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 June 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 August
13, 1999, was 2,903,278.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - June 30, 1999 (Unaudited)
and December 31, 1998 ...................... 3
Consolidated Statements of Operations - Three
Months Ended June 30, 1999 and 1998 and Six
Months Ended June 30, 1999 and 1998 (Unaudited)......... 5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 (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 .......................................... 19
Signatures .............................................. 20
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares)
(Unaudited)
<CAPTION>
June 30 December 31
1999 1998
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ - $ -
Accounts receivable:
Trade, less allowance for doubtful
accounts ($246-1999; $245-1998) 7,397 5,957
Other 60 30
------------------------------------
7,457 5,987
Inventories:
Raw materials 462 444
Work in process 168 151
Finished goods 89 80
Supplies 503 432
------------------------------------
1,222 1,107
Prepaid expenses and other 728 524
------------------------------------
Total current assets 9,407 7,618
Equipment and improvements:
Furniture and equipment 12,285 11,779
Leasehold improvements 1,305 1,283
------------------------------------
13,590 13,062
Less accumulated depreciation
and amortization (10,793) (10,087)
------------------------------------
2,797 2,975
Goodwill, net of accumulated amortization of
$3,492 in 1999 and $3,086 in 1998 13,601 14,007
------------------------------------
Total assets $ 25,805 $ 24,600
====================================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares)
(Unaudited)
<CAPTION>
June 30 December 31
1999 1998
------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 4,482 $ 3,095
Checks written in excess of bank balances 58 142
Accounts payable 2,727 3,531
Accrued expenses 1,700 1,724
Current portion of restructuring accrual 734 1,079
Current portion of long-term debt 1,480 1,140
Current portion of capital lease obligations 186 186
------------------------------------
Total current liabilities 11,367 10,897
Long-term portion of restructuring accrual - 76
Capital lease obligations 404 516
Long term debt obligations 1,774 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 - 3,750,000 shares;
Issued and outstanding -
2,903,236 shares in 1999 and
2,899,669 shares in 1998 437 435
Additional paid-in capital 59,845 59,815
Accumulated deficit (47,846) (48,748)
Treasury stock (176) (176)
------------------------------------
Total stockholders' equity 12,260 11,326
------------------------------------
Total liabilities and stockholders' equity $ 25,805 $ 24,600
====================================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Laboratory service revenues $ 8,210 $ 7,307 $ 15,260 $ 13,854
Product sales 942 599 1,727 1,131
----------------------------- ----------------------
9,152 7,906 16,987 14,985
Cost of services 5,386 4,878 10,225 9,278
Cost of sales 549 413 956 765
---------------------------- ----------------------
5,935 5,291 11,181 10,043
Gross profit 3,217 2,615 5,806 4,942
Operating expenses
Selling, general and administrative 2,254 1,867 4,274 3,669
Research and development 187 288 420 595
Interest and financing costs 199 177 375 317
Other non-recurring (164) - (164) -
---------------------------- ----------------------
2,476 2,332 4,905 4,581
---------------------------- ----------------------
Net income 741 283 901 361
---------------------------- ----------------------
---------------------------- ----------------------
Basic net earnings per common share $ 0.26 $ 0.10 $ 0.31 $ 0.12
---------------------------- ----------------------
---------------------------- ----------------------
Diluted net earnings per common share $ 0.25 $ 0.10 $ 0.31 $ 0.12
============================= ======================
(1) Income per share for the three months ended June 30, 1998 and the six months
ended June 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>
Six Months Ended
June 30 June 30
1999 1998
------------------------------------
<S> <C> <C>
Operating activities
Net income $ 901 $ 361
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,113 1,027
Changes in operating assets and liabilities;
Accounts receivable (1,470) (1,080)
Inventories (115) (44)
Prepaid expenses and other (204) (78)
Accounts payable, accrued expenses and other (827) (481)
Restructuring accruals (421) (107)
------------------------------------
Net cash used in operating activities (1,023) (402)
Investing activities
Purchases of equipment and improvements (529) (677)
Financing activities
Checks in excess of bank balance (84) -
Net proceeds from sale of common stock 2 12
Net proceeds from line of credit, term loans
