New MCLN 10K Annual Report!!
Form 10-K for MEDCLEAN TECHNOLOGIES, INC.
3-Mar-2010
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
The Company is including the following cautionary statement in this Annual Report on Form 10-K for any forward-looking statements made by, or on behalf of, the Company including its former wholly-owned subsidiary Aduromed Corporation. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management's expectation, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: technological advances by our competitors, changes in health care reform, including reimbursement programs, changes to regulatory requirements relating to environmental approvals for the treatment of infectious medical waste, capital needs to fund any delays or extensions of development programs, delays in the manufacture of new and existing products by us or third party contractors, market acceptance of our products, the loss of any key employees, delays in obtaining federal, state or local regulatory clearance for new installations and operations, changes in governmental regulations, availability of capital on terms satisfactory to us and continuing good relations with MedAssets . We are also subject to numerous Risk Factors relating to manufacturing, regulatory, financial resources and personnel as described in this Annual Report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
Results of Operations
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Net Revenue
Total revenue for 2009 was $2,547,006 compared with $2,098,067 for 2008. Of the revenue increase of $448,939 or 21.4%, $507,935 was attributable to an increase of revenues derived from sales of our MedClean system, which was partially offset by a $58,996 decrease for the sale of consumables, component parts and service contracts. Contract backlog as of December 31, 2009 was $657,673.
Revenues from our MedClean system for 2009 were $1,245,411 compared to $737,476 in 2008, an increase of $507,935. The increased revenue was attributable to new contracts in 2008 executed in 2009 and our ability to accelerate system installations into the second half of 2009 on existing contracts in backlog.
Revenues derived from the sale of consumables, component parts and service contracts decreased to $1,301,595 compared to $1,360,591 in the prior year. The revenue was attributable to orders for goods and services from a consistent install base of hospitals that have previously purchased our MedClean system.
Historically, orders for the MedClean system are contracted by purchase order and are billed in 3 increments. Typically, clients are invoiced on contract signing, delivery of components, and completion of installation and start-up.
Revenues derived from the sale of units may continue to fluctuate dramatically from period to period due to several factors including; the length of the sales cycle with any given customer, current and future market conditions with regard to financing programs available to customers, and our ability to focus and execute new acquisition options. The Company expects to add rental and per pound usage acquisition options to our currently available one-time purchase and leasing programs. These new programs will be focused on generating recurring revenue in an effort to add predictability to our future revenue generation.
Gross Profit
The gross profit for 2009 was $1,281,442 (50.3% of total revenue) compared with a gross profit in 2008 of $389,819 (18.6% of total revenue).
In 2009, we introduced a revised sale pricing structure for our products with higher gross profit margins as compared to prior years. As such, our gross profit margins increased from 18.6% to 50.3%, or a 170% increase. In addition, our total gross profit increased due to our increase in revenue from the comparable period, last year. By carefully managing the business we have been able to ensure that we are invoicing for all services performed and therefore, have been able to increase our total gross profit and revenue as compared to the prior year.
The components of costs of revenues for products include direct materials, depreciation, shipping and rigging costs and contract labor primarily used to install, repair and maintain our equipment.
Operating Expenses
Total operating expenses for 2009 was $6,637,130 compared with $5,076,944 for 2008, an increase of $1,560,186 or 30.7%.
In 2009, we incurred a $3,264,179 non cash charge to operations for the fair value of vesting options and warrants as compared to $1,938,118 in 2008 and $619,389 in 2009 for stock based compensation as compared to $817,250 in 2008; a net increase of $1,128,200 with other operating costs increasing by $431,986.
In the second half of 2009, we reduced our operating expenses significantly as compared to the first half of 2009 through cost cutting measures. Please note our discussion under Net Loss below.
Interest (Income) Expense
Interest and other income for 2009 was $1,047 compared with $49,585 of interest and other income in 2008 on reduced cash balances available for investment. The Company invests its excess cash in a money market account. In 2008, the Company recognized a one-time gain of $32,775.
Interest expense and amortization for 2009 was $13,024 compared with $3,192,459 in 2008. Interest expense in 2008 was associated with the bridge loan and other interest bearing notes of $106,250. Reduced borrowings accounted for the interest in 2009. Additionally, in 2008 we recognized non-cash amortization expense for warrants issued amounting to $3,086,209 issued as a result of the MRA.
Net loss
Net loss for 2009 was $(5,368,515) compared to a net loss in 2008 of $(7,829,999).
For the 6th month period For the 6th month period
ending 06/30/2009 ending 12/31/2009 YTD
Total Revenues $ 772,183 $ 1,774,823 $ 2,547,006
Cost of Sales $ 507,657 $ 757,907 $ 1,265,564
Gross Profit $ 264,526 $ 1,016,916 $ 1,281,442
34 % 57 % 50 %
Total Operating Expense $ 4,810,621 $ 1,826,509 $ 6,637,130
Income (loss) from operations $ (4,546,095 ) $ (809,593 ) $ (5,355,688 )
Total Other income and expense $ 5,790 $ 7,038 $ 12,827
Net income (loss) $ (4,551,885 ) $ (816,631 ) $ (5,368,515 )
During 2009 the company took measures to reduce non-essential operating expenses through staff reduction and outsourcing certain business functions. The net effect of the expense reduction programs and business restructuring began to take effect in the second half of 2009. Results of operations for the second half of 2009, net of one-time severance fees ($200,151), stock based consulting fees not related to operations of ($619,389) and legal/professional fees not related to operations $(33,240) resulted in net income of $36,149, after consideration of one-time, non recurring costs.
