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, 1999
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: (651) 636-7466
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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
10, 1999, was 2,903,673.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 ................................... 3
Consolidated Statements of Operations - Three
Months Ended September 30, 1999 and 1998 and Nine
Months Ended September 30, 1999 and 1998 ............... 5
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998 ............... 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 ....................................... 19
Signatures ........................................... 21
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
September 30 December 31
1999 1998
------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 287 $ -
Accounts receivable:
Trade, less allowance for doubtful
accounts ($375-1999; $245-1998) 7,200 5,957
Other 89 30
------------------------------------
7,289 5,987
Inventories:
Raw materials 482 444
Work in process 196 151
Finished goods 47 80
Supplies 422 432
------------------------------------
1,147 1,107
Prepaid expenses and other 900 524
------------------------------------
Total current assets 9,623 7,618
Equipment and improvements:
Furniture and equipment 12,464 11,779
Leasehold improvements 1,310 1,283
------------------------------------
13,774 13,062
Less accumulated depreciation
and amortization (11,089) (10,087)
------------------------------------
2,685 2,975
Goodwill, net of accumulated amortization of
$3,732 in 1999 and $3,086 in 1998 13,385 14,007
------------------------------------
Total assets $ 25,693 $ 24,600
====================================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
September 30 December 31
1999 1998
------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 4,090 $ 3,095
Checks written in excess of bank balances - 142
Accounts payable 2,901 3,531
Accrued expenses 1,855 1,724
Current portion of restructuring accrual 609 1,079
Current portion of long-term debt 1,387 1,140
Current portion of capital lease obligations 186 186
------------------------------------
Total current liabilities 11,028 10,897
Long-term portion of restructuring accrual - 76
Capital lease obligations 346 516
Long term debt obligations 1,709 1,785
Stockholders' equity
Preferred Stock, $1.00 par value:
Authorized - 1,000,000 shares;
Issued and outstanding -
none in 1999 and none in 1998 - -
Common Stock, $ .15 par value:
Authorized - 7,400,000 shares in 1999,
3,750,000 shares in 1998;
Issued and outstanding -
2,903,376 shares in 1999 and
2,899,669 shares in 1998 437 435
Additional paid-in capital 59,845 59,815
Accumulated deficit (47,496) (48,748)
Treasury stock (176) (176)
------------------------------------
Total stockholders' equity 12,610 11,326
------------------------------------
Total liabilities and stockholders' equity $ 25,693 $ 24,600
====================================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Laboratory service revenues $ 7,944 $ 6,861 $ 23,204 $ 20,715
Product sales 1,130 748 2,857 1,879
-------------------------------------------------------------------
9,074 7,609 26,061 22,594
Cost of services 5,283 4,957 15,508 14,226
Cost of sales 623 443 1,579 1,208
--------------------------------------------------------------------
5,906 5,400 17,087 15,434
Gross profit 3,168 2,209 8,974 7,160
Operating expenses
Selling, general and administrative 2,401 1,956 6,675 5,634
Research and development 198 283 618 878
Interest and financing costs 220 162 595 479
Other non-recurring - - (164) -
---------------------------------------------------------------------
2,819 2,401 7,724 6,991
---------------------------------------------------------------------
Net income 349 (192) 1,250 169
=====================================================================
Basic net earnings per common share (1) $ 0.12 $ (0.07) $ 0.43 $ 0.06
======================================================================
Diluted net earnings per common share (1) $ 0.12 $ (0.07) $ 0.42 $ 0.06
======================================================================
(1) Income per share for the three months and nine months
ended September 30, 1998 has been restated to reflect
a one-for-twenty reverse stock split in February, 1999
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30 September 30
1999 1998
------------------------------------
<S> <C> <C>
Operating activities
Net income $ 1,250 $ 169
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,625 1,564
Changes in operating assets and liabilities;
Accounts receivable (1,302) (1,013)
Inventories (40) 65
Prepaid expenses and other (376) (245)
Accounts payable, accrued expenses and other (499) 21
Restructuring accruals (546) (238)
------------------------------------
Net cash used in operating activities 112 323
Investing activities
Purchases of equipment and improvements (712) (809)
Financing activities
Checks in excess of bank balance (142) -
Net proceeds from sale of common stock 2 19
Net proceeds from line of credit, term loans
and notes payable 28,875 3,117
Principal payments on capital lease obligations (170) (135)
Principal payments on line of credit, term loans
and notes payable (27,678) (2,541)
------------------------------------
Net cash provided by financing activities 888 460
------------------------------------
Increase in cash and cash equivalents 287 (26)
Cash and cash equivalents at beginning of period - 58
------------------------------------
Cash and cash equivalents at end of period $ 287 $ 32
====================================
Supplemental noncash activities
During 1999, the Company entered into capital lease obligations totaling $58,300.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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
only of normal recurring adjustments) 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, 1999
are not necessarily indicative of the results that may be attained for the
entire year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The Company's stockholders approved a one-for-twenty reverse stock split
effective February 23, 1999. All stock options, warrant, share and per share
data included in this report reflect the effect of this reverse split.
