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MMMS > SEC Filings for MMMS > Form 10-K on 16-Apr-2013All Recent SEC Filings

Show all filings for MEDYTOX SOLUTIONS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for MEDYTOX SOLUTIONS, INC.


16-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described above under "Forward-Looking Statements" and "Item 1A. Risk Factors".
The discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Unless stated otherwise, the words "we," "us," "our," "the Company," "Medytox Solutions" or "Medytox Solutions, Inc." means Medytox Solutions, Inc.

Sufficiency of Cash Flows

The Company historically has utilized various credit facilities to fund working capital needs, acquisitions and capital expenditures. Future cash needs for working capital, acquisitions and capital expenditures may require management to seek additional equity or obtain additional credit facilities. The sale of additional equity could result in additional dilution to the Company's shareholders. A portion of the Company's cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies.

Results of Operations

Fiscal Year Ended December 31, 2012 to Fiscal Year Ended December 31, 2011

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The Company dramatically changed its business plan and focus during 2011. The casino marketing business wound down and the medical urine testing business started. There is little basis for comparability between the last two years.

Revenues

Revenues for the year ended December 31, 2012 were $21,076,357, entirely derived from laboratory and billing services. Revenues in 2011 were $3,992,652, consisting of $17,165 in casino business revenue and the remainder from laboratory services.

Operating Expenses

Operating expenses for the year ended December 31, 2012 were $17,545,404, compared to $3,384,498 for the year ended December 31, 2011. The increase in expenses during 2012 was attributable to the start-up of medical testing operations at PB Laboratories, LLC, including marketing services, billing services, the direct costs of the testing laboratory and personnel wages. The operating expenses incurred during the year ended December 31, 2012 consisted of: (i) direct costs of the testing laboratories of $2,913,169 (2011: $481,891);
(ii) general and administrative of $6,437,778 (2011: $1,161,498); (iii) sales and marketing expenses of $1,106,864 (2011: $879,246); (iv) bad debt expense of $7,021,945 (2011: $843,418); and (v) depreciation of $65,648 (2011: $18,445). Operating expenses increased due to an increase of $2,431,278 in direct costs of the testing laboratories, $5,276,280 in general and administrative, $227,618 in sales and marketing expenses, $6,178,527 in bad debt expense, and $47,203 in depreciation. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, and consulting costs.

Therefore, our income from operations for the year ended December 31, 2012 was $3,530,953 as compared to $608,154 for the year ended December 31, 2011.

Other expenses incurred during the year ended December 31, 2012 included: (i) interest expense of $653,588 (2011: $174,973); offset by (ii) gain on settlement of debt of $348,315 (2011: $-0-); (iii) gain on the settlement of assets of $2,546 (2011: loss of $18,586); and (iv) other income of $129 (2011: $-0-).

Net Income

Net income attributable to Medytox Solutions common shareholders for the year ended December 31, 2012 was $2,229,037 compared to $92,701 for the year ended December 31, 2011.

Disputed Segment

The dispute with Trident Laboratories, Inc. occurred in 2012. The assets and liabilities of Trident are excluded from the individual consolidated balance sheet line items and presented separately as assets and liabilities from disputed activity and operating activity for 2012 is excluded from the consolidated statement of operations. In addition, the Company has reserved $397,918 of net income from the disputed activity for the period from August 22, 2011 (date of acquisition) through December 31, 2012. The net assets and liabilities attributable to the disputed activity are as follows at December 31, 2012:

Assets attributable to disputed activity $ 1,367,796

Liabilities attributable to disputed activity $ 1,104,063

Liquidity and Capital Resources:

Assets

At December 31, 2012, we had total assets of $10,848,271, compared to $3,933,080 at December 31, 2011. Total assets at December 31, 2012 contained approximately $1,773,785 of cash, $3,269,180 in accounts receivable, $1,980,600 in deferred tax assets, $598,741 in property and equipment, $550,000 in intangible assets and $1,050,912 in goodwill. Total assets at December 31, 2011 consisted of $97,103 in cash, $1,619,727 in accounts receivable, $723,900 in deferred tax assets, $165,738 in property and equipment, and $1,302,112 in goodwill.

