FORM 10-Q/A-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
Commission file number 1-11394
MEDTOX SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
1238 Anthony Road, Burlington, North Carolina 27215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (910) 226-6311
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.
Yes X No
The number of shares of Common Stock, $.15 par value, outstanding as of August
1, 1997 was 55,516,742.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1:
Consolidated Balance Sheets - June 30, 1997 (Unaudited)
and December 31, 1996 ........................................ 3
Consolidated Statements of Operations - Three Months
Ended June 30, 1997 and 1996 and Six
Months Ended June 30, 1997 and 1996 (Unaudited)............... 5
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1997 and 1996 (Unaudited) ..................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................11
Part II Other Information .................................................18
Signatures ...................................................19
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares)
<CAPTION>
June 30 December 31
1997 1996
---------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 19 $ 82
Accounts receivable:
Trade, less allowance for doubtful
accounts ($362-1997; $358-1996) 5,328 4,476
Other 69 77
---------------------------------
5,397 4,553
Inventories:
Raw materials 531 488
Work in process 170 146
Finished goods 672 656
---------------------------------
1,373 1,290
Prepaid expenses and other 404 140
---------------------------------
Total current assets 7,193 6,065
Equipment and improvements:
Furniture and equipment 9,877 9,200
Leasehold improvements 1,100 929
---------------------------------
10,977 10,129
Less accumulated depreciation
and amortization (8,441) (7,951)
---------------------------------
2,536 2,178
Goodwill, net of accumulated amortization of
$1,658 in 1997 and $1,184 in 1996 15,362 15,836
---------------------------------
Total assets $ 25,091 $ 24,079
=================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except for number of shares)
<CAPTION>
June 30 December 31
1997 1996
----------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 3,315 $ 1,437
Accounts payable 2,681 2,387
Accrued expenses 1,547 2,074
Current portion of restructuring accrual 782 899
Current portion of long-term debt 2,121 2,790
Current portion of capital lease obligations 71 26
Other current liabilities - 14
----------------------------------
Total current liabilities 10,517 9,627
Long-term portion of restructuring accrual 604 904
Capital lease obligations 257 -
Stockholders' equity
Preferred Stock, $1.00 par value:
Authorized - 1,000,000 shares;
Issued and outstanding -
4 shares in 1997 and 238 in 1996 - -
Common Stock, $ .15 par value:
Authorized - 60,000,000 shares;
Issued and outstanding -
55,512,158 shares in 1997 and
25,555,796 shares in 1996 8,327 3,834
Additional paid-in capital 51,905 56,366
Accumulated deficit (46,343) (46,476)
----------------------------------
13,889 13,724
Less: Treasury stock (176) (176)
----------------------------------
Total stockholders' equity 13,713 13,548
----------------------------------
Total liabilities and stockholders' equity $ 25,091 $ 24,079
==================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1997 1996 1997 1996
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Restated
Revenues
Laboratory services $ 6,779 $ 6,735 $ 12,922 $ 11,483
Product sales 707 892 1,367 1,688
---------------------------------- ---------------------------------
7,486 7,627 14,289 13,171
Cost of sales
Laboratory services 4,153 4,228 8,005 7,217
Product sales 445 571 884 1,227
---------------------------------- ---------------------------------
4,598 4,799 8,889 8,444
---------------------------------- ---------------------------------
Gross profit 2,888 2,828 5,400 4,727
Operating expenses
Selling, general and administrative 2,421 2,623 4,580 5,030
Research and development 205 365 411 710
Restructuring costs - - - 858
---------------------------------- ---------------------------------
2,626 2,988 4,991 6,598
Other income (expenses)
Interest and financing costs, net (160) (126) (276) (203)
Royalties and fees - 22 - 85
---------------------------------- ---------------------------------
(160) (104) (276) (118)
---------------------------------- ---------------------------------
Net income (loss) 102 (264) 133 (1,989)
Less preferred stock dividends - - - 6,783
--------------------------------------------------------------------
Net income (loss)applicable to common
stockholders $ 102 $ (264) $ 133 $ (8,772)
Net income (loss) per share
applicable to common stockholders $ 0.00 $ (0.01) $ 0.00 $ (0.41)
================================== =================================
Weighted average number of
common shares outstanding 44,814,659 22,006,646 50,207,371 21,282,842
================================== =================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Six Months Ended
June 30 June 30
1997 1996
----------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net income (loss) $ 133 $ (1,989)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 964 1,054
Provision for losses on accounts receivable 4 68
Provision for obsolete inventory (97) -
Restructuring costs - 858
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (848) (1,591)
Inventories 14 (34)
Prepaid expenses and other (264) 161
Accounts payable, accrued expenses and other (247) (342)
Restructuring accruals (417) (506)
----------------------------------
Net cash used in operating activities (758) (2,321)
Investing activities
Purchases of equipment and improvements (528) (1,047)
Cash used for MEDTOX acquisition - (19,287)
----------------------------------
Net cash used in investing activities (528) (20,334)
Financing activities
Net proceeds from sale of preferred stock - 19,093
Net proceeds (costs) from sale of common stock 32 629
Net proceeds from line of credit, term loans
and notes payable 1,878 4,392
Principal payments on capital lease obligations (18) -
Principal payments on term loans and notes payable (669) (1,571)
----------------------------------
Net cash provided by financing activities 1,223 22,543
----------------------------------
Decrease in cash and cash equivalents (63) (112)
Cash and cash equivalents at beginning of period 82 258
----------------------------------
Cash and cash equivalents at end of period $ 19 $ 146
==================================
Supplemental noncash activities
During 1997, the Company entered into capital lease obligations of $320,000 to purchase equipment.