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using the "treasury stock" method.
In thousands, except share and per share amounts
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (A) $349 $(192) $1,250 $169
Weighted average number of shares 2,903,298 2,897,441 2,902,709 2,891,162
of common stock outstanding (B)
Dilutive effect of stock options 123,171 0 99,304 0
------- ------------- -------- ----------
Common stock and common 3,026,469 2,897,441 3,002,013 2,891,162
stock equivalents (C) ========= ========= ========= =========
Net income per share:
Basic (A/B) $.12 $(.07) $.43 $.06
==== ====== ==== ====
Diluted (A/C) $.12 $(.07) $.42 $.06
==== ====== ==== ====
</TABLE>
<PAGE>
Reclassifications: Certain reclassifications have been made to the 1998
financial statements to conform with 1999 presentation.
Comprehensive Income: Comprehensive income is a measure of all nonowner changes
in stockholders' equity and includes such items as net income, certain foreign
currency translation items, minimum pension liability adjustments, and changes
in the value of available-for-sales securities. For the three and nine months
ended September 30, 1999 and 1998, comprehensive income for the Company was
equivalent to net income as reported.
Accounting for Derivatives: In June 1997 the Financial Accounting Standards
Board released SFAS No. 133 "Accounting for Derivatives Instruments and Hedging
Activities", which will be effective for the company beginning January 1, 2001.
SFAS No. 133 establishes new accounting reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company has not yet completed its
analysis of the effect, if any, this standard will have on future operating
results.
NOTE B - DEBT
On January 14, 1998, the Company entered into a Credit Security Agreement (the
"Wells Fargo Credit Agreement" f/k/a "Norwest Credit Agreement") with Wells
Fargo Business Credit (Wells Fargo), f/k/a Norwest Business Credit. The Wells
Fargo Credit Agreement consists of (i) a term loan of $2,125,000, (ii) a term
loan of $700,000, (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
Wells Fargo Bank Minnesota, N.A. (the "Base Rate"). The $700,000 term loan has
an interest rate equal to 3.00% above the Base Rate as does the line of credit.
The note for the capital expenditures carries an interest rate equal to 1.25%
above the Base Rate. The Company utilized $4.5 million of the proceeds received
from Wells Fargo to pay off the outstanding loan balance owed to its former
lender.
On November 24, 1998 the Company and Wells Fargo Business Credit amended the
Credit Agreement. The amended Wells Fargo Credit Agreement consists of (i) an
increase in the remaining balance on the term loan to the original amount of
$2,125,000, (ii) an increase in the remaining balance on the $700,000 term loan
to $417,000, and (iii) a note of up to $1,000,000 for the purchase of capital
equipment for 1999.
On June 4, 1999 the Company and Wells Fargo Business Credit amended the Credit
Agreement. The amended Wells Fargo Credit Agreement consists of an increase in
<PAGE>
the $700,000 term loan to the original amount of $700,000. As of September 30,
1999 the $2,125,000 term loan carried a balance of $1,535,000; the $700,000 term
loan carried a balance of $525,000; the revolving line of credit balance was
$4,090,000; and the balance on the capital equipment note was $481,000.
As of December 31, 1998, the Company was not in compliance with certain
covenants of the Wells Fargo Credit Agreement. However, on April 12, 1999, the
Company amended the Wells Fargo Credit Agreement (the Third Amendment). The
Third Amendment waived the Company's noncompliance with these covenants at
December 31, 1998, increased the limit on the note for the purchase of capital
equipment from $1,000,000 to $1,400,000 and also modified the terms of the
financial covenants for 1999. As of September 30, 1999 the Company was in
compliance with the covenants of the Wells Fargo Credit Agreement as modified by
the Third Amendment.
