1,232
Amortization of intangibles 2,919 23
----------- -----------
Total operating expenses 14,758 3,390
Loss from operations (13,677) (3,282)
Interest income (expense), net 373 (3)
----------- -----------
Net loss (13,304) (3,285)
Preferred stock dividend earned -- (209)
----------- -----------
Net loss attributable to common stockholders (13,304) (3,494)
Basic and diluted net loss per common share (1.21) (0.94)
Basic and diluted weighted average
shares outstanding 11,019,552 3,732,105
Comprehensive loss:
Net loss (13,304) (3,494)
Unrealized gain on Available for
Sale Investments 1 --
----------- -----------
Total (13,303) (3,494)
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
-----------------------------
(In thousands, except share
and per share data)
(Unaudited)
<S> <C> <C>
Revenues:
Product sales 956 --
Website development, consulting, and other services 655 48
----------- -----------
Gross Revenue 1,611 48
Sales discounts, returns and allowances (43) --
----------- -----------
Revenue, net 1,568 48
Cost of revenues:
Product sales 664 --
Website development, consulting, and other services 304 21
----------- -----------
968 21
Gross profit 600 27
Operating expenses:
Sales and marketing 3,696 357
General and administrative 2,762 417
Product development 64 368
Noncash stock-based compensation -- 201
Amortization of intangibles 1,496 23
----------- -----------
Total operating expenses 8,018 1,366
Loss from operations (7,418) (1,339)
Interest income (expense), net 209 10
----------- -----------
Net loss (7,209) (1,329)
Preferred stock dividend earned --
----------- -----------
Net loss attributable to common stockholders (7,209) (1,329)
Basic and diluted net loss per common share (0.65) (0.36)
Basic and diluted weighted average shares outstanding 11,134,036 3,964,058
Comprehensive loss:
Net loss (7,209) (1,329)
Unrealized gain on Available for Sale Investments 131 --
----------- -----------
Total (7,078) (1,329)
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------------ ------------
<S> <C> <C>
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net loss (13,304) (3,285)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,176 51
Noncash stock-based expense 248 1,335
Amortization of debt, discount - 49
Change in certain assets and liabilities:
Accounts receivable, net (570) (48)
Unbilled receivables (301)
Inventory (114)
Prepaid expenses and other current assets (183) (538)
Other assets (8) (12)
Accounts payable (740) 626
Accrued compensation 24 (114)
Deferred revenue 1,029 39
Accrued expenses and other current liabilities 583 671
Other long-term liabilities (75) -
------------------ ------------
Net cash used in operating activities (10,235) (1,226)
Cash flows from investing activities:
Additions to property and equipment (843) (127)
Acquisition of businesses, net of cash acquired (812) (466)
------------------ ------------
Net cash used in investing activities (1,655) (593)
Cash flows from financing activities:
Proceeds from issuance of ESPP shares 75 -
Proceeds from issuance of stock options 74 -
Proceeds from short-term invstments - 880
Net proceeds from sale of 8% preferred stock - 1,582
Net proceeds from issuance of common stock - 20,808
Repayment of 8% convertible note payable - (550)
Repayment on advances to shareholders - (95)
Repurchase of preferred stock - (112)
Repayment on long-term liabilities - (10)
------------------ ------------
Net cash provided by financing activities 149 22,503
Net (decrease) increase in cash and cash equivalents (11,741) 20,684
Cash and cash equivalents, beginning of the period 15,504 1,907
------------------ ------------
Cash and cash equivalents, end of the period 3,763 22,591
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
MEDINEX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. The Company and Basis of Presentation
Medinex Systems, Inc. (the Company or Medinex), a Delaware corporation, formerly
named Nelloro Corporation (Nelloro) and Netivation.com, Inc., was originally
formed in 1993 for the purpose of acquiring interests in mineral properties. The
Company, which has its headquarters in Post Falls, Idaho, commenced its current
operations after acquiring the technology developed by the existing management
team in exchange for 2,500,000 shares of Nelloro common stock on September 26,
1997. No value was assigned to the technology as it had no net book value at the
time of the transaction and the common stock was deemed to have minimal value.