In January 1996, the Company acquired Medtox Laboratories, Inc. The purchase price was $24 million,
which included $19 million cash and the issuance of $5 million in common stock (2,517,306 shares).
During 1997, the Company converted 234 shares of preferred stock into 22,001,232 shares of common stock.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MEDTOX
Scientific, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
financial condition and results of operations have been included. Operating
results for the six month period ended June 30, 1997 are not necessarily
indicative of the results that may be attained for the entire year. For further
information, refer to the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K, (as amended), for the year ended December
31, 1996.
Loss Per Share: Loss per share amounts are based on the weighted average number
of shares of common stock outstanding.
Reclassifications: Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
NOTE B -- ACQUISITION OF MEDTOX LABORATORIES, INC. ("MEDTOX")
On January 30, 1996, the Company acquired MEDTOX, a toxicology laboratory
located in St. Paul, Minnesota. The purchase price was $24 million, which
included $19 million cash and the issuance of 2,517,306 shares of common stock.
The acquisition was accounted for under the purchase method of accounting
wherein the Company recognized approximately $22 million in goodwill. The
goodwill is being amortized over a period of 20 years. Utilizing an undiscounted
cash flow analysis, the Company concluded that the carrying value of the
remaining goodwill associated with the MEDTOX acquisition exceeded the estimated
future cash flows. Accordingly, the Company recorded a write-off of $6,016,000
at December 31, 1996.
The Company financed the acquisition by issuing $20 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. The
Company also entered into a revolving line of credit of up to $7 million for
working capital purposes.
The consolidated results of operations for the six months ended June 30, 1996
include the results of the MEDTOX operations from January 26, 1996 to June 30,
1996.
<PAGE>
NOTE C -- ACQUISITION OF BIOMAN PRODUCTS, INC. ("BIOMAN")
On June 1, 1995, the Company acquired Bioman, an environmental diagnostics
company. The purchase price was $140,000, which included cash and the issuance
of 21,489 shares of common stock. The acquisition was accounted for under the
purchase method of accounting wherein the Company recognized $117,000 of
goodwill, which was being amortized over a period of 20 years. The consolidated
results of operations for the six months ended June 30, 1996 included the
results of the Bioman operations. In September 1996, the Company sold the former
Bioman operations to a company headed by certain of the former employees of the
Company and Bioman.
NOTE D -- DEBT
To help finance the acquisition of MEDTOX, the Company entered into revolving
and term loan facilities with Heller Financial, Inc. ("Heller"). The debt
financing was for a total of $11,000,000 and consisted of two term loans
totaling $4,000,000 and up to $7,000,000 in the form of a revolving line of
credit based primarily on the receivables of the Company. The amount of credit
available to the Company varies with the accounts receivable and the inventory
of the Company. Effective May 1, 1997, the Company and Heller entered into the
First Amendment to Loan and Security Agreement and Limited Waiver (the
"Amendment Agreement") whereby Heller agreed to waive the then existing non
compliance with certain covenants. As part of the Amendment Agreement, the
Company and Heller agreed to revise the loan covenants and loan interest rates
commencing May 1, 1997. The interest rates on the two term loans of $2,000,000
are 3.0% and 2.5% above the prime rate respectively. The revolving line of
credit carries an interest rate equal to 2.0% above the prime rate.