At September 30, 1999, the Company had received $575,000 from private placements
of subordinated debt, with a maturity date of March 31, 2001. $175,000 was
received in the fourth quarter of 1998 with the remaining $400,000 received in
the first quarter of 1999. The debt carries an interest rate of 12% and has
accompanying warrants to purchase a number of shares of common stock equal to
25% of the notes purchased at an exercise price of $5.50 per share.
The Company has determined the value of the warrants at the date of the grants
to be $28,500. The value of the warrants has been accounted for as additional
paid-in capital and deducted from the principal of the subordinated notes as
discount on debt issued.
The funds received from the amendment to the Wells Fargo Credit Agreement and
the private placements of subordinated debt were used to fund the working
capital needs of the Company.
NOTE C - SEGMENTS
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in 1998, which changes the way the Company reports
information about its operating segments. The information for 1998 has been
restated to conform to the 1999 presentation.
The Company has two reportable segments: Product Sales and Lab Services. The
Product Sales segment is made up entirely of MEDTOX Diagnostics, Inc. Products
manufactured include easy to use, inexpensive, on-site drug tests such as
PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R). The Lab Services segment includes
MEDTOX Laboratories and CMS. Services provided include forensic toxicology,
clinical toxicology, heavy metals analyses, courier delivery, and medical
surveillance.
<PAGE>
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss.
<TABLE>
<CAPTION>
Segment Information
(In thousands) Three months ended Nine months ended
September 30 September 30
<S> <C> <C>
Laboratory Services: 1999 1998 1999 1998
Net Sales 7,944 6,861 23,204 20,715
Segment Income(Loss) 302 (71) 1,245 725
Product Sales: 1999 1998 1999 1998
Net Sales 1,130 748 2,857 1,879
Segment Income(Loss) 47 (121) 5 (556)
Total: 1999 1998 1999 1998
Net Sales 9,074 7,609 26,061 22,594
Income(Loss) 349 (192) 1,250 169
</TABLE>
NOTE D - CONTINGENCIES
In February, 1999 the Company settled a claim of patent infringement brought
against the Company by United States Drug Testing Laboratories on August 20,
1996. It was alleged that the Company infringed two patents allegedly owned by
United States Drug Testing Laboratories relating to forensically acceptable
determinations of gestational fetal exposure to drugs and other chemical agents.
The Company, while denying any infringement, has settled with United States Drug
Testing Laboratories and has paid United States Drug Testing Laboratories
$17,500 and issued United States Drug Testing Laboratories 2,500 shares of
common stock valued at $12,500. The Company had previously accrued for this
contingency. Accordingly, the settlement of this matter did not affect results
of operations during the three months and the nine months ended September 30,
1999.
Under the MEDTOX Laboratories acquisition agreement, the sellers of MEDTOX
Laboratories, remain liable for any and all damages awarded for any infringement
which may have occurred on or before the closing date of the Purchase Agreement.
The Purchase Agreement also provides for the seller to indemnify and hold the
Company harmless from and against any damages, loss, liability or expense,
including reasonable attorneys' fees and court cost in connection with any
infringement which may have occurred on or before the closing date. The Company
is seeking to recover $79,000 in damages from the sellers in accordance with
these provisions of the Purchase Agreement for legal fees and settlement cost
relating to the United States Drug Testing Laboratories claim.
<PAGE>
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against Morgan Capital LLC, David Bistricer and Alex Bistricer
alleging violation in Section 16(b) of the Securities and Exchange Act of 1934
and seeking recovery of more than $500,000 in short-swing profits. Messrs. David
and Alex Bistricer are former directors of the Company. 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. On July 21, 1998,
the Eighth Circuit reversed the District Court dismissal and remanded the case
to the District Court. On June 3, 1999, the United States District Court for the
District of Minnesota ruled in favor of the Company in its claim against Morgan
Capital LLC. The Court found that Morgan Capital, LLC had violated Section 16(b)
and ordered Morgan Capital, LLC to pay the Company damages of $551,000 plus
interest. The Company believes it is likely that Morgan Capital, LLC will appeal
the decision to the Eighth Circuit U.S. Court of Appeals. The Company has not
recorded a receivable for this amount due to the uncertainty of the matter.
