FORM 10-Q
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 September 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.)
402 West County Road D, St. Paul, Minnesota 55112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (612) 636-7466
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 November
1, 1997 was 56,154,301.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1:
Consolidated Balance Sheets - September 30, 1997 (Unaudited)
and December 31, 1996 ............................................... 3
Consolidated Statements of Operations - Three Months
Ended September 30, 1997 and 1996 and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)................. 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 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>
September 30 December 31
1997 1996
--------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 34 $ 82
Accounts receivable:
Trade, less allowance for doubtful
accounts ($397-1997; $358-1996) 5,745 4,476
Other 95 77
--------------------------------------
5,840 4,553
Inventories:
Raw materials 502 488
Work in process 135 146
Finished goods 638 656
--------------------------------------
1,275 1,290
Prepaid expenses and other 517 140
--------------------------------------
Total current assets 7,666 6,065
Equipment and improvements:
Furniture and equipment 10,201 9,200
Leasehold improvements 1,233 929
--------------------------------------
11,434 10,129
Less accumulated depreciation
and amortization (8,694) (7,951)
--------------------------------------
2,740 2,178
Goodwill, net of accumulated amortization of
$711 in 1997 and $1,184 in 1996 15,125 15,836
--------------------------------------
Total assets $ 25,531 $ 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>
September 30 December 31
1997 1996
---------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 3,403 $ 1,437
Accounts payable 3,386 2,387
Accrued expenses 1,537 2,074
Current portion of restructuring accrual 770 899
Current portion of long-term debt 1,786 2,790
Current portion of capital lease obligations 106 26
Other current liabilities - 14
---------------------------------------
Total current liabilities 10,988 9,627
Long-term portion of restructuring accrual 505 904
Capital lease obligations 313 -
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 -
55,543,300 shares in 1997 and
25,555,796 shares in 1996 8,331 3,834
Additional paid-in capital 51,910 56,366
Accumulated deficit (46,340) (46,476)
---------------------------------------
13,901 13,724
Less: Treasury stock (176) (176)
---------------------------------------
Total stockholders' equity 13,725 13,548
---------------------------------------
Total liabilities and stockholders' equity $ 25,531 $ 24,079
=======================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(in thousands except for per share amounts)
Restated
<S> <C> <C> <C> <C>
Revenues
Laboratory service revenues $ 6,510 $ 6,072 $ 19,432 $ 17,555
Product sales 770 722 2,137 2,410
---------------------------------------------------------------
7,280 6,794 21,569 19,965
Cost of services 4,161 3,895 12,166 11,112
Cost of sales 427 552 1,311 1,779
---------------------------------------------------------------
4,588 4,447 13,477 12,891
---------------------------------------------------------------
Gross profit 2,692 2,347 8,092 7,074
Operating expenses
Selling, general and administrative 2,292 3,317 6,872 8,347
Research and development 230 334 641 1,044
Restructuring costs - 1,108 - 1,966
---------------------------------------------------------------
2,522 4,759 7,513 11,357
Other income (expenses)
Interest and financing costs, net (168) (78) (444) (281)
Royalties and fees - 5 - 90
---------------------------------------------------------------
(168) (73) (444) (191)
---------------------------------------------------------------
Net income (loss) 2 (2,485) 135 (4,474)
Less preferred stock deemed dividend - - - 6,783
Net income (loss) applicable to common
===============================================================
shareholders $ 2 $ (2,485) $ 135 $ (11,257)
===============================================================
Net income (loss) per share
applicable to common stockholders $ 0.00 $ (0.10) $ 0.00 $ (0.56)
===============================================================
Weighted average number of
common shares outstanding 55,524,219 25,485,225 48,423,741 19,953,009
===============================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
September 30
1997 1996
--------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net income (loss) $ 135 $ (4,474)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,454 1,703
Write off of goodwill and other assets - 221
Gain on sale or retirement of equipment - (16)
Provision for losses on accounts receivable 39 102
Provision for obsolete inventory (97) -
Restructuring costs - 1,966
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (1,326) (1,077)
Inventories 112 57
Prepaid expenses and other (377) 255
Accounts payable, accrued expenses and other 448 102
Restructuring accruals (528) (992)
--------------------------------
Net cash used in operating activities (140) (2,153)
Investing activities
Purchases of equipment and improvements (870) (1,065)
Cash used for MEDTOX acquisition - (19,324)
--------------------------------
Net cash used in investing activities (870) (20,389)
Financing activities
Proceeds from sale of equipment - 24
Net proceeds from sale of preferred stock - 19,129
Net proceeds (costs) from sale of common stock 42 690
Net proceeds from line of credit, term loans and notes payable 1,966 4,671
Principal payments on capital lease obligations (43) -
Principal payments on term loans and notes payable (1,003) (1,905)
--------------------------------
Net cash provided by financing activities 962 22,609
Increase (decrease) in cash and cash equivalents (48) 67
Cash and cash equivalents at beginning of period 82 258
--------------------------------
Cash and cash equivalents at end of period $ 34 $ 325
================================
Supplemental noncash activities
During 1997, the Company entered into capital lease obligations of $435,000 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.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month period ended September 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.
