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MMMS > SEC Filings for MMMS > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for MEDYTOX SOLUTIONS, INC.

Form 10-Q for MEDYTOX SOLUTIONS, INC.


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements made in this Form 10-Q are "forward-looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995)
regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. 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 its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "believe," "anticipate," "future," "potential," "estimate," "encourage," "opportunity," "growth," "leader," "expect," "intend," "plan," "expand," "focus," "through," "strategy," "provide," "offer," "allow," commitment," "implement," "result," "increase," "establish," "perform," "make," "continue," "can," "ongoing," "include" or the negative of such terms or comparable terminology. All forward-looking statements included in this Form 10-Q are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements.

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read together with our financial statements and related notes included elsewhere in this report.

Company Overview

Medytox Solutions, Inc. (the "Company", "Medytox", "we", "us", or "our") is a holding company that owns and operates businesses in the medical services sector. Its principal line of business is clinical laboratory blood and urine testing services, with a particular emphasis in the provision of urine drug toxicology and comprehensive pain medication monitoring programs to physicians, clinics and rehabilitation facilities in the United States. In each of 2012 and the six months ended June 30, 2013, testing services to rehabilitation facilities represented over 70% of our revenues.

We offer a complete, turn-key urine drug testing (UDT) program allowing physicians to proactively monitor and treat patients. The Medytox UDT program is utilized by physicians to identify and evaluate prescribed and/or non-prescribed drugs that when combined may cause adverse drug interactions dangerous to a patient's health. With our UDT program, physicians can be more assured their patients are adhering to their therapeutic drug regimens and are in compliance with their prescribed guidelines. Our UDT program helps the health care provider achieve better outcomes for patients and in evaluating to what extent the prescribed medications and their dosages are working for the patient to achieve a better outcome towards recovery.

In addition to our clinical testing operations, we provide a web-based portal to provide laboratory ordering and results to our physician customers.

As a provider of clinical laboratory services, we continue to pursue our strategy of acquiring or entering into binding relationships with high-complexity laboratories that can facilitate our customers' needs. We have successfully completed several such acquisitions or strategic partnerships with laboratories located in different regions of the United States, allowing us to correspondingly increase our client base. These laboratories, and those we shall continue to seek out, offer or can be developed to offer the most advanced analytical technology for the processing of urine and blood specimens including Immunoassay Analyzers (IA) for screens and GCMS/LCMS for confirmations. We currently anticipate that the laboratories will be fully-staffed professional COLA-accredited high-complexity laboratories with additional certifications such as the COLA Laboratory of Excellence Award (COLA's Highest Commendation), CLIA (Clinical Laboratory Improvement Amendments) and the State of Florida's AHCA Clinical Laboratory License for Non-Waived High Complexity testing . Our in-house billing company services all of our acquired or allied facilities, utilizing electronic processing of

claims to the major insurance payers and eliminating the need to rely on and pay for the services of clearing houses allowing us to maximize profit retention.

Company History

Medytox was incorporated in Nevada on July 20, 2005 under the name Casino Players, Inc. The original business was conducted by a wholly-owned subsidiary, Casino Rated Players, Inc., a Nevada corporation that operated as a casino representative company offering complementary rooms to rated players.

During 2010 and 2011, the casino representative business was minimal. In the first half of 2011, Company management decided to reorganize as a holding company to acquire and manage a number of companies in the medical services sector.

On June 22, 2011, the Company organized Medytox Medical Management Solutions Corp. ("MMMS"), a Florida corporation, as a wholly-owned subsidiary. MMMS is a marketing company selling laboratory testing services to medical clinics, hospitals and physicians' offices. MMMS operates from the corporate offices in West Palm Beach, Florida.

On July 26, 2011, the Company organized Medytox Institute of Laboratory Medicine, Inc. ("MILM"), a Florida corporation, as a wholly-owned subsidiary.
MILM was organized to acquire and manage medical testing laboratories. MILM operates from the corporate offices in West Palm Beach, Florida.

On August 22, 2011, MILM entered into a purchase agreement to acquire 81% of Trident Laboratories, Inc. (Trident), a privately-owned Florida corporation.
Trident operates a medical testing laboratory specializing in urine testing from a facility in Hollywood, Florida. MILM acquired 49% ownership in Trident at closing and had the right to acquire an additional 32% for $500,000 to be paid in full by August 22, 2012. The sellers had an option to sell the remaining 19% ownership in Trident for a certain period. The sellers requested the purchase agreement be rescinded on January 16, 2012. MILM filed an action seeking to enforce the purchase agreement against Trident and its shareholders, Michelle Steegstra, Christopher Hawley, Donnette Hawley, Michael Falestra and Skyler Lukas (collectively, the "Trident Defendants") for (i) civil conspiracy,
(ii) specific performance, (iii) anticipatory breach of contract, (iv) constructive trust, (v) accounting, and (vi) interpleader. In addition, the Trident Defendants filed a counterclaim and third-party complaint stating causes of action for (i) fraudulent inducement, (ii) civil conspiracy, (iii) tortious interference with business relationships, and (iv) defamation. On July 2, 2013, a jury awarded MILM $2,906,844 on its breach of contract claim against the Trident Defendants and awarded Seamus Lagan $750,000 individually against Christopher Hawley for Mr. Hawley's defamatory postings on the internet. The jury rejected every claim made against the MILM parties. Final judgment has not yet been entered and there is still the possibility of post-trial motions and an appeal.