As of June 30, 1997, the Company was not in compliance with certain covenants in
its Amendment Agreement with Heller. Heller has notified the Company that it
does not currently intend to exercise any of its rights or remedies regarding
non compliance available to Heller under the Loan Agreement with Heller.
NOTE E -- RESTATEMENT OF 1996 FINANCIAL STATEMENTS
In March 1997, the Securities and Exchange Commission Staff (the "Staff")
announced its position on accounting for preferred stock which is convertible
into common stock at a discount from the market rate at the date of issuance.
The Staff's position is that a preferred stock dividend should be recorded for
the difference between the conversion price and the quoted market price of
common stock at the date of issuance. To comply with this position, the Company
restated its 1996 loss applicable to common stockholders for the six months
ended June 30, 1996 to reflect a deemed dividend of $6,783,000 related to the
January 1996 sales of the Series A Preferred Stock. The restatement resulted in
an increase in the previously reported net loss per share applicable to common
stockholders to $.41 from the previously reported amount of $.09.
NOTE F -- CONTINGENCIES
The Company is a defendant to claims of patent infringement asserted on August
20, 1996. It is alleged the Company infringes two patents allegedly owned by the
plaintiff relating to forensically acceptable determinations of gestational
fetal exposure to drugs and other chemical agents. The Company has answered the
compliant denying any infringement and has counterclaimed for a declatory
judgment that the patents are invalid, unenforceable, and not infringed. It also
has counterclaimed for unfair competition under federal and state law,
requesting money damages as well as injunctive relief. The Company intends to
vigorously pursue its defense of the claims and to vigorously prosecute its
counterclaims.
<PAGE>
On March 18, 1997, a lawsuit was commenced in New York State Court by a former
holder of the Series A Preferred Stock claiming entitlement to additional shares
of Common Stock as a result of the Company's previous inability to issue the
conversion shares. The conversion shares have been issued to the former Series A
Preferred Shareholder. The Company has denied any liability and intends to
contest the lawsuit unless a reasonable settlement can be reached.
The Company believes that the probable resolution of the above contingencies
will not materially affect the financial position or results of operations of
the Company.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority shareholder and two outside directors of the
Company alleging violation of Section 16b of the Securities Exchange Act of 1934
and seeking recovery of more than $500,000 in short-swing profits. On August 4,
1997, the U.S. District Court granted Defendants' motion to dismiss the
Company's complaint, ruling that the Defendants' conduct did not constitute a
violation of Section 16(b). The Company is considering whether to appeal that
decision.
<PAGE>
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, the
possible effects of the MEDTOX acquisition and its related financings and other
factors which are described herein and/or in documents incorporated by reference
herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company commenced operations in June 1983 and until 1986 was a
development stage company. The Company became engaged in the manufacture and
sale of Conventional Biodiagnostic Products as a result of its acquisition of
Granite Technological Enterprises, Inc. in 1986. The Company began the
manufacture and sale of its EZ-SCREEN(R) diagnostic tests in 1985 and introduced
its patented one-step assays, VERDICT(R) and RECON(R), in 1993. Also in 1993,
the Company formed DIAGNOSTIX, Inc. to market its agricultural diagnostic
products. The Company entered the laboratory testing market when it completed
the acquisition of Princeton Diagnostic Laboratories of America, Inc., (PDLA) in
1994. In 1995, the Company acquired the former operations of Bioman through its
DIAGNOSTIX, Inc. subsidiary. On January 30, 1996 the Company completed the
acquisition of MEDTOX. The results of operations for the six months ended June
30, 1996 include the operations of MEDTOX from January 26, 1996 through the end
of the period. Since inception, the Company has financed its working capital
requirements primarily from the sale of equity securities.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Total revenues for the three months ended June 30, 1997 were $7,486,000
as compared to $7,627,000 for the three months ended June 30, 1996. The decrease
was attributable to a decrease in revenues from product sales. Laboratory
service revenues were $6,779,000 for the three months ended June 30, 1997,
compared to $6,735,000 for the three months ended June 30, 1996. This increase
was the result of increased sample volume partially offset by a decreased
average selling price per sample.