The transaction has been accounted for as a reverse acquisition with Medinex as
the acquiror. Medinex's existing business operations commenced upon the
acquisition of the technology.
The Company develops, designs and markets software and websites focused on the
political and medical communities. These communities, known as vertical portals,
are for individuals, groups and businesses sharing a common interest.
The Company emerged from the development stage during 1999. The Company is
subject to the risks and challenges associated with other companies at a similar
stage of development including dependence on key individuals, successful
development and marketing of its products and services, the acceptance of the
Internet as a medium for advertising, competition from substitute services and
larger companies with greater financial, technical, management and marketing
resources. Further, during the period required to develop commercially viable
products, services and sources of revenues, the Company may require additional
funds.
The unaudited interim condensed consolidated financial statements and related
notes thereto have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The accompanying interim condensed
consolidated financial statements and related notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's annual report (Commission File Number 000-26337) filed
on Form 10KSB for the fiscal year ended December 31, 1999. The financial
information included herein reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for interim periods. The results of operations
for the six-month periods ended June 30, 2000 and 1999 and the three-month
periods ended June 30, 2000 and 1999 are not necessarily indicative of operating
results for the entire year.
Certain prior year amounts have been reclassified for consistency with current
year financial statement presentation.
2. Acquisitions
In May 2000, the Company acquired all of the assets and business of Pinnacle
MedSource, Inc. (Pinnacle). Pinnacle is a medical distribution company
specializing in wholesale distribution to providers and dealers of medical
equipment for disabled and home bound patients. Medinex paid cash consideration
of $300, paid off a loan of approximately $107, and issued 404,000 unregistered
shares of the Company's common stock for a total purchase price of $1,116. The
acquisition was accounted for using the purchase method of accounting. Goodwill
approximated $223, $112 was allocated to assembled workforce, and $781 was
allocated to customer base, all of which is being amortized over a three year
life on a straight line basis.
3. Intangible Assets
Intangible assets consist primarily of acquired technology, assembled workforce,
customer base and goodwill related to acquisitions accounted for under the
purchase method of accounting. Amortization of these purchased intangibles is
provided on the straight-line basis over the respective useful lives of the
assets, primarily three years. The Company identifies and records impairment
losses on intangible and other assets when events and circumstances indicate
that such assets might be impaired. The Company considers factors such as
significant changes in the regulatory or business climate and projected future
cash flows from the respective asset. As of June 30, 2000, intangible assets
consisted of the following:
<PAGE>
<TABLE>
<S> <C>
Acquired technology $ 4,955
Assembled workforce 3,411
Customer base 3,634
Goodwill 7,181
Less: Accumulated Amortization (3,988)
--------
$ 15,193
</TABLE>
4. Inventory
Inventories are stated at the lower of average cost or market and consist of
medical supplies.
5. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation, and
disclosure of revenues in financial statements. The Company believes our revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation Number 44 (FIN 44), Accounting for Certain Transactions involving
Stock Compensation. FIN 44 clarifies the application of Accounting Principles
Board Opinion 25 for only certain issues. This Interpretation is effective July
1, 2000, but certain conclusions in this Interpretation cover specific events
that occur after either December 15, 1998, or January 12, 2000. To the extent
that this Interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000.
The Company does not believe that the adoption of FIN 44 will have a material
effect on the Company's financial position or results of operations.
6. Commitments and contingencies
From time to time the Company is subject to various other legal proceedings that
arise in the ordinary course of business. Although the Company cannot predict
the outcomes of these proceedings with certainty, the Company does not believe
that the disposition of these matters will have a material adverse effect on its
financial position, results of operations or cash flows.
During the first quarter of 2000, Medinex entered into multiple marketing
agreements whereby Medinex will work with Internet content providers to provide
political content and public affairs services. These contracts require the
payment of approximately $1,703 for the remainder of the agreements, plus
warrants to purchase shares of Medinex stock.
On June 16, 2000, Medinex terminated an employee for what Medinex believes to
have been a good cause. On July 27, 2000 the employee filed a lawsuit against
Medinex, alleging breach of contract, among other things, and seeking
monetary damages in an unspecified amount. Management intends to vigorously
defend Medinex against this claim and believes that a material adverse
outcome is not probable.