<PAGE>
The consolidated results of operations for the nine months ended September 30,
1996 include the results of the MEDTOX operations from January 26, 1996 to
September 30, 1996.
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 nine months ended September 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 rate on the remaining term loan of
$2,000,000 is 2.5% above the prime rate. The revolving line of credit carries an
interest rate equal to 2.0% above the prime rate.
As of September 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.
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 nine months
<PAGE>
ended September 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 $.56 from the previously reported amount of $.22.
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
complaint 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.
The Company believes that the probable resolution of the above contingency 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). On October 29, 1997, the Company filed an appeal of
that decision to the United States Court of Appeals for the Eighth Circuit. That
appeal is currently pending.
<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 nine months ended
September 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 September 30, 1997 Compared to Three Months Ended September
30, 1996
Total revenues for the three months ended September 30, 1997 were
$7,280,000 as compared to $6,794,000 for the three months ended September 30,
1996. The increase was attributable to an increase in revenues from both
laboratory services and product sales. Laboratory service revenues were
$6,510,000 for the three months ended September 30, 1997, compared to $6,072,000
for the three months ended September 30, 1996. This 7% 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 $405,000 for the three months ended September 30, 1997
compared to sales of $369,000 recorded for the same period in 1996. This 10%
increase is due to increased sales of the VERDICT test kits.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $182,000 for the three months ended September 30,
1997 compared to sales of $283,000 for the three months ended September 30,
1996. For the three months ended September 30, 1996 the Company had sales of
$88,000 which were generated through the former operations of Bioman. Excluding
these revenues, sales of agricultural diagnostic products were $195,000 for the
three months ended September 30, 1996. As such, the sales of these products for
the three months ended September 30, 1997 were, on a pro forma basis, 7% lower
<PAGE>
than 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 $183,000 for the three months ended September 30,
1997 compared to $70,000 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 36% for the three months ended September 30, 1997 compared to the
same period in 1996, when the gross margin was also 36%.
Gross margins from the sales of both manufactured products and products
purchased for resale for the three months ended September 30, 1997 were 45%
compared to 24% of sales of these products during the three months ended
September 30, 1996. This increase in gross margin from product sales is
primarily the result of increased sales of 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 three months ended
September 30, 1997 were $2,292,000, compared to $3,317,000 for the three months
ended September 30, 1996. The $1,025,000 reduction in these expenses in 1997 was
primarily the result of the consolidation of certain administrative functions
into the MEDTOX facility, decreased amortization expense, and an overall effort
to monitor and control costs.
Research and development expenses incurred during the three months
ended September 30, 1997 were $230,000 as compared to $334,000 for the same
period in 1996. The reduction of $104,000 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 three months ended September 30, 1996, the Company took
certain actions in order to improve the operating results of the Company
including reducing the work force at its Burlington, North Carolina location.
Primarily as a result of this action the Company recorded a charge of $1,108,000
during the three months ended September 30, 1996, including $602,000 related to
severance payments. The Company had no such charge during the three months ended
September 30, 1997.
For the three months ended September 30, 1997, the Company incurred net
interest and financing costs of $168,000, compared to costs of $78,000 incurred
<PAGE>
during the three months ended September 30, 1996. This increase was the result
of increased borrowings against the line of credit during the three months ended
September 30, 1997 as compared to September 30, 1996.
For the three months ended September 30, 1997, the Company had no revenues
from royalties and fees, compared to $5,000 for the three months ended September
30, 1996.
As a result of the above, net income for the three months ended September
30, 1997 was $2,000, compared to the net loss of $2,485,000 for the three months
ended September 30, 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Total revenues for the nine months ended September 30, 1997 were
$21,569,000 as compared to $19,965,000 for the nine months ended September 30,
1996. The increase was attributable to the increase in revenues from laboratory
services. Laboratory service revenues were $19,432,000 for the nine months ended
September 30, 1997 as compared to $17,555,000 for the nine months ended
September 30, 1996. This increase of 11% was primarily the result of the timing
of the acquisition of MEDTOX whereby the Company realized revenues from MEDTOX
for approximately eight months during the nine months ended September 30, 1996,
as compared to the complete nine month period ended September 30, 1997. Had the
acquisition of MEDTOX been effective January 1, 1996, the Company would have had
revenues of $18,755,000 from laboratory services during the nine months ended
September 30, 1996, as compared to the $19,432,000 realized from the sale of
laboratory services during the nine months ended September 30, 1997, this would
represent a pro forma increase of $677,000 or 4%.
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 $1,239,000 for the nine months ended September 30, 1997
compared to sales of $1,134,000 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, as well as increased sales of the
VERDICT one-step test kits.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $510,000 for the nine months ended September 30
1997, compared to sales of $970,000 for the nine months ended September 30,
1996. For the nine months ended September 30, 1996, the Company had sales of
$367,000 which were generated through the former operations of Bioman. Excluding
these revenues, sales of agricultural diagnostic products were $603,000 for the
nine months ended September 30, 1996. As such, the sales of these products for
the nine months ended September 30, 1997 were, on a pro forma basis, 15% lower
<PAGE>
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 $388,000 for the nine months ended September 30,
1997 compared to $231,000 for the same period in 1996. This increase was due to
increased revenues from contract manufacturing services.