Product sales include the sales generated from substance abuse testing
products, which incorporates the EZ-SCREEN and VERDICT on site test kits and
other ancillary products for the detection of abused substances. Sales from
these products were $397,000 for the three months ended June 30, 1997 compared
to sales of $441,000 recorded for the same period in 1996. This decrease of 10%
was primarily due to the absence of certain sales generated through the former
operations of Bioman.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $185,000 for the three months ended June 30, 1997
compared to sales of $372,000 for the three months ended June 30, 1996. For the
three months ended June 30, 1996 the Company had sales of $133,000 which were
generated through the former operations of Bioman,. Excluding these revenues,
sales of agricultural diagnostic products were $239,000 for the three months
ended June 30, 1996. As such, the sales of these products for the three months
ended June 30, 1997 were, on a pro forma basis, 23% lower than the comparable
period in 1996. The primary reason for the decrease was due to decreased
<PAGE>
purchases by the USDA for the Company's products. The Company believes that this
is the result of decreased testing by the USDA for the tests that utilize the
Company's products.
Sales of contract manufacturing services, microbiological and associated
product sales were $125,000 for the three months ended June 30, 1997 compared to
$79,000 for the same period in 1996. This increase is the result of increased
revenues from contract manufacturing services. In July, 1997, the Company
entered into a three year Supply Agreement with Boehringer Mannheim Corporation
("BMC"), whereby the Company will supply to BMC controls for certain products of
BMC.
The gross margin from the revenues generated from the laboratory
services was 39% for the three months ended June 30, 1997 an increase compared
to the same period in 1996, when the gross margin was 37%. The improvement in
the gross margin was primarily due to the increased efficiencies in the
laboratory combined with an increase in the number of tests performed in the
laboratory.
Gross margins from the sales of both manufactured products and products
purchased for resale for the three months ended June 30, 1997 were 37% compared
to 36% of sales of these products during the three months ended June 30, 1996.
This increase in gross margin from product sales is primarily the result of
increased sales of contract manufacturing services.
Selling, general and administration expenses for the three months ended
June 30, 1997 were $2,421,000, compared to $2,623,000 for the three months ended
June 30, 1996. The $202,000 reduction in these expenses in 1997 was primarily
the result of the consolidation of certain administrative functions into the
MEDTOX facility as well as decreased amortization expense.
Research and development expenses incurred during the three months
ended June 30, 1997 were $205,000 as compared to $365,000 for the same period in
1996. The reduction of $160,000 in research and development expenses is
primarily the result of a reduction of personnel and a refocus of efforts in the
research and development function associated with the Company's on-site
products.
For the three months ended June 30, 1997, the Company incurred net
interest and financing costs of $160,000, compared to costs of $126,000 incurred
during the three months ended June 30, 1996. This increase was the result of
increased borrowings against the line of credit during the three months ended
June 30, 1997 as compared to June 30, 1996.
For the three months ended June 30, 1997, the Company had no revenues from
royalties and fees, compared to $22,000 for the three months ended June 30,
1996.
<PAGE>
As a result of the above, the net income for the three months ended June
30, 1997 was $102,000, compared to the net loss of $264,000 for the three months
ended June 30, 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenues for the six months ended June 30, 1997 were $14,289,000
as compared to $13,171,000 for the six months ended June 30, 1996. The increase
was attributable to the increase in revenues from laboratory services.
Laboratory service revenues were $12,922,000 for the six months ended June 30,
1997 as compared to $11,483,000 for the six months ended June 30, 1996. This
increase of 13% was primarily the result of the timing of the acquisition of
MEDTOX whereby the Company realized revenues from MEDTOX for approximately five
months during the six months ended June 30, 1996, as compared to the complete
six month period ended June 30, 1997. Had the acquisition of MEDTOX been
effective January 1, 1996, the Company would have had revenues of $12,683,000
from laboratory services during the six months ended June 30, 1996, as compared
to the $12,922,000 realized from the sale of laboratory services during the six
months ended June 30, 1997, this would represent a pro forma increase of
$239,000 or 2%.
Product sales include the sales generated from substance abuse testing
products, which incorporates the EZ-SCREEN and VERDICT on site test kits and
other ancillary products for the detection of abused substances. Sales from
these products were $834,000 for the six months ended June 30, 1997 compared to
sales of $765,000 recorded for the same period in 1996. This increase of 9% was
primarily the result of sales of the EZ-SCREEN PROFILE(TM) test kits which were
introduced in May, 1996.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $328,000 for the six months ended June 30 1997,
compared to sales of $687,000 for the six months ended June 30, 1996. For the
six months ended June 30, 1996, the Company had sales of $279,000 which were
generated through the former operations of Bioman. Excluding these revenues,
sales of agricultural diagnostic products were $408,000 for the six months ended
June 30, 1996. As such, the sales of these products for the six months ended
June 30, 1997 were, on a pro forma basis, 20% lower than during the comparable
period in 1996. The primary reason for the decrease was due to decreased
purchases by the USDA for the Company's products. The Company believes that this
is the result of decreased testing by the USDA for the tests that utilize the
Company's products.