7. Segment Information
The Company manages and reports its operations in two business segments: medical
line of business and political line of business. The Company uses gross profit,
which is defined as net revenues less cost of revenues, to evaluate performance.
Corporate and other amounts include corporate operating costs and unrealized
gains on investments. There were no material intersegment transactions.
<PAGE>
The following table represents the Company's segment information for the
Six-month period ended June 30, 2000:
OPERATIONS BY BUSINESS SEGMENT FOR THE
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Medical Segment Political Segment
--------------- -----------------
<S> <C> <C>
Revenues, net $ 1,536 $1,251
Cost of revenues $ 1,108 $ 598
Gross profit $ 428 $ 653
Profit Reconciliation:
Gross profit for
reportable segments 1,081
Operating expenses (14,758)
Non-operating income, net 373
--------
Net Loss 13,304
</TABLE>
The Company does not track assets by operating segments. Consequently, it is not
practicable to show assets by operating segments.
8. Subsequent Event
On July 26, 2000, Medinex sold all of the issued and outstanding stock of
Raintree Communications Corporation, Public Disclosure, Inc., Net.Capitol, Inc.,
and U.S. Congress Handbook, Inc., along with certain other political-related
assets, to Politics.com, Inc. ("Politics.com") in exchange for 40,100,000 shares
of common stock of Politics.com. Politics.com, a Delaware corporation, is a
developer of Internet-based products and services for public affairs and
political organizations. The assets were sold to Politics.com pursuant to an
Asset Purchase Agreement dated as of July 14, 2000. Prior to the closing, there
was no material relationship between Politics.com, and its affiliates, on the
one hand, and Medinex, and its affiliates, on the other hand.
The amount of consideration specified in the Asset Purchase Agreement and
received by Medinex was 40,100,000 shares of common stock of Politics.com.
The 40,100,000 shares Medinex received pursuant to the transaction represent
just more than 80% of Politics.com's outstanding stock, are "restricted
securities" (within the meaning of Rule 144 under the Securities Act of 1933,
as amended), and are subject to a six month contractual restriction on
transfer. As a result of the sale, Politics.com became a majority-owned
subsidiary of Medinex. In connection with the transaction, Howard R. Baer and
Kevin C. Baer (and their affiliates), (i) canceled in the aggregate
approximately $1,400 of indebtedness owed to them by Politics.com and (ii)
surrendered to Politics.com an aggregate of 1,166,307 shares of
Politics.com's common stock, $0.00001 par value per share. The purchase price
was the result of arm's-length negotiation between Politics.com and Medinex,
based on Politics.com's and Medinex's evaluation of the fair market value of
the Medinex assets sold. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and Notes to Condensed
Consolidated Financial Statements thereto included elsewhere in this report.
In addition to historical information, the following discussion contains
certain forward-looking statements that involve known and unknown risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements in this report should be read as being
applicable to all related forward-looking statements wherever they appear in
this report. Actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below and
in our reports filed with the Securities and Exchange Commission including
our annual report on Form 10-KSB for the year ended December 31, 1999 (the
"Form 10-K"). These forward-looking statements reflect only our opinion as of
the date of this report and should not be relied upon. The Company does not
assume any obligation to revise forward-looking statements.
Overview
Netivation.com, Inc. changed its name to Medinex Systems, Inc. effective July
20, 2000. Medinex Systems, Inc., is a business-to-business e-commerce company
incorporated in the State of Delaware (Medinex or the Company). Medinex's
strategy is to build significant revenues by developing leading Internet
products and services to the medical and health care community. Medinex
commenced current operations in September 1997 and began generating revenues
from the sale of advertising and sponsorships in January 1999.
Acquisitions play a major part in Medinex's growth strategy. Medinex acquired
seven (7) companies during 1999 and three (3) companies as of the end of the
second quarter of 2000. All acquisitions were accounted for by the purchase
method of accounting. Under the purchase method, assets acquired are accounted
for at their fair market values and results of operations are included
prospectively in the condensed consolidated financial statements from their
respective acquisition dates. The acquired companies represented a substantial
portion of Medinex's growth during the second half of 1999 and are expected to
be an integral part of Medinex's growth in 2000.