On August 22, 2011, the Company acquired 100% of Medical Billing Choices, Inc. ("ARC"), a privately-held North Carolina corporation, for $100,000 cash and a $750,000 installment note. Now known as ARC Medical Billing, the company operates a medical billing service for a variety of medical providers throughout the southeastern United States from offices in Charlotte, North Carolina. ARC is the main billing company for the Medytox-owned laboratories and allows Medytox to offer medical billing services to its customers.

On September 16, 2011, the board of directors agreed to change the name of the Company to Medytox Solutions, Inc. and to file for a new trading symbol. On October 27, 2011, FINRA approved the name change and the new symbol, "MMMS".

On February 16, 2012, Medytox Diagnostics, Inc. ("MDI"), a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement for the purchase of 50.5% of the outstanding membership interests in Collectaway, LLC ("Collectaway"), a clinical laboratory located in Palm Beach County, Florida. The name of Collectaway, LLC was changed to PB Laboratories, LLC.

On March 9, 2012, the Company formed Medytox Medical Marketing & Sales, Inc., a Florida corporation, as a wholly-owned subsidiary that provides marketing for clinical laboratories that are owned by the Company.

On September 10, 2012, the Company entered into an agreement to purchase all of the assets and intellectual property rights to the software known as "Medytox Advantage" that it did not already own from Dash Software, LLC for $150,000.

On October 12, 2012, the Company's wholly-owned subsidiary, MDI, acquired the remaining 49.5% ownership in PB Laboratories, LLC that it did not already own. MDI now owns 100% of this laboratory.

On December 7, 2012, the Company's wholly-owned subsidiary, MDI, entered into an agreement to acquire 50.5% ownership in Biohealth Medical Laboratory, Inc., a Miami-based clinical laboratory. The Company immediately initiated an investment program to increase the clinical lab testing capacity of blood and urine specimens at Biohealth Medical Laboratory, Inc.

On January 1, 2013, the Company's wholly-owned subsidiary, MDI, purchased 100% of the stock of Alethea Laboratories, Inc. ("Alethea"). Althea operates a licensed clinical lab in Las Cruces, New Mexico and is an enrolled Medicare provider.

On January 29, 2013, the Company formed Advantage Reference Labs, Inc., a Florida corporation, as a wholly-owned subsidiary that will provide reference, confirmation and clinical testing services.

On April 4, 2013, the Company's wholly-owned subsidiary, MDI, purchased 100% of the membership interests of International Technologies, LLC ("International").
International operates a licensed clinical laboratory in Waldwick, New Jersey and is a licensed Medicare provider.

Plan of Operation

Medytox is a holding company that owns and operates businesses in the medical services sector. Medytox has invested in a strong sales team, a client services team and proprietary technologies to better serve the needs of a modern-day medical provider.

The Company intends to grow from the acquisition and formation of businesses into the expansion of these businesses to provide an extensive range of services to medical providers for improved patient care.

We intend to acquire or enter into agreements with laboratories that offer, or can be developed to offer, the most advanced analytical technology for the processing of urine and blood specimens including Immunoassay Analyzers (IA) for screens and GCMS/LCMS for confirmations. We currently anticipate that the laboratories will be fully-staffed professional COLA-accredited high-complexity laboratories with additional certifications such as the COLA Laboratory of Excellence Award (COLA's Highest Commendation), CLIA (Clinical Laboratory Improvement Amendment) and the State of Florida High-Complexity ACHA License.

Results of Operations

For the three months ended June 30, 2013 compared to the three months ended June 30, 2012

Revenues

Revenues were $8,602,577 for the three months ended June 30, 2013 compared to $2,352,360 for the three months ended June 30, 2012, an increase of $6,250,217, or 266%. The increase is primarily due to the Company's subsidiaries, PB Labs and Biohealth, operating at full scale during the second quarter of 2013 while PB Labs and Biohealth were acquired in February 2012 and December 2012, respectively.