In May 1999 the Company settled a lawsuit in the Circuit Court of Cook County,
Illinois. The suit was brought by a previous landlord who alleged that the
Company breached the terms of a lease in connection with the asset acquisition
of MEDTOX Laboratories. In December 1998, the Court had granted summary judgment
against the Company on the issue of liability. The Company settled this matter
in May, 1999 for $684,965. The Company had previously accrued $850,000 at
December 31, 1998 for this contingency. The decrease in the accrual was recorded
in the second quarter of 1999 as a reduction in restructuring costs.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, Year 2000 remediation
efforts, or estimates or
<PAGE>
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.
Introduction
MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX Laboratories, Inc. and
MEDTOX Diagnostics, Inc., are referred to herein as "the Company". MEDTOX
Laboratories, Inc. is a toxicology laboratory which was founded in 1984 and
provides forensic toxicology, clinical toxicology, and heavy metals analyses.
MEDTOX Diagnostics, Inc. develops, manufactures and markets on-site diagnostic
and screening tests which are used to detect substances in humans, foodstuffs,
animals, feed and the environment. The company is continuing to transition these
operating units from being providers of high quality testing services and
devices into a broader service organization by supporting underlying laboratory
analysis and point-of-care devices with logistics management, data management
and overall program management services.
The Company has two reportable segments: Laboratory Services and Product Sales.
Laboratory Services include forensic toxicology, clinical toxicology, and heavy
metal analyses as well as logistics, data, and overall program management
services. Product Sales include a variety of on-site screening products.
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
entered the laboratory testing market when it completed the acquisition of
Princeton Diagnostic Laboratories of America, Inc., (PDLA) in 1994. On January
<PAGE>
30, 1996 the Company, then known as EDITEK, Inc., completed the acquisition of
MEDTOX. In 1997, the Company changed its name to MEDTOX Scientific, Inc.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Laboratory Services
Revenues from Laboratory Services for the three months ended September 30, 1999
were $7,944,000 as compared to $6,861,000 for the three months ended September
30, 1998. The increase of $1,083,000 or 15.8% was primarily attributable to an
8.8% increase in laboratory samples and an increase in revenue from value added
services.
The gross margin from the revenues generated from the laboratory services was
33.5% for the three months ended September 30, 1999 as compared to a gross
margin of 27.8% for the same period in 1998. The increase in gross margin is
primarily attributable to improved efficiencies from higher sample volume and
increased revenue from value added services.
Selling, general and administrative expenses for the three months ended
September 30, 1999 were $2,070,000 compared to $1,703,000 for the three months
ended September 30, 1998. The increase of $367,000 or 21.6% in 1999 was
primarily the result of increased sales expense. As a percentage of sales,
selling, general and administrative expenses were 26.1% for the three months
ended September 30, 1999 compared to 24.8% for the same period in 1998.
Research and development expenses incurred during the three months ended
September 30, 1999 were $83,000 as compared to $131,000 for the same period in
1998. This decrease of $48,000 was primarily the result of a decrease in
personnel costs.
The Laboratory Services segment for the three months ended September 30, 1999
incurred interest and financing costs of $205,000, compared to costs of $147,000
incurred during the three months ended September 30, 1998 primarily as a result
of higher debt levels.
As a result of the above, the net income for the Laboratory Services segment of
the Company for the three months ended September 30, 1999 was $302,000, compared
to the net loss of $71,000 for the three months ended September 30, 1998.
Product Sales
Revenues from Product Sales for the three months ended September 30, 1999
increased 51.1% to $1,130,000 as compared to $748,000 for the three months ended
September 30, 1998. The increase was primarily attributable to increased sales
in substance abuse testing products.
<PAGE>
Product sales from substance abuse testing products, which incorporates the
EZ-SCREEN PROFILE(R)-II and VERDICT(R)-II on-site test kits and other ancillary
products for the detection of abused substances, increased 134.2% to $726,000
for the three months-ended September 30, 1999 compared to sales of $310,000 in
1998. The increase in product sales is primarily due to a strong response to the
introduction of the Company's second-generation test kits, PROFILE(R)- II and
VERDICT(R)- II. The Company is continuing to develop new products in this area
and plans to introduce its Emergency Room (ER) panel in the first quarter of
2000.