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Liabilities

Our total liabilities were $9,013,835 at December 31, 2012, compared to $5,127,701 at December 31, 2011. The increase from 2011 to 2012 was primarily due to an increase of approximately $1,277,309 in accounts payable and accrued expenses, $1,050,419 in loans, $1,332,200 in income tax liabilities, offset by a decrease of $1,311,875 in stock repurchase agreements. Total liabilities at December 31, 2012 included approximately $1,168,443 in accounts payable, $1,026,922 in accrued expenses, $1,920,000 in current and deferred income tax liabilities, and $3,696,489 in loans and notes payable. Total liabilities at December 31, 2011 included approximately $379,124 in accounts payable, $538,932 in accrued expenses, $551,700 in current and deferred income tax liabilities, $2,346,070 in loans and notes payable and $1,311,875 in stock repurchase agreements.

Total Stockholders' Equity

Our stockholders' equity was $1,834,436 at December 31, 2012, compared to a deficit of ($1,194,621) at December 31, 2011. The increase in equity from 2011 to 2012 was mainly due to $2,229,037 of net income for 2012

During 2012 and 2011, the Company financed its operations primarily from the issuance of notes payable and loans from related parties. The related party loans are not pursuant to any written agreement. The Company has agreed to repay such loans upon the receipt of sufficient capital.

During 2012, the Company financed its expansion and operations with a revolving credit line based on accounts receivable. The goal was to finance the operations with collections from the medical testing business (toxicology). As of February, 2012, we acquired a clinical laboratory and outfitted it to be our main testing site. Testing revenues in the first quarter of 2012 were $1,430,840, increased in the second quarter of 2012 to $2,321,162, increased to $9,115,681 in the third quarter, and were $7,837,943 in the fourth quarter, resulting in annual revenues of $20,705,626 for the year ended December 31, 2012 2012..

In 2011, our auditors expressed doubt about our ability to continue as a going concern, due to the disruption in services associated with the legal dispute with Trident Laboratories, Inc. In 2012, our auditors have no such doubt, based on the Company having two profitable quarters back-to-back coupled with a significant increase in accounts receivable as compared to 2011. At December 31, 2012, the Company had positive working capital and the stockholders' deficit has become stockholders' equity.

The following is a summary of the Company's cash flows from operating, investing, and financing activities for the fiscal years ended December 31, 2012 and 2011.

                                                2012        2011
Cash flows from operations                  $ 2,004,947 $ (862,724)

Cash flows used in investing activities     $ (545,949) $ (36,667)

Cash flows from financing activities        $ 217,704   $ 987,182

Deferred Compensation

At December 31, 2011, two members of Company management were owed a total of $291,766 in deferred compensation from prior operations. During 2012, $15,000 was paid and both members agreed to forgive the remaining $276,766 and allow the Company to cancel the liability.

SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable

Accounts receivable consists of amounts due primarily from insurance companies on behalf of customers for laboratory services performed and are shown net of an allowance for doubtful accounts. Receivables are determined to be

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past due based on the payment terms of the original contracts or invoices. The Company uses the allowance method for recognizing bad debts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. When an account is deemed uncollectible, it is written off against the allowance. The Company generally does not require collateral for its accounts receivable. The Company does not typically charge interest on past due receivables.

Long-Lived Assets and Intangible Property

The Company accounts for the impairment or disposal of long-lived assets according to the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 360 "Property, Plant and Equipment". ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.

Fair Value of Financial Instruments

The Company's balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.

ASC 820 "Fair Value Measurements and Disclosures" defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) a reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1 -

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 -

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

Level 3 -

Inputs that are both significant to the fair value measurement and unobservable.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned.
The Company considers revenue realized or realizable and earned when all of the following criteria are met:

persuasive evidence of an arrangement exists,

the product has been shipped or the services have been rendered to the customer,

the sales price is fixed or determinable, and

collectability is reasonably assured.

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The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when a urine or blood specimen is tested and the services are billed to an insurance company, an individual, Medicare or Medicaid. We record the invoice as accounts receivable and reserve for bad debt, insurance discounts (self- pay write off 100%) and estimate net revenues to equal 60% of billed revenues.

Stock Based Compensation

The Company accounts for Stock-Based Compensation under ASC 718 "Compensation - Stock Compensation", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Under ASC 505-50, the Company determines the fair value of the options, warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in capital in shareholders' equity/(deficit) over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options or warrants at the end of each period.

Income Taxes

Income taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized.

The FASB has issued ASC 740 "Income Taxes". ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

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