and notes payable 19,061 6,290
Principal payments on capital lease obligations (112) (94)
Principal payments on line of credit, term loans
and notes payable (17,315) (5,131)
------------------------------------
Net cash provided by financing activities 1,552 1,077
------------------------------------
Increase in cash and cash equivalents - (2)
Cash and cash equivalents at beginning of period - 58
------------------------------------
Cash and cash equivalents at end of period $ - $ 56
====================================
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
June 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 six-month period ended June 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 "treasury stock" method.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income (A) $741,000 $283,000 $901,000 $361,000
Weighted average number of shares
of common stock outstanding (B) 2,903,502 2,897,033 2,902,414 2,888,666
Dilutive effect of stock options 30,386 0 23,193 0
Common stock and common
stock equivalents (C) 2,933,888 2,897,033 2,925,607 2,888,666
Net income per share:
Basic (A/B) $.26 $.10 $.31 $.12
Diluted (A/C) $.25 $.10 $.31 $.12
</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 six months ended June
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, 2000.
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
the $700,000 term loan to the original amount of $700,000. As of June 30, 1999
the $2,125,000 term loan carried a balance of $1,712,000; the $700,000 term loan
carried a balance of $700,000; the revolving line of credit balance was
$4,482,000; and the balance on the capital equipment note was $309,000.
<PAGE>
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 June 30, 1999 the Company was in compliance
with the covenants of the Wells Fargo Credit Agreement as modified by the Third
Amendment.
At June 30, 1999, the Company had received $575,000 ($400,000 of which was
received during the first quarter of 1999) from private placements of
subordinated debt, with a maturity date of March 31, 2001. 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. Products
manufactured include easy to use, inexpensive, on-site drug tests such as
PROFILE II, EZ-SCREEN, EZ-QUANT, and VERDICT. 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 Six months ended
June 30 June 30
<S> <C> <C> <C> <C>
Laboratory Services: 1999 1998 1999 1998
Net Sales 8,210 7,307 15,260 13,854
Segment Income(Loss) 710 500 943 796
Product Sales: 1999 1998 1999 1998
Net Sales 942 599 1,727 1,131
Segment Income(Loss) 31 (217) (42) (435)
Total: 1999 1998 1999 1998
Net Sales 9,152 7,906 16,987 14,985
Income(Loss) 741 283 901 361
</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 infringes 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 effect results
of operations during the three months and the six months ended June 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 had violated Section 16(b) and
ordered Morgan Capital to pay the Company damages of $551,000 plus interest. The
Company believes it is likely that Morgan Capital will appeal the decision to
the 8th Circuit U.S. Court of Appeals.
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 for $684,965. The Company had previously accrued $850,000 for this
contingency.
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, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
<PAGE>
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
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.
<PAGE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Laboratory Services
Revenues from Laboratory Services for the three months ended June 30, 1999 were
$8,210,000 as compared to $7,307,000 for the three months ended June 30, 1998.
The increase of $903,000 or 12.4% was primarily attributable to an 8.8% 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
34.4% for the three months ended June 30, 1999 as compared to a gross margin of
33.2% 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 June 30,
1999 were $2,009,000 compared to $1,650,000 for the three months ended June 30,
1998. The increase of $359,000 or 21.8% in 1999 was primarily the result of
increased sales expenses. As a percentage of sales, selling, general and
administrative expenses were 24.5% for the three months ended June 30, 1999
compared to 22.6% for the same period in 1998.
Research and development expenses incurred during the three months ended June
30, 1999 were $84,000 as compared to $132,000 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 June 30, 1999
incurred interest and financing costs of $183,000, compared to costs of $148,000
incurred during the three months ended June 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 June 30, 1999 was $710,000, compared to
the net income of $500,000 for the three months ended June 30, 1998.