Product sales from agricultural diagnostic products decreased 25.2% to $169,000
for the three months ended September 30, 1999 compared to $226,000 in 1998. The
primary reason for the decrease of $57,000 was the result of decreased purchases
by the USDA for the Company's products. The USDA's needs for the Company's
products vary from quarter to quarter and sales to the USDA are expected to
fluctuate accordingly.
Sales of contract manufacturing services, microbiological and associated
products increased 10.8% to $235,000 for the three months ended September 30,
1999 compared to $212,000 in 1998. This increase was due to increased revenue
from both historical and new customers.
Gross margins from Product Sales for the three months ended September 30, 1999
were 44.9% compared to 40.8% for the three months ended September 30, 1998. The
increase in gross margin from product sales was due to higher overall sales of
products.
Selling, general and administration expenses for Products Sales during the three
months ended September 30, 1999 were $331,000 compared to $253,000 for the three
months ended September 30, 1998. The increase of $78,000 or 30.8% was primarily
the result of increased costs associated with higher sales volume.
Research and development expenses incurred for Product Sales during the three
months ended September 30, 1999 were $115,000 as compared to $152,000 for the
same period in 1998. The decrease of $37,000 or 24.3% was primarily the result
of completion of the development of the Company's Profile(R)-II new generation
on-site product.
For the three months ended September 30, 1999, the Product Sales segment
incurred interest and financing costs of $15,000 compared to $15,000 during the
three months ended September 30, 1998.
As a result of the above, the Product Sales segment net income for the three
months ended September 30, 1999 was $47,000, compared to the net loss of
($121,000) for the three months ended September 30, 1998.
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Laboratory Services
Revenues from Laboratory Services for the nine months ended September 30, 1999
were $23,204,000 as compared to $20,715,000 for the nine months ended September
30, 1998. The increase of $2,489,000 or 12.0% was primarily attributable to an
8.5% increase in laboratory samples and an increase in average revenue per
sample from value added services.
The gross margin from the revenues generated from the laboratory services was
33.2% for the nine months ended September 30, 1999 as compared to a gross margin
of 31.3% for the same period in 1998.
Selling, general and administrative expenses for the nine months ended September
30, 1999 were $5,819,000 compared to $4,899,000 for the nine months ended
September 30, 1998. The increase of $920,000 or 18.8% in 1999 was primarily the
result of increased sales expense. As a percentage of sales, selling, general
and administrative expenses were 25.1% for the nine months ended September 30,
1999 compared to 23.6% for the same period in 1998.
Research and development expenses incurred during the nine months ended
September 30, 1999 were $247,000 as compared to $435,000 for the same period in
1998. This decrease of $188,000 was primarily the result of a decrease in
personnel costs.
The Laboratory Services segment for the nine months ended September 30, 1999
incurred interest and financing costs of $547,000, compared to costs of $435,000
incurred during the nine months ended September 30, 1998. The increase was
primarily as a result of higher debt levels.
As a result of the above, the net income for the Laboratory Services segment of
the Company for the nine months ended September 30, 1999 was $1,245,000,
compared to the net income of $725,000 for the nine months ended September 30,
1998.
Product Sales
Revenues from Product Sales for the nine months ended September 30, 1999
increased 52.0% to $2,857,000 as compared to $1,879,000 for the nine months
ended September 31, 1998. The increase was attributable to increased sales in
all product sales areas.
Product sales from substance abuse testing products, which incorporates the
EZ-SCREEN PROFILE(R)-II and VERDICT(R)-II on-site test kits and other ancillary
products for the detection of abused substances, increased 88.9% to $1,735,000
<PAGE>
for the nine months ended September 30, 1999 compared to sales of $918,000 in
1998. The increase in product sales is primarily due to a strong response to the
introduction of the Company's second-generation test kit, PROFILE(R)- II.
Product sales from agricultural diagnostic products increased 5.1% to $395,000
for the nine months ended September 30 1999 compared to $376,000 in 1998. The
primary reason for the increase of $19,000 was the result of increased purchases
by the USDA for the Company's products.
Sales of contract manufacturing services, microbiological and associated
products increased 24.3% to $727,000 for the nine months ended September 30,
1999 compared to $585,000 in 1998. This increase was due to increased revenues
from both historical customers and new customers.