Sales of contract manufacturing services, microbiological and
associated product sales were $205,000 for the six months ended June 30, 1997
compared to $161,000 for the same period in 1996. This increase was primarily
due to increased revenues from contract manufacturing services.
<PAGE>
Revenues generated from the shipment of products to the U.S. Department
of Defense were $75,000 for the six months ended June 30, 1996. The Company had
no such sales during the six months ended June 30, 1997. The contract the
Company had with the Department of Defense has expired. At this time, the
Company does not know if the U.S. Department of Defense intends to purchase any
more of the kits the Company has developed.
The gross margin from the revenues generated from the laboratory
services was 38% for the six months ended June 30, 1997 as compared to a gross
margin of 37% for the same period in 1996. During the six months ended June 30,
1997, the Company was able to offset declining average selling prices by
reducing costs through the consolidation of laboratory operations in 1996 as
well as continued improvements in efficiency of laboratory operations.
Gross margins from the sales of both manufactured products and products
purchased for resale for the six months ended June 30, 1997 were 35% compared to
27% of sales of these products during the six months ended June 30, 1996. This
increase in gross margin from product sales is primarily the result of the
increased sales of the EZ-SCREEN PROFILE product and contract manufacturing
services, as well as reduced costs as a result of certain restructuring steps
taken in 1996.
Selling, general and administration expenses for the six months ended
June 30, 1997 were $4,580,000, compared to $5,030,000 for the six months ended
June 30, 1996. The $450,000 reduction in these expenses in 1997 was primarily
the result of the consolidation of certain administrative functions into the
MEDTOX facility as well as decreased amortization expense.
Research and development expenses incurred during the six months ended
June 30, 1997 were $411,000 as compared to $710,000 for the same period in 1996.
The reduction of $299,000 in research and development expenses is primarily the
result of a reduction of personnel and a refocus of efforts in the research and
development function associated with the Company's on-site products.
During the six months ended June 30, 1996, the Company determined that
it would be beneficial to consolidate the laboratory operations of PDLA into the
laboratory operations at MEDTOX. In addition the Company decided to down size
certain administrative positions at both PDLA and MEDTOX in order to eliminate
duplicative functions. As a result of this restructuring plan, the Company
recorded a charge of $858,000 during the six months ended June 30, 1996 to cover
certain costs of the restructuring, including $100,000 related to certain
severance payments. The Company had no such charge during the six months ended
June 30, 1997.
For the six months ended June 30, 1997, the Company incurred net
interest and financing costs of $276,000, compared to costs of $203,000 incurred
<PAGE>
during the six months ended June 30, 1996. This increase was the result of the
funds borrowed by the Company to complete the financing for the acquisition of
MEDTOX.
For the six months ended June 30, 1997, the Company had no revenues
from royalties and fees, compared to $85,000 for the six months ended June 30,
1996. This decrease was primarily due to the absence of royalties from AML as
the agreement with AML has expired.
As a result of the above, the net income for the six months ended June 30,
1997 was $133,000, compared to the net loss of $1,989,000 for the six months
ended June 30, 1996.
In March 1997, the Securities and Exchange Commission Staff (the "Staff")
announced its position on accounting for preferred stock which is convertible
into common stock at a discount from the market rate at the date of issuance. To
comply with this position, the Company restated its loss for the six months
ended June 30, 1996 applicable to common stockholders to reflect a deemed
dividend of $6,783,000 related to the January 1996 sales of the Series A
Preferred Stock. The restatement resulted in an increase in the previously
reported net loss applicable to common stockholders from the previously reported
$1,989,000 to $8,772,000 for the six months ended June 30, 1996. The Company had
no such charge for the six months ended June 30, 1997.
Management believes the acquisition of MEDTOX and the restructuring of
the laboratory operations will continue to improve the operating results of the
Company. Management expects net sales to grow through both the addition of new
accounts, as well as the introduction of new laboratory testing services and
on-site products.
