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 March 31, 1998
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 April
30, 1998 was 57,936,275.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1:
Consolidated Balance Sheets - March 31, 1998 (Unaudited)
and December 31, 1997 ..................................... 3
Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997 (Unaudited) ................. 5
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 (Unaudited) ................. 6
Notes to Consolidated Financial Statements................. 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 10
Part II Other Information ............................................. 13
Signatures ............................................... 14
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
Unaudited
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 317 $ 58
Accounts receivable:
Trade, less allowance for doubtful
accounts (1998--$330; 1997--$514) 5,867 5,443
Other 87 110
-----------------------------
5,954 5,553
Inventories:
Raw materials 496 414
Work in process 129 134
Finished goods 468 594
-----------------------------
1,093 1,142
Prepaid expenses and other 499 415
-----------------------------
Total current assets 7,863 7,168
Equipment and improvements:
Furniture and equipment 11,283 10,669
Leasehold improvements 1,003 1,243
-----------------------------
12,286 11,912
Less accumulated depreciation
and amortization (9,018) (8,946)
-----------------------------
3,268 2,966
Goodwill, net of accumulated amortization of
$2,480 in 1998 and $2,273 in 1997 14,619 14,747
-----------------------------
Total assets $ 25,750 $ 24,881
=============================
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
Unaudited
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 2,816 $ 3,572
Accounts payable 3,854 3,768
Accrued expenses 1,384 1,326
Current portion of restructuring accrual 451 521
Current portion of long-term debt 1,390 1,451
Current portion of capital leases 132 112
-----------------------------
Total current liabilities 10,027 10,750
Long-term portion of restructuring accrual 265 265
Long-term portion of debt obligations 1,505 -
Capital lease obligations 297 295
Stockholders' equity
Preferred Stock, $1.00 par value:
Authorized - 1,000,000 shares;
Issued and outstanding -
0 shares in 1998 and 4 in 1997 - -
Common Stock, $.15 par value:
Authorized - 60,000,000 shares;
Issued and outstanding -
57,928,101 shares in 1998 and
56,828,173 shares in 1997 8,690 8,525
Additional paid-in capital 51,515 51,673
Accumulated deficit (46,373) (46,451)
-----------------------------
13,832 13,747
Less: Treasury Stock (176) (176)
-----------------------------
Total stockholders' equity 13,656 13,571
Total liabilities and stockholders' equity $ 25,750 $ 24,881
=============================
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
Unaudited Unaudited
<S> <C> <C>
Revenues
Laboratory service revenues $ 6,547 $ 6,143
Product sales 532 660
------------------------------
Total revenues 7,079 6,803
Cost of services 4,288 3,985
Cost of sales 352 439
------------------------------
4,640 4,424
------------------------------
Gross profit 2,439 2,379
Operating expenses
Selling, general and administrative 1,914 2,026
Research and development 307 206
------------------------------
2,221 2,232
Other income (expenses)
Interest and finance costs, net 140 116
------------------------------
Net income $ 78 $ 31
==============================
Net income per share $ 0.00 $ 0.00
==============================
Weighted average number of
common shares outstanding 57,603,921 46,541,154
=================================
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
Unaudited Unaudited
<S> <C> <C>
Operating activities
Net income $ 78 $ 31
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 484 470
Write-off goodwill and other assets - -
Gain on sale or retirement of equipment - -
Provision for losses on accounts receivable - (19)
Provision for obsolete inventory - (69)
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (401) (419)
Inventories 49 12
Prepaid expenses and other (84) (233)
Accounts payable, accrued expenses and other 146 149
Restructuring accruals (70) (212)
--------------------------
Net cash used in operating activities 202 (290)
Investing activities
Purchases of equipment and improvements (522) (237)
--------------------------
Net cash used in investing activities (522) (237)
Financing activities
Proceeds from sale of equipment - -
Net proceeds from sale of preferred stock - -
Net proceeds (costs) from sale of common stock 7 (53)
Net proceeds from line of credit, term loans
and notes payable 5,387 921
Principal payments on capital lease obligations (36) -
Principal payments on term loans and notes payable (4,779) (335)
--------------------------
Net cash provided by financing activities 579 533
Increase in cash and cash equivalents 259 6
Cash and cash equivalents at beginning of period 58 82
--------------------------
Cash and cash equivalents at end of period $ 317 $ 88
===========================
Supplemental noncash activities
During 1998, the Company entered into capital lease obligations of $58,300 to
purchase equipment.