Gross margins from Product Sales for the nine months ended September 30, 1999
were 44.7% compared to 35.7% for the nine months ended September 31, 1998. The
increase in gross margin from product sales was due to higher overall sales of
products.
Selling, general and administration expenses for Products Sales during the nine
months ended September 30, 1999 were $856,000, compared to $735,000 for the nine
months ended September 30, 1998. The increase of $121,000 or 16.5% was primarily
the result of increased costs associated with higher sales volume.
Research and development expenses incurred for Product Sales during the nine
months ended September 30, 1999 were $371,000 as compared to $443,000 for the
same period in 1998. The decrease of $72,000 or 16.3% was primarily the result
of completed development of the Company's PROFILE(R)-II on-site product.
For the nine months ended September 30, 1999, the Product Sales segment incurred
interest and financing costs of $48,000 as compared to $44,000 for the same
period in 1998. The increase of $4,000 or 9.1% was primarily the result of
increased debt levels. The interest and finance costs were the result of the
funds borrowed by the Company to fund asset purchases and working capital
requirements.
As a result of the above, the Product Sales segment net income for the nine
months ended September 30, 1999 was $5,000, compared to the net loss of
($556,000) for the nine months ended September 30, 1998.
Material Changes in Financial Condition
Laboratory Services
As of September 30, 1999 net accounts and notes receivable for Laboratory
Services were $6,442,000 compared to $5,554,000 at December 31, 1998. This
<PAGE>
increase of $888,000 or 16.0% was primarily the result of higher sales for the
quarter ended September 30, 1999 as compared to quarter ended December 31, 1998.
Prepaid expenses and other assets were $768,000 at September 30, 1999 as
compared to $503,000 at December 31, 1998. This increase of $265,000 or 52.7% is
primarily the result of renewal of annual licenses, fees, and contracts which
will be amortized throughout the year.
At September 30, 1999, Laboratory Services had a total balance of restructuring
accruals of $609,000 compared to a balance of $1,155,000 at December 31, 1998.
The decrease of $546,000 is the result of settlement of pending litigation and
certain payments made during the nine months ended September 30, 1999.
At September 30, 1999, Laboratory Services had a total loan balance owed to its
financial lender of $6,484,000 compared to a total balance of $5,264,000 at
December 31, 1998. The increase of $1,220,000 or 23.2% was the result increased
borrowing during the nine months ended September 30, 1999.
Product Sales
At September 30, 1999, net accounts receivable for Product Sales were $758,000.
This $355,000 increase as compared to $403,000 at December 31, 1998 was
primarily due to higher sales in the quarter ended September 30, 1999 as
compared to the quarter ended December 31, 1998.
Prepaid expenses and other assets were $132,000 at September 30, 1999 as
compared to $21,000 at December 31, 1998. The increase of $111,000 is primarily
the result of partial payments on specialized equipment ordered but not yet
operational and renewal of certain annual expenses which will be amortized
throughout the year.
At September 30, 1999, the Product Sales segment had a total loan balance owed
to its financial lender of $698,000, compared to a total balance of $756,000
owed at December 31, 1998. The net decrease of $58,000, or 7.7%, was the result
of payments made during the nine months ended September 30, 1999.
Liquidity and Capital Resources
Cash received from debt financing has been the primary source of funding for the
working capital requirements of the Company. At September 30, 1999, the Company
had available borrowings of $1,027,000. The Company believes that the
aforementioned capital will be sufficient to fund the Company's planned
operations through the remainder of 1999. While there can be no assurance that
the available capital will be sufficient to fund the future operations of the
Company beyond 1999, the Company believes that consistent profitable earnings,
as well as access to debt and equity, will be the primary basis for funding the
operations of the Company for the long term.
<PAGE>
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 products, services, and research and development contracts. There
can be no assurance that costs can be controlled, revenues can be increased,
financing may be obtained, or that the Company will continue to be profitable.
Year 2000
The Year 2000 issue arises from the fact that many computer systems rely on a
two-digit date code to identify the year (e.g. 99 to represent 1999) and thus
may not be able to differentiate between the year 2000 and the year 1900. If not
corrected, systems processing date-dependant information may fail or create
erroneous results causing disruption of operations including, but not limited
to, a temporary inability to process transactions, report results, send
invoices, or engage in similar normal business activity.