In January 2000, the Company acquired U.S. Congress Handbook, Inc. ("USCH").
USCH publishes congressional directories designed to give readers complete,
low-cost information about the U.S. Congress in both written and electronic
formats. Medinex received all of the outstanding shares of USCH's capital stock
in exchange for 75,000 unregistered shares of Medinex's common stock and payment
of $0.2 million in cash and a $0.2 million promissory note. Upon completion of
the acquisition, USCH became a wholly-owned subsidiary of Medinex.
In March 2000, the Company acquired most of the assets and business of
DisabilityMall.com. DisabilityMall.com provides information on the products,
resources, and services available to the disabled, the handicapped, the
physically challenged, the elderly, as well as to caregivers and health care
professionals. Medinex paid consideration of $0.3 million and 20,000 in
unregistered shares of Medinex's common stock for this acquisition.
In May 2000, the Company acquired all of the assets and business of Pinnacle
MedSource, Inc. (Pinnacle). Pinnacle is a medical distribution company
specializing in wholesale distribution to providers and dealers of medical
equipment for disabled and home bound patients. Medinex paid consideration of
$0.4 million and 404,000 in unregistered shares of the Company's common stock
for this acquisition. Upon completion of the acquisition, Pinnacle became a
wholly-owned subsidiary of Medinex.
On July 26, 2000, Medinex sold all of the issued and outstanding stock of
Raintree Communications Corporation, Public Disclosure, Inc., Net.Capitol, Inc.,
and U.S. Congress Handbook, Inc., along with certain other political-related
assets, to Politics.com, Inc. ("Politics.com") in exchange for 40,100,000 shares
of common stock of Politics.com. Politics.com, a Delaware corporation, is a
developer of Internet-based products and services for public affairs and
political organizations. The assets were sold to Politics.com pursuant to an
Asset Purchase Agreement dated as of July 14, 2000. Prior to the closing, there
was no material relationship between Politics.com, and its affiliates, on the
one hand, and Medinex, and its affiliates, on the other hand.
The amount of consideration specified in the Asset Purchase Agreement and
received by Medinex was 40,100,000 shares of common stock of Politics.com. The
40,100,000 shares Medinex received pursuant to the transaction represent just
more than 80% of Politics.com's outstanding stock, are "restricted securities"
(within the meaning of Rule 144 under the Securities Act of 1933, as amended),
and are subject to a six month contractual restriction on transfer. As a result
of the sale, Politics.com became a majority-owned subsidiary of Medinex. In
connection with the transaction, Howard R. Baer and Kevin C. Baer (and their
affiliates), (i) canceled in the aggregate approximately $1.4 million of
indebtedness owed to them by Politics.com and (ii) surrendered to Politics.com
an aggregate of 1,166,307 shares of Politics.com's common stock, $0.00001 par
value per share. The purchase price was the result of arm's-length negotiation
between Politics.com and Medinex, based on Politics.com's and Medinex's
evaluation of the fair market value of the Medinex assets sold.
<PAGE>
Revenues are generated from e-commerce merchandise sales, website development
and hosting, Internet access, software licenses, consulting, and advertising.
Sales of products directly to customers through e-commerce are recognized when
shipped. In these transactions, Medinex acts as merchant-of-record. Accordingly,
Medinex records, as revenue, the full sales price of the product sold and
records the full cost of the product to Medinex as the cost of revenues when
shipping the product.
Software licensing costs and website development revenues are generally
recognized when all elements essential to the functionality of the software or
the website have been delivered. In arrangements where Medinex has continued
significant involvement with the licensee, revenues are deferred and recognized
over the term of the agreement. Hosting contracts typically have a term of one
year, with fees charged on a monthly basis.
Advertising consists of the sale of impressions on one or more of Medinex's
network of websites for cash or barter. Advertising revenues are recognized
ratably over the term of the applicable agreement. Internet access is billed on
a monthly basis and is recognized as earned.