During 1997, the Company entered into capital lease obligations of $133,000 to
purchase equipment.
During 1997, the Company converted 229 shares of preferred stock into 21,112,342
shares of common stock.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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 footnotes 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 three month period ended March 31, 1998 are not necessarily
indicative of the results that may be attained for the entire year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K, for the year ended
December 31, 1997.
Net Income Per Share: Net income per share amounts are based on the
weighted average number of shares of common stock outstanding.
Reclassifications: Certain reclassifications have been made to the 1997
Financial Statements to conform with the 1998 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 $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. In
connection with the acquisition, the Company entered into a revolving line of
credit of up to $7 million for working capital purposes.
<PAGE>
NOTE C -- DEBT
On January 14, 1998, the Company entered into a Credit and Security Agreement
(the "Credit Agreement") with Norwest Business Credit ("Norwest"). The Credit
Agreement consists of (i) a term loan of $2,125,000 which matures on January 15,
2001, (ii) a term loan of $700,000 which matures on January 15, 1999, (iii) a
revolving line of credit based upon the balance of the Company's trade accounts
receivable, and (iv) a note of up to $1,200,000 for the purchase of capital
equipment for 1998. The term loan of $2,125,000 carries an interest rate equal
to 1.25% above the publicly announced rate of interest by Norwest Bank
Minnesota, N.A. (the "Base Rate", 8.5% at March 31, 1998) as does the note for
capital expenditures. The $700,000 term loan has an interest rate equal to 3.00%
above the Base Rate. The revolving line of credit has an interest rate of 1.00%
above the Base Rate. The Company utilized $4.5 million of the proceeds received
from Norwest to pay off the outstanding loan balances owed to its former lender.
NOTE D -- 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 declaratory
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, while not
abandoning its legal recourse, has recently entered into settlement discussions
with the plaintiff. The Company believes that the probable resolution of
this matter 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 former 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 the Defendants' motion to dismiss the
Company's complaint, ruling the Defendants' conduct did not constitute a
violation of Section 16b. 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 as Environmental Diagnostics, Inc. 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. On January 30, 1996 the Company completed the
acquisition of MEDTOX. In 1997, the Company changed its name to MEDTOX
Scientific, Inc. Since inception, the Company has financed its working capital
requirements primarily from the sale of equity securities.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Total revenues for the three months ended March 31, 1998 were
$7,079,000 as compared to $6,803,000 for the three months ended March 31, 1997.
Laboratory service revenues were $6,547,000 for the three months ended March 31,
1998 as compared to $6,143,000 for the three months ended March 31, 1997. This
increase of 7% in laboratory service revenues was primarily the result of an
increase in laboratory samples of 16% which was the result of increased sales
volume from current clients as well as new clients. In addition, the Company
realized revenues during the quarter ended March 31, 1998 from courier services,
for medical institutions, which it began providing in late 1997.
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 $314,000 for the three months ended March 31, 1998 compared
to sales of $437,000 recorded for the same period in 1997. The Company believes
that the decrease in sales of 28% is primarily due to increased competition from
products perceived as more user-friendly than the Company's current products.
The Company believes that the introduction of its new generation of on-site test
kits later this year will enable the Company to compete successfully in the
on-site drug screening market and offer comprehensive drug testing kits and
services.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $84,000 for the three months ended March 31 1998,
compared to sales of $143,000 for the three months ended March 31, 1997. The
Company believes that the primary reason for the decrease of 41% was due to
timing differences in orders from the USDA for the Company's products.
<PAGE>
Sales of contract manufacturing services, microbiological and
associated product sales were $134,000 for the three months ended March 31, 1998
compared to $80,000 for the same period in 1997. The increase of 68% was due to
increased revenue from contract manufacturing services from both historical
customers and revenues from customers added in late 1997.
The gross margin from the revenues generated from the laboratory
services was 35% for the three months ended March 31, 1998 as compared to a
gross margin of 35% for the same period in 1997. During the three months ended
March 31, 1998, the Company was able to offset declining average selling prices
by reducing costs through the increase in sample volume and improved operating
efficiencies.