Readiness
In 1998, the Company created a task force representing all departments
with the goal of achieving an uninterrupted transition into the Year 2000 for
its products, internal computer systems, and equipment. The Company has no
products with embedded computer chips or date-sensitive controls and therefore
does not believe there are any Year 2000 compatibility issues. The Company has
nearly completed its assessment, modifications, and testing of its internal
computer systems and equipment. The Company presently believes that with the
modifications completed or planned to existing software and conversion to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems.
The Company has identified and completed formal communication with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties ability to resolve their own Year 2000 issues. The
Company has received responses from all of those suppliers that it believes are
highly critical to its operations. The Company is not aware of Year 2000 issues
with it key suppliers that would have a material adverse effect on its business
activities or results of operations.
Costs
The Company believes that the total cost of its Year 2000 efforts will not
be material to its financial condition, liquidity or results of operations.
Changes required to internally supported software were minor compared to the
modifications performed in the normal course of business. The Company used
internal resources and delayed other projects while completing the Year 2000
modifications. Updates to externally supported software were generally covered
under existing service contracts. The total cost of the Company's Year 2000
efforts in 1998 and 1999 is estimated to be less than $50,000. The total cost
relates primarily to software license fees and new hardware and equipment, but
excludes costs associated with Company employees. Costs associates with Year
2000 compliance are expensed as incurred.
<PAGE>
Risks
Management believes that sufficient resources have been allocated and
contingency plans are in place to avoid any material impact on operating
results. However, there can be no guarantee that the Company's systems were
successfully converted or that Year 2000 problems will not result in an
interruption in, or failure of, certain normal business activities or
operations. In addition, there can be no guarantee that the systems of other
companies on which the Company relies will be Year 2000 compliant and the
Company is unable to determine whether failure of third parties will have a
material impact on the Company's results of operations, liquidity or financial
condition. At the present time, it is not possible to determine whether such
events are likely to occur or quantify any potential impact they might have on
the Company's future operating results or financial condition.
Contingency Plans
Business continuation plans for critical business processes
and applications have been developed. The Company has established a contingency
plan which addresses alternative processes such as manual procedures, potential
alternative suppliers, and increased inventory to protect against supply
interruption.
Readers are cautioned that forward-looking statements contained in the "Year
2000" update should be read in conjunction with the Company's disclosures under
the heading: "CAUTIONARY STATEMENT IDENTIFIYING IMPORTANT FACTORS THAT COULD
CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN
FORWARD-LOOKING STATEMENTS" under Item 2 above.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS. See Part I, Note D
ITEM 2 CHANGES IN SECURITIES Inapplicable
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Annual Meeting (the "1998 Annual Meeting") of the stockholders of
the Company was held on September 16, 1999. The following items were approved by
a vote of the stockholder.
<PAGE>
1. The following individuals were elected to serve on the Board of
Directors of the Company for the ensuing year and until their respective
successors are duly elected and qualified: Harry G. McCoy, Pharm. D., Samuel C.
Powell, Ph.D., Richard J. Braun, James W. Hansen, Miles E. Efron.
2. By a vote of 2,333,440 in favor and 238,818 against, the
stockholders of the Company approved the amendment to Article FOURTH of the
Company's Certificate of Incorporation to increase its number of authorized
common stock from 3,750,000 shares to 7,400,000 shares. 330,989 shares were
abstained or did not vote.
3. By a vote of 1,468,805 in favor and 120,703 against, the
stockholders of the Company approved an amendment to Article FIFTH of the
Company's Certificate of Incorporation to provide for the classification of the
Board of Directors into three classes of directors with staggered term of
office. 1,313,739 shares were abstained or did not vote.
4. By a vote of 2,404,280 in favor and 146,104 against, the
stockholders of the Company approved an amendment to the Company's Employee
Stock Purchase Plan to increase from 25,000 to 150,000 the number of shares
authorized to be issued pursuant to that Plan. 352,863 shares were abstained or
did not vote.
During the quarter ended September 30, 1999, no other matters were submitted to
a vote of securities holders.
ITEM 5 OTHER INFORMATION. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27: Financial Data Schedule
<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 12, 1999
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
and Treasurer
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