Financial Condition
Liquidity and Capital Resources
The Company's cash on hand and working capital as of December 31, 2009 and 2008 are as follows:
2009 2008
Cash on hand $ 534,425 $ 1,922,401
Working capital (deficit) $ (229,469) $ 626,293
During 2009, the Company purchased $25,449 in fixed assets. The Company anticipates purchasing approximately $20,000 in additional fixed assets in 2010.
Net cash used in operating activities totaled $1,914,551 in 2009.
Our accounts receivable balance may have dramatic swings from one period to another depending upon the timing and the amount of milestone billings included in the balance at the end of any accounting period. There are three milestone billings representing a percentage of the contract value for each installment and our payment terms are ``upon receipt''. Receivable balances are typically paid within 15 days of the invoice date. Billings for maintenance contracts and consumables are due within 45 days and are more numerous but much smaller in value than milestone billings. We review our outstanding receivable balances on a regular basis to ensure that the allowance for bad debt is adequate. Due to the varying nature in the timing and amounts of the receivable balances as noted above, the change in the allowance for doubtful account will not necessarily correlate with the increase or decrease in the accounts receivable balance. The accounts receivable balance as of December 31, 2009 was $144,117 net of an allowance of $15,589. The $32,167 decrease in the accounts receivable balance reflects no outstanding milestone billings from contracts in backlog.
Our inventory balance may have dramatic swings from one period to another depending upon the expected installation date of our MedClean systems and our accounts payable balances can have similar swings depending on payment terms and any volume purchases or discounts we may take advantage of from time to time. During 2009, the Company decreased its inventory on hand by $70,717 to $815,634. The accounts payable and accrued liabilities balance as of December 31, 2009 was $253,742.
In November and December 2009, we received $597,480 in gross proceeds for the exercise of 95,676,105 warrants and options to purchase our common stock.
To supplement its cash resources, the Company has been pursuing a number of alternative financing arrangements with various investment entities. We are currently looking to secure additional working capital to provide the necessary funds for us to execute our business plan through various sources, including bank facilities, bridge loans and equity offerings. However, we continue to incur significant operating losses and the resultant reduction of our cash position. We cannot assure that we will be able to obtain additional funding, and the lack thereof would have a material adverse impact on our business.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. A summary of the critical accounting policies and the judgments that we make in the application of those policies is presented in Note 1 to our consolidated financial statements.
Our consolidated financial statements are based on the selection of accounting policies and the application of accounting estimates, some of which require management to make significant assumptions. Actual results could differ materially from the estimated amounts. The following accounting policy is critical to understanding and evaluating our reported financial results:
Accounting for Stock-Based Compensation
We account for our stock options and warrants using the fair value method promulgated by Accounting Standards Codification subtopic 480-10, Distinguishing Liabilities from Equity ("ASC 480-10") which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Therefore, our results include non-cash compensation expense as a result of the issuance of stock options and warrants and we expect to record additional non-cash compensation expense in the future.
Revenue recognition
Prior to 2009 we recognized revenues from fixed-price and modified fixed-price construction type contracts on the percentage-of-completion method measured by the percentage of cost incurred to date to estimated total cost for each contract. That method was used because the contracts were long term in nature and management considered total cost to be the best available measure of progress on the contracts. Beginning in 2009, we changed its product mix to short term contracts subject to customer acceptance upon completion. Therefore, we recognize revenues upon completion of the system installation. Clients will be invoiced upon the following milestones, contract signing, delivery of components, and the completion and acceptance of installation and start-up.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Revenues from direct sales of our mobile unit will be recognized as we ship units. We provide a one year warranty on the systems installs. We also obtain a one year warranty on the system components from the component manufacturer, thereby mitigating potential warranty costs. Accordingly, we have accrued no reserve for warranty. On the installed base after the warranty term has expired, the Company offers a maintenance agreement of one or more years to the customer. The Customer is billed for, and pays for the maintenance agreement in advance. Revenues from such maintenance agreements are recognized ratably over the lives of the maintenance agreements, with the excess of the amount collected over the amount recognized as deferred revenue. At December 31, 2009 and 2008 we had $236,500 and $136,691 in deferred revenue from maintenance agreements.
Revenues from the sale of accessories, repairs and replacement parts are recognized when shipped to the customer in accordance with a valid contract or order agreement. The contract or order agreement specifies delivery terms and pricing, and is considered to reasonably assure collection from the customer.
Revenues and cost from multi-year rental contracts on our mobile unit will be recognized ratably over the life of the rental contract.
Recent accounting pronouncements
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) ("ASU 2009-13") and ASU 2009-14, Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985, Software) ("ASU 2009-14"). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the Company's consolidated results of operations or financial condition.
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. Adoption of ASU 2010-02 did not have a material impact on the Company's consolidated results of operations or financial condition.
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. Adoption of ASU 2010-01 did not have a material impact on the Company's consolidated results of operations or financial condition.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) ("ASU 2009-05"). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures - Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company's consolidated results of operations or financial condition.
In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. Adoption of ASU 2010-12 did not have a material impact on the Company's consolidated results of operations or financial condition.
Inflation
Our opinion is that inflation has not had, and is not expected to have, a material effect on our operation.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
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