Revenues generated from the shipment of products to the U.S. Department
of Defense were $75,000 for the nine months ended September 30, 1996. The
Company had no such sales during the nine months ended September 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 37% for the nine months ended September 30, 1997 as compared to a
gross margin of 37% for the same period in 1996. During the nine months ended
September 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 nine months ended September 30, 1997 were 39%
compared to 26% of sales of these products during the nine months ended
September 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 nine months ended
September 30, 1997 were $6,872,000, compared to $8,347,000 for the nine months
ended September 30, 1996. The $1,475,000 reduction in these expenses in 1997 was
primarily the result of the consolidation of certain administrative functions
into the MEDTOX facility, decreased amortization expense, and an overall effort
to monitor and control costs.
Research and development expenses incurred during the nine months ended
September 30, 1997 were $641,000 as compared to $1,044,000 for the same period
in 1996. The reduction of $403,000 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.
<PAGE>
During the nine months ended September 30, 1996, the Company determined
that it would be beneficial to consolidate the laboratory operations of PDLA
into the laboratory operations at MEDTOX as well as to down size certain
administrative positions at both PDLA and MEDTOX in order to eliminate
duplicative functions. The Company also determined that to improve the operating
results of the Company, it would be necessary to sell the former operations of
Bioman, close its farm facility and reduce its work force at its Burlington,
North Carolina location. As a result of these restructuring steps, the Company
recorded charges of $1,966,000 during the nine months ended September 30,
1996 to cover certain costs of the restructurings, including $702,000 related to
certain severance payments. The Company had no such charge during the nine
months ended September 30, 1997.
For the nine months ended September 30, 1997, the Company incurred net
interest and financing costs of $444,000, compared to costs of $281,000 incurred
during the nine months ended September 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 nine months ended September 30, 1997, the Company had no
revenues from royalties and fees, compared to $90,000 for the nine months ended
September 30, 1996. This decrease was primarily due to the absence of royalties
from American Medical Laboratories, Inc. ("AML") as the agreement with AML has
expired.
As a result of the above, the net income for the nine months ended
September 30, 1997 was $135,000, compared to the net loss of $4,474,000 for the
nine months ended September 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 nine months
ended September 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 $4,474,000 to
$11,257,000 for the nine months ended September 30, 1996. The Company had no
such charge for the nine months ended September 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.
<PAGE>
Material Changes in Financial Condition
As of September 30, 1997, accounts receivable were $5,840,000 compared
to $4,553,000 at December 31, 1996. The increase of $1,287,000 is primarily the
result of higher sales in the quarter ended September 30, 1997 as compared to
the quarter ended December 31, 1996.
Prepaid expenses and other assets were $517,000 at September 30, 1997 as
compared to $140,000 at December 31, 1996. The increase of $377,000 is primarily
the result of the renewal of annual maintenance contracts, annual licenses and
fees, an increase in prepaid supplies, and prepayments made for the purchase of
certain laboratory equipment.
The balance of equipment and improvements at September 30, 1997 was
$11,434,000 as compared to a balance of $10,129,000 at December 31, 1996. The
increase of $1,305,000 was the result of purchases of equipment and capital
improvements for the laboratory operation to improve efficiencies and reduce
operating costs.
As of September 30, 1997, accounts payable totaled $3,386,000 compared to
$2,387,000 at December 31, 1996. The increase of $999,000, or 42%, is primarily
the result of increased purchases of kits, forms and other supplies as a result
of increased business for the laboratory testing services, as well as certain
capital expenditures.
Accrued expenses were $1,537,000 at September 30, 1997, as compared to
$2,074,000 at December 31, 1996. The decrease of $537,000, or 26%, was the
result of payments made during the first nine months of 1997 for expenses
accrued at December 31, 1996.
At September 30, 1997, the Company had a total balance of leases
payable of $419,000 compared to a balance of $26,000 at December 31, 1996. The
increase in the balance of the leases payable was the result of the purchase of
certain equipment to improve operating efficiencies in the laboratory.
September 30, 1997, the Company had a total balance of restructuring
accruals of $1,275,000 compared to a balance of $1,803,000 at December 31, 1996.
The decrease in the balance of the restructuring accruals of $528,000, or 29%,
was the result of payments made during the nine months ended September 30, 1997.
At September 30, 1997, the Company had a total loan balance owed to its
financial lender of $5,181,000, compared to a total balance of $4,227,000 owed
at December 31, 1996. The net increase of $954,000, or 23%, was primarily 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.
<PAGE>
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 September 30, 1997, the Company had
cash and cash equivalents of $34,000. 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 September 30, 1997, the Company had total availability of $3,667,000
on the line of credit of which $3,253,000 was borrowed, leaving a net
availability of $414,000 as of September 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
continue to 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
There was no Report on Form 8-K during the three months ended
September 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: November 13, 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
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