Deferred revenue consists primarily of prepaid licensing, hosting, and software
revenues that are being amortized over their contract life. Typical contract
life does not extend beyond twelve months. In several cases, the cash is
collected upfront. The revenue is recognized ratably over the period of the
contract. There are no significant incremental costs.
Results of Operation
Revenues. For the six months ended June 30, 2000, Medinex generated net revenues
of $2.8 million. This compares to net revenues of $0.1 million for the six
months ended June 30, 1999. Most of the revenue growth was the result of
companies acquired after Medinex's initial public offering.
Medinex ended the second quarter of 2000 with $1.6 million in deferred revenues.
Medinex may experience seasonality in its advertising, membership traffic, and
some e-commerce revenues. Medinex also expects that business usage of the
Internet, and of its products and services may typically decline during the
summer, year-end, and holiday periods.
Cost of revenues. Cost of product revenues primarily consists of the cost of
books and medical supplies sold over the Internet. Website development,
consulting, and other services' cost of revenues consisting primarily of payroll
costs for technology employees and hosting/maintenance costs. For the six months
ended June 30, 2000, cost of revenues represented sixty-one percent 61% of net
revenues or $1.7 million.
Gross profit. For the six months ended June 30, 2000, the gross profit dollars
were $1.1 million or thirty-nine percent (39%) of net revenues. Medinex offers
discounts on certain items as promotional opportunities. These promotions lower
gross profit percentages on the specific items offered but are intended to
attract more customers.
In the future, Medinex's gross profit will be affected by the mix of products
and services sold. Because of Medinex's limited experience in predicting
revenues and product mix, Medinex is not able to predict the gross profit it may
generate in future periods. Periodically, Medinex may sell its products and
services at a loss and experience negative gross profits as it attempts to
develop market share and attract members to its communities. Further, Medinex
expects to experience significant fluctuations in its operating results in the
future as a result of its early stage of development.
Operating expenses. Operating expenses for the six months ended June 30, 2000
totaled $14.8 million, compared with $3.4 million for the same period in
1999. Operating expenses increased mostly due to a growth in head count, as
well as increase in expenditures for advertising, marketing programs, and
professional services fees. The increase in operating expenses primarily
reflects Medinex's transition from an early stage of development to the stage
of marketing and offering services. For example, the number of employees
increased from 30 as of June 30, 1999 to 163 as of June 30, 2000. Medinex
anticipates headcount decreases as well as implementation of certain cost
controls.
Sales and marketing expenditures increased for the six months ended June 30,
2000 to $5.7 million compared to $0.8 million for the same period in 1999. Of
the $5.7 million sales and marketing expenditures for the six months ended June
30, 2000, 1.4 million was related to multiple marketing agreements with Internet
content providers.
General and administrative expenses grew from $0.7 million for the six months
ended June 30, 1999 to $5.5 million for the six months ended June 30, 2000.
Amortization expenses due to acquisitions were $2.9 million for the six months
ended June 30, 2000,which compares to $.02 million for the six months ended June
30, 1999.
<PAGE>
Loss from operations. Medinex's loss from operations for the six months ended
June 30, 2000 was $13.3 million, compared to $3.3 million for the same period in
1999.
Net loss and loss per share. Medinex's net loss applicable to common
shareholders for the six months ended June 30, 2000 was $13.3 million, compared
with $3.5 million for the same period in 1999. The loss per basic and diluted
share was $1.21 for the six months ended June 30, 2000 versus $0.94 for the same
period of 1999. Medinex expects continuing losses for the foreseeable future and
there is no assurance that profitability will be achieved.
Liquidity and capital resources
On June 22, 1999, Medinex completed its initial public offering of 2,500,000
shares of common stock, resulting in net proceeds of $20.8 million. As of June
30, 2000, Medinex had cash and cash equivalents totaling $3.8 million, compared
to $15.5 million as of December 31, 1999.
Since its June 1999 IPO, Medinex acquired ten (10) companies that enhance and
extend the range of Medinex's products and services. Medinex paid total
consideration of 3,048,286 shares or options to acquire shares of Medinex
common stock, $1.9 million cash and $0.2 million in promissory notes to
acquire the outstanding stock and/or assets of these companies.