Gross margins from the sales of both manufactured products and products
purchased for resale for the three months ended March 31, 1998 were 34% compared
to 34% of sales of these products during the three months ended March 31, 1997.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $1,914,000, compared to $2,026,000 for the three months
ended March 31, 1997. The decrease of $112,000, or 6%, is primarily the result
of reduced sales and marketing expenses due to a restructuring of the sales and
marketing group in 1997.
Research and development expenses incurred during the three months
ended March 31, 1998 were $307,000 as compared to $206,000 for the same period
in 1997. The increase of $101,000 or 49% in research and development expenses is
primarily the result of increased expenses for the development of additional
laboratory based tests.
For the three months ended March 31, 1998, the Company incurred net
interest expense of $140,000, compared to net interest expense of $116,000
incurred during the three months ended March 31, 1997. This increase was the
result of the funds borrowed by the Company to finance certain equipment
purchases and provide working capital.
As a result of the above, the net income for the three months ended March
31, 1998 was $78,000, compared to the net income of $31,000 for the three months
ended March 31, 1997.
Management believes the acquisition of MEDTOX and the restructuring of
the laboratory operations has and will continue to improve the operating results
of the Company, although there can be no assurance of the continued success of
reducing costs and improving efficiencies. Management expects net sales to grow
through both the addition of new accounts and the introduction of new laboratory
testing services and on-site products, particularly the new Profile(R) II on-
site product for the detection of multiple substances of abuse. In addition,
the Company believes that the laboratory business is subject to
seasonality consistent with hiring practices of its clients. This seasonality
results in higher sales in the second quarter with lower sales in July and
December.
<PAGE>
Material Changes in Financial Condition
As of March 31, 1998, cash and cash equivalents were $317,000 compared
to $58,000 at December 31, 1997.
As of March 31, 1998, accounts receivable were $5,954,000 compared to
$5,553,000 at December 31, 1997. The increase of $401,000, or 7%, is primarily
the result of higher sales in the quarter ended March 31, 1998 as compared to
the quarter ended December 31, 1997.
Prepaid expenses and other assets were $499,000 at March 31, 1998 as
compared to $415,000 at December 31, 1997. The increase of $84,000, or 20%,
is primarily the result of an increase in certain annual expenses which will be
amortized throughout the year.
At March 31, 1998, the Company had a total balance of restructuring
accruals of $716,000 compared to a balance of $786,000 at December 31, 1997.
This decrease of 9% is the result of certain payments made during the quarter
ended March 31, 1998.
At March 31, 1998, the Company had a total loan balance owed to its
financial lender of $5,711,000, compared to a total balance of $5,016,000 owed
at December 31, 1997. The net increase of $695,000, or 14%, was the result of
increased borrowings by the Company to provide working capital and to pay for
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 March 31, 1998, the Company
had cash and cash equivalents of $317,000. In the short term, the Company
believes that the aforementioned capital will be sufficient to fund the
Company's planned operations through 1998, although there can be no
assurance that the available capital will be sufficient to fund the future
operations of the Company beyond 1998. The Company believes that consistent
profitable earnings, as well as continued 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 realized from the acquisition of MEDTOX has enabled the Company to
generate positive cash flow. The Company continues to follow a plan which
includes (i) continuing to aggressively monitor and control costs and (ii)
increasing revenue from sales of the Company's services and products. There can
however be no assurance that costs can be controlled, revenues can be increased,
additional financing obtained, 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. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
There were no reports filed on Form 8-K during the three months ended
March 31, 1998.
<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: May 8, 1998
MEDTOX SCIENTIFIC, INC.
By: /s/ Harry G. McCoy
Harry G. McCoy, Chairman and President
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 6284
<ALLOWANCES> 330
<INVENTORY> 1093
<CURRENT-ASSETS> 7863
<PP&E> 12286
<DEPRECIATION> 9018
<TOTAL-ASSETS> 25750
<CURRENT-LIABILITIES> 10027
<BONDS> 0
0
0
<COMMON> 8690
<OTHER-SE> 4966
<TOTAL-LIABILITY-AND-EQUITY> 25750
<SALES> 7079
<TOTAL-REVENUES> 7079
<CGS> 4640
<TOTAL-COSTS> 6861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 78
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