Operating Expenses and Other Income

For the three months ended June 30, 2013 our total operating expenses were $7,675,800 compared to $3,262,730 for the three months ended June 30, 2012 resulting in an increase of $4,413,070, or 135%. The increase is attributable to increases in direct costs of revenue of $1,284,936, general and administrative expenses of $614,761, legal fees related to the Trident lawsuit of $451,213, sales and marketing expenses of $466,920, bad debt expense of $1,477,925 and depreciation and amortization of $117,315. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, legal fees, and consulting costs. The remaining increases are directly attributable to the increase in revenues and the acquisitions of PB Labs and Biohealth during 2012 and Alethea and International Tech during 2013.

Our income from operations for the three months ended June 30, 2013 was $926,777 as compared to a loss from operations of $(910,370) for the three months ended June 30, 2012.

Other expenses incurred during the three months ended June 30, 2013 included:
(i) interest expense of $75,758 (2012: $141,334); offset by (ii) gain (loss) on settlement of debt of $(47,100) (2012: $59,000); (iii) gain on the settlement of assets of $100 (2012: $-0-); and (iv) other income of $58 (2011: $20,694).

Net income attributable to Medytox Solutions common shareholders for the three months ended June 30, 2013 was $438,912 compared to $37,973 for the three months ended June 30, 2012.

For the six months ended June 30, 2013 compared to the six months ended June 30, 2012

Revenues

Revenues were $16,626,336 for the six months ended June 30, 2013 compared to $3,591,341 for the six months ended June 30, 2012, an increase of $13,034,995, or 363%. The increase is primarily due to the Company's subsidiary, PB Labs, operating at full scale during the first and second quarters of 2013 and Biohealth beginning operations in the second quarter of 2013 while PB Labs and Biohealth were acquired in February 2012 and December 2012, respectively.

Operating Expenses and Other Income

For the six months ended June 30, 2013 our total operating expenses were $14,442,103 compared to $5,219,266 for the six months ended June 30, 2012 resulting in an increase of $9,222,837, or 177%. The increase is attributable to increases in direct costs of revenue of $2,622,472, general and administrative expenses of $1,642,372, legal fees related to the Trident lawsuit of $424,705, sales and marketing expenses of $843,049, bad debt expense of $3,526,865 and depreciation and amortization of $163,374. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, legal fees and consulting costs. The remaining increases are directly attributable to the increase in revenues and the acquisitions of PB Labs and Biohealth during 2012 and Alethea and International Tech during 2013.

Our income from operations for the six months ended June 30, 2013 was $2,184,233 as compared to a loss from operations of $(1,627,925) for the six months ended June 30, 2012.

Other expenses incurred during the six months ended June 30, 2013 included: (i) interest expense of $263,602 (2012: $174,667); (ii) loss on legal settlement of $69,800 (2012: $-0-); offset by (iii) gain on settlement of debt of $-0- (2012:
$59,000); (iv) gain on the settlement of assets of $350 (2012: $-0-); and (v) other income of $209 (2011: $21,203).

Net income (loss) attributable to Medytox Solutions common shareholders for the six months ended June 30, 2013 was $853,384 compared to a loss of $(653,045) for the six months ended June 30, 2012.

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 and the first six months of 2013 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 June 30, 2013. The net assets and liabilities attributable to the disputed activity are as follows at June 30, 2013:

Assets attributable to disputed activity $ 1,367,796

Liabilities attributable to disputed activity $ 1,104,063

Liquidity and Capital Resources

Overview

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.

For the six months ended June 30, 2013, we funded our operations primarily through cash provided by operations and borrowings from third parties, while for the six months ended June 30, 2012 we funded our operations through borrowings from both third and related parties. Our principal use of funds during the six months ended June 30, 2013 has been for payments on borrowings, acquisitions and general corporate expenses.

Liquidity and Capital Resources during the six months ended June 30, 2013 compared to the six months ended June 30, 2012

As of June 30, 2013, we had cash of $956,250 and deficit in working capital of $2,288,173. The Company generated cash flow from operations of $1,531,585 for the six months ended June 30, 2013 compared to cash provided by operations of $159,203 for the six

months ended June 30, 2012. The cash flow from operating activities for the six months ended June 30, 2013 was primarily attributable to the Company's net income from operations of $1,336,490, increased by depreciation and amortization of $204,033, stock issued for services of $62.500, stock-based compensation of $165,000, increase in allowance for bad debts of $259,300, accretion of loan costs as interest of $112,092, and accretion of beneficial conversion feature as interest of $16,784, and offset by the gain on disposal of assets of $350, and net changes in operating assets and liabilities of $624,264. Cash provided by operations for the six months ended June 30, 2012 was primarily attributable to the Company's net loss from operations of $653,045, offset by depreciation and amortization of $40,659, increase in allowance for bad debts of $550,120, accretion of loan costs as interest of $16,667, liabilities attributable to disputed subsidiary of $389,135 and net changes in operating assets and liabilities of $129,910, and increased by noncontrolling interests of $314,243.