For the six months ended June 30, 2000, cash used in operating activities was
$10.2 million. Cash used in operating activities consisted primarily of funding
Medinex net operating losses.
Capital expenditure for the six months ended of June 30, 2000, consisting
primarily of additional computer equipment purchases, were $0.8 million.
Medinex management is very focused on cash flow and is evaluating a variety of
outside financing alternatives with the appropriate consideration given to
shareholder dilution. As a separate public company, Politics.com also has
opportunities for raising capital. Further, Medinex holds over 40 million shares
of stock in Politics.com (OTC: POCO), which will have liquidity opportunities in
the future or the possibility for selling in a private placement transaction.
There are also opportunities for other business combinations, acquisitions, and
divestitures that offer the potential for cash infusions to Medinex. In addition
to cash on hand at June 30, 2000, Medinex also has an investment in 175,000
shares of MoneyZone.com, which closed at $5.25/share at quarter end,
representing a value of over $0.9 million.
At the same time, management has reduced monthly expenses and implemented
strict expense policies and procedures to control expenses going forward. The
company has reduced non-revenue generating headcount in operations and
general and administrative functions. Headcount totaled 163 on July 31, 2000,
which represents a reduction of 19 from a high of 182 during the first half
of the year. Sales headcount will continue to increase in order to grow top
line revenues. This includes the creation of a large account sales team that
will focus on selling large dollar value opportunities to hospitals, large
clinics, insurance companies, and others within the industry. As part of this
plan, Medinex has reduced it's emphasis on low margin sales, choosing to
focus more on higher margin product and technology sales. LeadPage sales
continue to grow month to month and the release of the Medinex office, has
provided the company with higher margin products. As of June 30, 2000, the
Company has known commitments of approximately $1.0 million to Yahoo!,
approximately $0.8 million to Microsoft and approximately $3.7 million in
minimum lease payments for its remaining lease terms. The Company is in
process of renegotiating payment and contract terms on the Microsoft
agreement. On July 5, 2000 a legal proceeding was filed against Yahoo! Inc.,
("Yahoo!") by Medinex. The complaint was filed because the Company believes
Yahoo! is in breach of contract. If the Company is successful in its claim
then there may be a reduction in the amounts of payment to Yahoo!.
While management believes that the likelihood of securing additional finances
is high and that a combination of expense reduction and increased revenues
will result in adequate cash flows to satisfy short term liquidity needs our
external auditors have indicated that absent an external financing in the
future, it is possible that we would receive a going concern qualification in
the auditor's report on our December 31, 2000 financial statements.
Product and market strategy.
Medinex Office. Medinex Office is an Internet-based, commonly referred to as ASP
(Application Server Provider) based software, physician's practice management
system. With Medinex Office, doctors can access all of their patient records
from anywhere, at any time. Since Medinex Office runs over the Web, physicians
no longer need to worry about expensive software upgrades and hardware
maintenance. International Data Corp. estimates the overall U.S. market for ASPs
will grow from $200 million in 1999 to $6 billion in 2003. Medinex Office is at
the forefront of ASP based physician practice management systems, unlike many
competitors that are using legacy client/server via. Cytrix technology until
they can develop a pure ASP version. Medinex Office is 100% ASP based. A
GartnerGroup representative was once quoted as saying, that "in three to four
years,
<PAGE>
some 60% of practices could be leasing their applications via. ASPs." In an
article entitled "Is there an ASP in your future?" in Internet Health Care
Magazine, it was estimated that "The cost of using an ASP can be as much as 30%
less than the total cost of owning and operating your own system."
Medinex plans to distribute Medinex Office five sales channels: Internet Service
Providers (ISPs), Value Added Resellers (VARs) Hospitals, Insurance Companies,
and Direct-to-Doctors.
Internet Service Providers (ISPs).
Medinex Office gives ISPs an easy way to rapidly raise themselves above the
competition. Not only does Medinex Office give them a value added service to
offer alongside their traditional offering, but also is a great way to enter
the highly lucrative healthcare marketplace.