Material Changes in Financial Condition
As of June 30, 1997, accounts receivable were $5,397,000 compared to
$4,553,000 at December 31, 1996. The increase of $844,000 is primarily the
result of higher sales in the quarter ended June 30, 1997 as compared to the
quarter ended December 31, 1996.
Prepaid expenses and other assets were $404,000 at June 30, 1997 as
compared to $140,000 at December 31, 1996. The increase of $264,000 is primarily
the result of the renewal of annual maintenance contracts, annual licenses and
fees and an increase in prepaid supplies.
The balance of equipment and improvements at June 30, 1997 was
$10,977,000 as compared to a balance of $10,129,000 at December 31, 1996. The
increase of $848,000 was the result of purchases of equipment and capital
improvements for the laboratory operation to improve efficiencies and reduce
operating costs.
As of June 30, 1997, accounts payable totaled $2,681,000 compared to
$2,387,000 at December 31, 1996. The increase of $294,000, or 12%, is primarily
the result of increased purchases of kits, forms and other supplies as a result
of increased business for the laboratory testing services consistent with the
seasonality of the business.
Accrued expenses were $1,547,000 at June 30, 1997, as compared to
$2,074,000 at December 31, 1996. The decrease of $527,000, or 34%, was the
result of payments made during the first six months of 1997 for expenses accrued
at December 31, 1996.
At June 30, 1997, the Company had a total balance of leases payable of
$328,000 compared to a balance of $26,000 at December 31, 1996. The increase in
<PAGE>
the balance of the leases payable was the result of the purchase of certain
equipment to improve operating efficiencies in the laboratory.
June 30, 1997, the Company had a total balance of restructuring
accruals of $1,386,000 compared to a balance of $1,803,000 at December 31, 1996.
The decrease in the balance of the restructuring accruals of $417,000, or 23%,
was the result of payments made during the six months ended June 30, 1997.
At June 30, 1997, the Company had a total loan balance owed to its
financial lender of $5,436,000, compared to a total balance of $4,227,000 owed
at December 31, 1996. The net increase of $1,209,000, or 29%, was the result of
increased borrowings by the Company from its line of credit to pay certain
accrued expenses and restructuring accruals as well as purchases of certain
assets to improve operating efficiencies.
Liquidity and Capital Resources
Since its inception, the working capital requirements of the Company
have been funded primarily by cash received from equity investments in the
Company and more recently debt financing. At June 30, 1997, the Company had cash
and cash equivalents of $19,000. The Company is currently marginally profitable
and, as such, is relying on a continued positive cash flow from operations and
its line of credit to fund its working capital and asset purchases. The amount
of credit on the revolving line of credit is based primarily on the receivables
of the Company and, as such, varies with the accounts receivable, and to a
lesser degree the inventory of the Company. The revolving line of credit carries
an interest rate equal to 2.0% above the prime rate. As of June 30, 1997, the
Company had total availability of $3,512,000 on the line of credit of which
$3,315,000 was borrowed, leaving a net availability of $197,000 as of June 30,
1997. In the short term, the Company believes that the aforementioned capital
will be sufficient to fund the Company's planned operations through 1997,
although there can be no assurance that the available capital will be sufficient
to fund the future operations of the Company beyond 1997. The Company believes
that consistent profitable earnings, as well as access to capital, will be the
primary basis for funding the operations of the Company for the long term.
The Company believes that the acquisition of MEDTOX, the subsequent
consolidation of the laboratory operations from PDLA into MEDTOX, and other
synergy that will be realized from the acquisition of MEDTOX will enable the
Company to generate positive cash flow. The Company continues to follow a plan
which includes (i) continuing to aggressively monitor and control costs, (ii)
increasing revenue from sales of the Company's products, services, and research
and development contracts, as well as (iii) continue to selectively pursue
synergistic acquisitions to increase the Company's critical mass. There can be
no assurance that costs can be controlled, revenues can be increased, financing
may be obtained, acquisitions successfully consummated, or that the Company will
be profitable.
<PAGE>
ITEM 2 CHANGES IN SECURITIES. Inapplicable
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.41, Amendment to the Loan and Security
Agreement and Limited Waiver Between the Company and Heller
dated May 1, 1997.
There was no Report on Form 8-K during the three months ended
June 30, 1997.
<PAGE>
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.
Date: August 12, 1997
MEDTOX SCIENTIFIC, INC.
By: /s/ Richard J. Braun
Richard J. Braun, Chief Executive Officer
By: /s/ Peter J. Heath
Peter J. Heath, Vice President of Finance
and Chief Financial Officer