Cash used in investing activities for the six months ended June 30, 2013 includes $567,642 for the purchase of property and equipment, cash advanced to related parties of $674,763 and cash paid for acquisitions of $252,000, offset by cash received for the sale of property and equipment of $350 and cash received in acquisitions of $3,736. Cash used in investing activities for the six months ended June 30, 2012 was attributable to the purchase of property and equipment of $167,201 and cash advanced to related parties of $898.

Cash used in financing activities for the six months ended June 30, 2013 includes $52,350 for deferred loan costs, dividends on preferred B stock of $483,106, payments on notes payable of $984,252, payments on capital lease obligations of $60,093, payments on related party loans of $95,000 and common stock repurchased from a lender of $100,000, offset by proceeds received from the sale of common stock of $116,000 and proceeds received from the issuance of notes payable of $800,000. Cash provided by financing activities for the six months ended June 30, 2012 includes proceeds from the issuance of notes payable of $550,000 and borrowings from related parties of $275,040, offset by payments made on repurchase agreements of $33,082, payments made on notes payable of $279,508, and payments on related party loans of $114,558.

On May 14, 2012, the Company borrowed $550,000 from TCA Global Credit Master Fund, LP (the "Lender") pursuant to the terms of the Senior Secured Revolving Credit Facility Agreement, dated as of April 30, 2012 (the "Credit Agreement"), among Medytox, MMMS, MDI, PB Labs and the Lender. The funds were used for general corporate purposes. Under the Credit Agreement, Medytox may borrow up to an amount equal to the lesser of 80% of its Eligible Accounts (as defined in the Credit Agreement) and the revolving loan commitment, which initially was $550,000.

Medytox could request that the revolving loan commitment be raised by various specified amounts at specified times, up to a maximum of $4,000,000. In each case, whether to agree to any such increase in the revolving loan commitment is in the Lender's sole discretion.

On August 9, 2012, the Company borrowed an additional $525,000 in a second round of funding. These additional funds were also used for general corporate purposes. In this second round of funding, certain changes were made to the terms of the Credit Agreement:

the revolving loan commitment was increased from $550,000 to $1,100,000 and was subject to further increase, up to a maximum of $4,000,000, in the Lender's sole discretion;

the maturity date of the loan was extended to February 8, 2013 from the original maturity date of November 30, 2012 (subject to the Lender's continuing ability to call the loan upon 60 days written notice); and

a prepayment penalty was added of 5% if substantially all of the loan is prepaid between 91 and 180 days prior to the maturity date, or 2.50% if substantially all of the loan is prepaid within 90 days of the maturity date.

On December 4, 2012, the Company borrowed an additional $650,000 in a third round of funding. These additional funds were used for general corporate purposes. In this third round of funding, certain additional changes were made to the terms of the Credit Agreement:

the revolving loan commitment was increased from $1,100,000 to $1,725,000 and is subject to further increase, up to a maximum of $15,000,000, in the Lender's sole discretion;

the maturity date of the loan was extended to September 3, 2013 from the previous maturity date of February 8, 2013, (subject to the Lender's continuing ability to call the loan upon 60 days written notice); and

a covenant was added to require that any subsidiary that is formed, acquired or otherwise becomes a subsidiary must guarantee the loan and pledge substantially all of its assets as security for the loan.

On March 4, 2013, Medytox borrowed an additional $800,000 from the Lender pursuant to the terms of Amendment No. 3 to Senior Secured Revolving Credit Facility Agreement, dated as of February 28, 2013 ("Amendment No. 3"). These additional funds were used in accordance with management's discretion. In connection with Amendment No. 3, Advantage Reference Labs, Inc., a newly-formed wholly-owned subsidiary of Medytox ("Advantage"), entered into a Guaranty Agreement to guaranty the TCA loan and a Security Agreement to pledge substantially all its assets to secure its guaranty.

On July 15, 2013, the Company borrowed an additional $500,000 from the Lender pursuant to the terms of Amendment No, 4 to Senior Secured Revolving Credit Facility Agreement, dated as of June 30, 2013 ("Amendment No. 4"). In connection with Amendment No. 4, Alethea Laboratories, Inc. and International Technologies, LLC, wholly-owned subsidiaries of the Company, each entered into a Guaranty Agreement to guaranty the TCA loan and a Security Agreement to pledge substantially all its assets to secure its guaranty.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2, "Summary of Significant Accounting Policies" in our audited consolidated financial statements as of and for the year ended December 31, 2012, included in our Annual Report on Form 10-K as filed on April 16, 2013, for a discussion of our critical accounting policies and estimates.

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