Value Added Resellers
VARs are already providing computer hardware, support, and service to the
healthcare community. VARs license Medinex Office by region; bundling it with
their existing offers, or as a stand alone solution. Medinex Systems hosts all
data and provides the security.
Hospitals
Hospitals can license large blocks of Medinex Office and offer it to their
doctors; strengthening the relationship. Hospitals can choose to host the data
themselves, or Medinex Systems can take care of the entire issue.
Insurance Companies
The Insurance Company channel functions just like the Hospital. Insurers license
large blocks and resell it to participating physicians. Insurers have the added
benefit of being able to act as the claims clearinghouse; making the doctor's
life easier, while saving the company thousands in claims transactions fees.
Direct to Doctor
Our direct program is simple. An individual physician can simply log on to our
Web site, fill out a short form, and supply a credit card. Once the transaction
is processed, a user name and password is supplied and the physician can start
utilizing the software immediately. We also offer a full range of training
options and customer support.
LeadPages. LeadPages are single-page Web sites within the MedMarket.com
community. Easily found through keyword or plain text searches, they offer
basic information about a company and include a link to that company's main
Web site. LeadPages are designed to do three things: allow a company to
advertise before a targeted audience, generate increased traffic to a
company's Web site, and deliver qualified sales leads. We believe companies
with a LeadPage presence at MedMarket.com are getting more for their
advertising dollar than they could get anywhere else and anticipate 1,000
LeadPage clients by the end third quarter 2000.
LeadPage Stores. Adding to the effectiveness of LeadPages at MedMarket.com is
our latest offering, the LeadPage Store. The idea is to take our foundation -
thousands of unique visitors and hundreds of medical businesses - and build an
e-commerce solution on top of it. By making it easy for shoppers to find what
they need, and by delivering a ready-to-buy audience to a company's LeadPage
Store, we facilitate an exchange that delivers on the promise of e-commerce:
convenience, easy price comparisons, and quick market access. We believe online
ordering and purchasing is a natural extension of the foundation we've built
over the last several years.
The New MedMarket.com. On July 24, the Company debuted a newly designed
MedMarket.com, featuring improved search capabilities and cleaner navigation and
reinforcing our position as the Internet's top medical e-commerce community. We
also introduced MyMedMarket, which allows visitors who look to MedMarket.com for
healthcare products to save their favorite searches for quick reference. These
improvements make MedMarket.com more convenient than ever. In addition, a new
cluster of dedicated servers ensures MedMarket.com will be available when
customers need it - well into the future.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
On July 27, 2000 a legal proceeding was filed against Medinex by Gary D. Strong
and Peggy L. Strong, husband and wife. Gary D. Strong ("Strong") was Medinex's
former Investor Relations Director. The complaint was filed in the First
Judicial District of the State of Idaho in and for the County of Kootenai.
The underlying facts of this case are as follows:
Effective January 11, 2000, Medinex and Strong entered into an employment
agreement by which Strong accepted employment as Medinex's Investor Relations
Director. On June 16, 2000, Medinex terminated Strong's employment for what
Medinex believes to have been a good cause. The Strongs then filed the lawsuit
against Medinex, alleging breach of contract, among other things, and seeking
monetary damages in an unspecified amount in excess of the district court's
$10,000 jurisdictional minimum, as well as their court costs and attorney's
fees.
On July 5, 2000 a legal proceeding was filed against Yahoo! Inc., ("Yahoo!") by
Medinex. The complaint was filed in the First Judicial District of the State of
Idaho in and for the County of Kootenai.
The underlying facts of this case are as follows:
On January 14, 2000, Medinex and Yahoo entered into a contract whereby Medinex
purchased the use of certain impressions or keywords on the Yahoo! network at a
cost of $1.9 million for Medinex and its subsidiaries to use in their public
policy Internet products. Subsequent to the execution of the contract, Yahoo!
advised Medinex that it would not be able to provide to Medinex the use of
certain keywords as originally contracted. When attempts to resolve this issue
failed, Medinex filed the lawsuit against Yahoo!, alleging breach of contract,
among other things, and seeking a declaratory judgment that Medinex has not
violated the terms of the contract and will not be required to make any
additional payments under the contract, prejudgment interest, compensatory
damages in an amount to be proven at trial, as well as Medinex's costs and
attorney's fees.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended, June 30, 2000, Medinex sold 404,000 shares of
common stock without registering the stock under the Exchange Act. Medinex
sold the unregistered shares to the stockholders of Pinnacle Medsource, Inc.
under the terms of an Agreement and Plan of Merger dated May 3, 2000, in
which Medinex acquired all of the issued and outstanding stock of Pinnacle
MedSource, Inc.
