SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
or
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT |
For the transition period from to
Commission File Number 1-15445
DRUGMAX, INC.
(Exact name of registrant as specified in its charter)
| NEVADA | 34-1755390 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
25400 US Highway 19 North, Suite 137, Clearwater, FL 33763
(Address of principal executive offices)
(727) 533-0431
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act.) ¨ Yes x No.
As of August 4, 2004 there were 8,193,152 shares of common stock, par value $0.001 per share, outstanding.
DRUGMAX, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
TABLE OF CONTENTS
| Page # | ||
| PART I FINANCIAL INFORMATION | ||
| Item 1. Financial Statements |
||
| Condensed Consolidated Balance Sheets June 30, 2004 (unaudited) and March 31, 2004 |
3 | |
| 4 | ||
| 5 | ||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
7 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 | |
| 20 | ||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
21 | |
| Item 4. Controls and Procedures |
22 | |
| PART II OTHER INFORMATION | ||
| Item 1. Legal Proceedings |
23 | |
| 24 | ||
| Item 6. Exhibits and Reports on Form 8-K |
24 | |
| 27 | ||
| Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 |
||
| Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302 |
||
| Exhibit 32.1 Certification Pursuant to Section 906 |
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| Exhibit 32.2 Certification Pursuant to Section 906 |
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2
PART I – FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DRUGMAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2004 |
March 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 2,349,690 | $ | 2,787,793 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $1.7 million and $2.6 million, respectively. |
10,750,686 | 11,696,387 | ||||||
| Inventory |
17,246,931 | 16,370,969 | ||||||
| Prepaid expenses and other current assets |
1,998,370 | 1,608,531 | ||||||
| Total current assets |
32,345,677 | 32,463,680 | ||||||
| Property and equipment, net |
1,453,088 | 1,409,602 | ||||||
| Goodwill |
13,105,000 | 13,105,000 | ||||||
| Notes receivable, net of allowance of $.7 million. |
26,474 | 40,843 | ||||||
| Stockholders notes receivable |
21,277 | 21,277 | ||||||
| Intangible assets, net |
630,675 | 658,845 | ||||||
| Other assets |
50,538 | 50,625 | ||||||
| Deposits |
25,411 | 108,215 | ||||||
| Total assets |
$ | 47,658,140 | $ | 47,858,087 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 18,886,157 | $ | 14,339,752 | ||||
| Accrued expenses and other current liabilities |
753,070 | 1,853,823 | ||||||
| Credit line payable |
14,571,656 | 17,251,194 | ||||||
| Current portion of long-term liabilities |
133,673 | 192,222 | ||||||
| Total current liabilities |
34,344,556 | 33,636,991 | ||||||
| Long-term debt and capital leases |
123,348 | 157,950 | ||||||
| Total liabilities |
34,467,904 | 33,794,941 | ||||||
| Stockholders' equity: |
||||||||
| Preferred stock, $.001 par value, 2,000,000 shares authorized, no preferred shares issued or outstanding |
— | — | ||||||
| Common stock, $.001 par value; 24,000,000 shares authorized, 8,193,152 and 8,189,986 shares issued and outstanding, respectively |
8,192 | 8,189 | ||||||
| Additional paid-in capital |
43,787,879 | 43,784,716 | ||||||
| Accumulated deficit |
(30,605,835 | ) | (29,729,759 | ) | ||||
| Total stockholders' equity |
13,190,236 | 14,063,146 | ||||||
| Total liabilities and stockholders' equity |
$ | 47,658,140 | $ | 47,858,087 | ||||
See accompanying notes to condensed consolidated financial statements.