Product Sales
Revenues from Product Sales for the three months ended June 30, 1999 increased
57.3% to $942,000 as compared to $599,000 for the three months ended June 30,
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 90.8% to $561,000 for
the three months-ended June 30,1999 compared to sales of $294,000 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
<PAGE>
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 increased 7.6% to $71,000
for the three months ended June 30, 1999 compared to $66,000 in 1998. The
primary reason for the increase of $5,000 was the result of increased 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 30.1% to $310,000 for the three months ended June 30, 1999
compared to $239,000 in 1998. This increase was due to increased revenues from
both historical customers and new customers added in late 1998.
Gross margins from Product Sales for the three months ended June 30, 1999 were
41.8% compared to 31.1% for the three months ended June 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 June 30, 1999 were $245,000 compared to $217,000 for the three
months ended June 30, 1998. The increase of $28,000 or 12.9% 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 June 30, 1999 were $103,000 as compared to $156,000 for the same
period in 1998. The decrease of $53,000 or 34.0% 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 June 30, 1999, the Product Sales segment incurred
interest and financing costs of $16,000 compared to $29,000 during the three
months ended June 30, 1998. The decrease was the result of lower borrowings by
the Company.
As a result of the above, the Product Sales segment net income for the three
months ended June 30, 1999 was $31,000, compared to the net loss of ($217,000)
for the three months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Laboratory Services
Revenues from Laboratory Services for the six months ended June 30, 1999 were
$15,260,000 as compared to $13,854,000 for the six months ended June 30, 1998.
The increase of $1,406,000 or 10.1% was primarily attributable to an 8.5%
<PAGE>
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
33.0% for the six months ended June 30, 1999 as compared to a gross margin of
33.0% for the same period in 1998.
Selling, general and administrative expenses for the six months ended June 30,
1999 were $3,748,000 compared to $3,188,000 for the six months ended June 30,
1998. The increase of $560,000 or 17.6% in 1999 was primarily the result of
increased depreciation expense, and increased sales expense. As a percentage of
sales, selling, general and administrative expenses were 24.5% for the six
months ended June 30, 1999 compared to 23.0% for the same period in 1998.
Research and development expenses incurred during the six months ended June 30,
1999 were $164,000 as compared to $304,000 for the same period in 1998. This
decrease of $140,000 was primarily the result of a decrease in personnel costs.
The Laboratory Services segment for the six months ended June 30, 1999 incurred
interest and financing costs of $342,000, compared to costs of $288,000 incurred
during the six months ended June 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 six months ended June 30, 1999 was $943,000, compared to the
net income of $796,000 for the six months ended June 30, 1998.
Product Sales
Revenues from Product Sales for the six months ended June 30, 1999 increased
52.7% to $1,727,000 as compared to $1,131,000 for the six months ended June 30,
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 65.8% to $1,008,000
for the six months ended June 30, 1999 compared to sales of $608,000 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 50.7% to $226,000
for the six months ended June 30 1999 compared to $150,000 in 1998. The primary
reason for the increase of $76,000 was the result of increased 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.
<PAGE>
Sales of contract manufacturing services, microbiological and associated
products increased 31.9% to $492,000 for the six months ended June 30, 1999
compared to $373,000 in 1998. This increase was due to increased revenues from
both historical customers and new customers added in late 1998.
Gross margins from Product Sales for the six months ended June 30, 1999 were
44.6% compared to 32.4% for the six months ended June 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 six
months ended June 30, 1999 were $526,000, compared to $481,000 for the six
months ended June 30, 1998. The increase of $45,000 or 9.4% was primarily the
result of increased costs associated with higher sales volume.
Research and development expenses incurred for Product Sales during the six
months ended June 30, 1999 were $256,000 as compared to $291,000 for the same
period in 1998. The decrease of $35,000 or 12.0% was primarily the result of
completed development of the Company's Profile (R)-II on-site product.