<TABLE>
<CAPTION>
NUMBER OF EXEMPTION
NAME OF COMPANY/PARTY TYPE OF SECURITIES SHARES GIVEN DATE RELIED ON
--------------------- ------------------ ------------ ---- ---------
<S> <C> <C> <C> <C>
Pinnacle Medsource, Inc. Common Stock 404,000 May 26, 2000 Section 4(2),
Section 3(a)(10)
</TABLE>
Each stockholder was given the opportunity to review and discuss Medinex's
business with the directors, officers, and management of Medinex. Each
stockholder represented their intention to acquire the securities for investment
only and not for distribution. Appropriate legends are affixed to the stock
certificates issued in these transactions. No underwriters were used in relation
to these transactions.
On June 22, 1999, Medinex's Registration Statement on Form SB-2 covering the
offering of 2,500,000 shares of Medinex's Common Stock, Commission file number
333-74569 was declared effective. The offering commenced on June 23, 1999, and
terminated upon the sale of all 2,500,000 shares of Medinex common stock. The
offering was managed by EBI Securities Corporation and Millennium Financial
Group, Inc. (the "Underwriters"). The total price to the public for the shares
offered and sold by Medinex was $25,000,000. The amount of expenses incurred by
Medinex in connection with the offering is as follows (in Thousands):
<PAGE>
<TABLE>
<S> <C>
Underwriting discounts and commissions $2,625
Finders fees 136
Expenses paid to or for the Underwriter 1,431
------
Total expenses $4,192
</TABLE>
All of the foregoing expenses were direct or indirect payments to persons other
than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of Medinex's common stock; or (iii) affiliates of Medinex.
The net proceeds of the offering to Medinex (after deducting the Underwriter's
discounts and commissions and offering expenses) was $20,808. From the offering
date, the net proceeds have been used in the following manner, in the following
reasonably estimated amounts (in Thousands):
- Investments in debt instruments of the United States Government and
its agencies and investments in marketable equity securities: $3,763
- Acquisition of other businesses: $1,912
- Loan to Oron Strauss, previous Votenet General Manager: $133
- Working Capital: $15,000
Item 4. Submission of Matters to a Vote of Security Holders.
Medinex held its annual stockholder meeting on June 12, 2000. A total of
10,869,516 shares of common stock were outstanding at the date of record and
entitled to vote at the meeting. Of the total outstanding, 6,709,535 shares were
represented at the meeting and 4,159,981 shares were not.
Stockholders cast votes for the election of the following directors whose terms
expire in 2003;
For Abstained
Gary S. Paquin 6,685,593 23,942
T.A. Drew Wahlin 6,685,593 23,942
Stockholders cast votes for the ratification of Arthur Andersen, LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000:
For Withheld Abstained
6,540,272 163,793 5,470
Item 5. Other Information
Medinex filed a Form S-8 Registration Statement with the Securities and Exchange
Commission on April 7, 2000. The S-8 Registration Statement was filed pursuant
to Rule 416(c ) and was for the purpose of registering a total of 1,000,000
shares for issuance under the Non-Qualified Stock Plan.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
Exhibit 2.1 Agreement and Plan of Merger dated May 3, 2000 among
Netivation.com, Inc., Netivation.com Merger Three Corp., and
Pinnacle Medsource, Inc..
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Press release dated May 12, 2000 announced the expansion of
business to business platform with the acquisition of Pinnacle,
a home medical equipment distributor
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Medinex Systems, Inc. (Registrant)
Dated: August 10, 2000
/s/ Anthony J. Paquin
----------------------------------------
Anthony J. Paquin
President and Chief Executive Officer