3
DRUGMAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended June 30, 2004 |
For the Three Months Ended June 30, 2003 |
|||||||
| Revenues |
$ | 39,993,420 | $ | 60,659,545 | ||||
| Cost of goods sold |
38,791,676 | 58,672,332 | ||||||
| Gross profit |
1,201,744 | 1,987,213 | ||||||
| Selling, general and administrative expenses |
1,771,787 | 1,741,552 | ||||||
| Amortization expense |
2,800 | — | ||||||
| Depreciation expense |
62,467 | 52,502 | ||||||
| Total operating expenses |
1,837,054 | 1,794,054 | ||||||
| Operating (loss) income |
(635,310 | ) | 193,159 | |||||
| Other income (expense) |
||||||||
| Interest income |
13,271 | 9,709 | ||||||
| Other income |
3,342 | 434,016 | ||||||
| Interest expense |
(257,294 | ) | (672,612 | ) | ||||
| Total other expense |
(240,681 | ) | (228,887 | ) | ||||
| Loss before income tax provision and minority interest |
(875,991 | ) | (35,728 | ) | ||||
| Income tax provision |
— | — | ||||||
| Equity (loss) from unconsolidated subsidiary |
(87 | ) | — | |||||
| Net loss |
$ | (876,078 | ) | $ | (35,728 | ) | ||
| Net loss per common share - basic |
$ | (0.11 | ) | $ | (0.01 | ) | ||
| Net loss per common share - diluted |
$ | (0.11 | ) | $ | (0.01 | ) | ||
| Weighted average shares outstanding - basic |
8,191,363 | 7,130,475 | ||||||
| Weighted average shares outstanding - diluted |
8,191,363 | 7,130,475 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
DRUGMAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Three Months Ended June 30, 2004 |
For the Three Months Ended June 30, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (876,078 | ) | $ | (35,728 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Amortization of financing costs charged to interest expense |
50,369 | 96,602 | ||||||
| Depreciation and amortization |
65,267 | 52,502 | ||||||
| Forgiveness of liability |
— | (501,561 | ) | |||||
| Equity loss from unconsolidated subsidiary |
87 | — | ||||||
| Changes in operating assets and liabilities, net of acquisition: |
||||||||
| Accounts receivable, net |
938,868 | (1,006,790 | ) | |||||
| Inventory |
(875,962 | ) | 785,561 | |||||
| Due from affiliates |
— | 10,470 | ||||||
| Prepaid expense and other current assets |
(383,006 | ) | (58,457 | ) | ||||
| Other assets |
— | 46,660 | ||||||
| Notes receivable |
14,369 | 58,809 | ||||||
| Deposits |
82,804 | (5,679 | ) | |||||
| Accounts payable |
4,546,405 | (2,452,065 | ) | |||||
| Accrued expenses and other current liabilities |
(1,100,753 | ) | (117,914 | ) | ||||
| Net cash provided by (used in) operating activities |
2,462,370 | (3,127,590 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(105,950 | ) | (33,059 | ) | ||||
| Net cash used in investing activities |
(105,950 | ) | (33,059 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net change in restricted cash |
— | 2,000,000 | ||||||
| Net change under revolving line of credit agreement |
(2,679,538 | ) | 1,391,486 | |||||
| Increase in deferred financing costs |
(25,000 | ) | (270,008 | ) | ||||
| Payments of long-term debt and capital leases |
(93,151 | ) | (79,068 | ) | ||||
| Payments to affiliates |
— | (4,377 | ) | |||||
| Proceeds from issuance of common stock |
3,166 | — | ||||||
| Net cash (used in) provided by financing activities |
(2,794,523 | ) | 3,038,033 | |||||
| INCREASE IN CASH AND CASH EQUIVALENTS |
(438,103 | ) | (122,616 | ) | ||||
| Cash and cash equivalents at beginning of period |
2,787,793 | 161,489 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 2,349,690 | $ | 38,873 | ||||
(continued)
5
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS ACTIVITIES |
|||||||
| Cash paid for interest |
$ | 206,925 | $ | 195,076 | |||
| Cash paid for income taxes |
$ | — | $ | — | |||
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|||||||
| In April 2003, pursuant to the agreement with W.A. Butler & Company, the Company recorded the reversal of a long-term debt to W.A. Butler & Co. |
$ | 501,561 | |||||
| In May 2003, the Company purchased substantially all the assets of Avery Pharmaceuticals, Inc. No cash was paid for the acquisition. In conjunction with the acquisition, liabilities were assumed as follows: |
|||||||
| Fair value of assets acquired |
$ | 789,202 | |||||
| Acquisition note executed |
(90,000 | ) | |||||
| Forgiveness of debt owed to the Company |
(52,571 | ) | |||||
| Liabilities assumed |
$ | 646,631 | |||||
| In June 2003, the Company issued 57,143 shares of common stock of the Company to Jugal K. Taneja for his guaranty executed in favor of Congress. |
$ | 91,429 | |||||
(concluded)
See accompanying notes to condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended June 30, 2004 and 2003.
NOTE A-BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of DrugMax, Inc. and its wholly-owned subsidiaries, Discount Rx, Inc., a Louisiana corporation (“Discount”), Valley Drug Company (“Valley”) and its wholly-owned subsidiary Valley Drug Company South (“Valley South”), Desktop Media Group, Inc. (“Desktop”) and its wholly-owned subsidiary VetMall, Inc. (“VetMall”), and Discount Rx, Inc., a Nevada corporation (“Discount Nevada”), (collectively referred to as the “Company”). All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended March 31, 2004.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
7
NOTE B - STOCK BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), which was effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”), and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The Company has adopted the recognition provisions of APB Opinion No. 25. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended June 30, 2004 and 2003:
| For the Three Months Ended June 30, 2004 |
For the Three Months Ended June 30, 2003 |
|||||||
| Net loss reported |
$ | (876,078 | ) | $ | (35,728 | ) | ||
| Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
795,826 | 579,161 | ||||||
| Pro forma net loss |
$ | (1,671,904 | ) | $ | (614,889 | ) | ||