For the six months ended June 30, 1999, the Product Sales segment incurred
interest and financing costs of $33,000 as compared to $29,000 for the same
period in 1998. The increase of $4,000 or 13.8% 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 loss for the six months
ended June 30, 1999 was ($42,000), compared to the net loss of ($435,000) for
the six months ended June 30, 1998.
Material Changes in Financial Condition
Laboratory Services
As of June 30, 1999 net accounts and notes receivable for Laboratory Services
were $6,785,000 compared to $5,554,000 at December 31, 1998. This increase of
$1,231,000 or 22.2% was primarily the result of higher sales for the quarter
ended June 30, 1999 as compared to quarter ended December 31, 1998.
Prepaid expenses and other assets were $652,000 at June 30, 1999 as compared to
$503,000 at December 31, 1998. This increase of $149,000 or 29.6% is primarily
the result of renewal of annual licenses, fees, and maintenance contracts which
will be amortized throughout the year.
<PAGE>
At June 30, 1999, Laboratory Services had a total balance of restructuring
accruals of $734,000 compared to a balance of $1,155,000 at December 31, 1998.
The decrease of $421,000 is the result of settlement of pending litigation and
certain payments made during the six months ended June 30, 1999.
At June 30, 1999, Laboratory Services had a total loan balance owed to its
financial lender of $7,147,000 compared to a total balance of $5,264,000 at
December 31, 1998. The increase of $1,883,000 or 35.8% was the result increased
borrowing during the six months ended June 30, 1999.
Product Sales
At June 30, 1999, net accounts receivable for Product Sales were $612,000. This
$209,000 increase as compared to $403,000 at December 31, 1998 was primarily due
to higher sales in the quarter ended June 30, 1999 as compared to the quarter
ended December 31, 1998.
Prepaid expenses and other assets were $76,000 at June 30, 1999 as compared to
$21,000 at December 31, 1998. The increase of $55,000 is primarily the result of
the renewal of certain annual expenses which will be amortized throughout the
year.
At June 30, 1999, the Product Sales segment had a total loan balance owed to its
financial lender of $583,000, compared to a total balance of $756,000 owed at
December 31, 1998. The net decrease of $173,000, or 22.8%, was the result of
payments made during the six months ended June 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 June 30, 1999, the Company had
checks written in excess of cash of $58,000 and available borrowings of
$454,000. The Company believes that the aforementioned capital will be
sufficient to fund the Company's planned operations through 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.
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, acquisitions successfully consummated, or that the
Company will continue to be profitable.
<PAGE>
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-dependent information may fail or create
erroneous results, causing disruptions of operations, including, but not limited
to, a temporary inability to process transactions, report results, send
invoices, or engage in similar normal business activity.
The Company has completed its assessment of its internal computer systems and
has completed 85% of the testing and modifications required to a portion of its
software so that its computer systems function properly with respect to dates in
the year 2000 and beyond. The Company expects the remaining 15% of the testing
and modifications to be completed during the third quarter. The Company
presently believes that with these modifications 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 initiated 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. As there can be no
guarantee that the systems of other companies on which the Company relies will
be timely converted or that a failure to convert or a conversion that is
incompatible with the Company's system would not have an adverse effect on the
Company's systems, the Company is developing contingency plans including
alternate vendors and increased stock levels for all critical items.
The Company anticipates completing the Year 2000 project prior to any adverse
impact on its computer operating system, however, if such modifications and
conversions are not made, or completed timely, the Year 2000 issue could have a
material impact on the operations of the Company.
The cost of the Year 2000 project is not expected to be material. Changes
required to internally supported software are minor compared to the
modifications performed in the normal course of business and the Company plans
to use internal resources and delay other projects to complete these Year 2000
modifications. Updates to externally supported software are covered under
existing service contracts or are not anticipated to have costs material in
nature.
The assessment of the impact, cost, and completion of the Year 2000 project is
based on management's best estimates. Actual results could differ materially
from those anticipated by factors including, but not limited to, the continued
availability of certain resources, third party modification plans, and the
ability to locate and correct all relevant computer codes.
<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. Inapplicable
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: August 16, 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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