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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 1-11394
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MEDTOX SCIENTIFIC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3863205
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(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
402 West County Road D, St.Paul, Minnesota 55112
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(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
4, 2000, was 3,404,346.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 ................................ 3
Consolidated Statements of Operations - Three
And Six Months Ended June 30, 2000 and 1999.......... 5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 and 1999.................. 6
Notes to Consolidated Financial Statements........... 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 11
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk..................................... 17
Part II Other Information ............ ........................ 18
Item 2:
Changes in Securities................................. 18
Item 4:
Submission of Matters to a Vote of Securities Holders.... 19
Signatures ....................................... 20
<PAGE>
Item 1: FINANCIAL STATEMENTS
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 576
Accounts receivable:
Trade, less allowance for doubtful
accounts ($326 in 2000 and $274 in 1999) 9,207 6,982
Other 87 125
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9,294 7,683
Inventories:
Raw materials 645 462
Work in process 320 230
Finished goods 190 126
Supplies 1,061 978
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2,216 1,796
Prepaid expenses and other 777 815
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Total current assets 12,287 10,294
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 14,865 12,820
Leasehold improvements 1,649 1,354
-----------------------------
16,514 14,174
Less accumulated depreciation
and amortization (12,073) (11,358)
-----------------------------
4,441 2,816
GOODWILL, net of accumulated amortization of
$3,994 in 2000 and $3,568 in 1999 12,735 13,161
-----------------------------
Total assets $ 29,463 $ 26,271
=============================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 352 $ -
Line of credit 4,829 4,208
Accounts payable 3,293 3,682
Accrued expenses 1,586 1,554
Current portion of restructuring accrual 235 384
Current portion of long-term debt 1,427 1,236
Current portion of capital leases 186 186
-------------------------------
Total current liabilities 11,908 11,250
LONG TERM PORTION OF RESTRUCTURING ACCRUAL - 85
LONG-TERM DEBT 3,385 1,737
LONG-TERM PORTION OF CAPITAL LEASES 572 409
STOCKHOLDERS' EQUITY:
Preferred Stock, $1.00 par value:
Authorized - 50,000 shares;
Issued and outstanding -
none in 2000 and none in 1999 - -
Common Stock, $ .15 par value:
Authorized - 7,400,000 shares in 2000 and 1999;
Issued and outstanding -
2,937,073 shares in 2000 and
2,904,410 shares in 1999 441 436
Additional paid-in capital 59,884 59,859
Accumulated deficit (46,551) (47,329)
Treasury stock (176) (176)
------------------------------
Total stockholders' equity 13,598 12,790
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Total liabilities and stockholders' equity $ 29,463 $ 26,271
==============================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
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<S> <C> <C> <C> <C>
Revenues
Laboratory service revenues $ 9,460 $ 8,210 $ 17,745 $ 15,260
Product sales 1,856 942 3,247 1,727
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11,316 9,152 20,992 16,987
Cost of services 6,093 5,386 11,634 10,225
Cost of sales 809 549 1,372 956
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6,902 5,935 13,006 11,181
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Gross profit 4,414 3,217 7,986 5,806
Operating expenses
Selling, general and administrative 3,349 2,254 6,147 4,274
Research and development 306 187 555 420
Interest and financing costs 278 199 506 375
Other non-recurring - (164) - (164)
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3,933 2,476 7,208 4,905
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Net income 481 741 778 901
================================================================
Basic earnings per common share $ 0.17 $ 0.26 $ 0.27 $ 0.31
==================================================================
Diluted earnings per common share $ 0.16 $ 0.25 $ 0.26 $ 0.31
==================================================================
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
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<S> <C> <C>
Operating activities
Net income $ 778 $ 901
Adjustments to reconcile net income to net cash
(used in)provided by operating activities:
Depreciation and amortization 1,141 1,113
Changes in operating assets and liabilities:
Accounts receivable (2,187) (1,470)
Inventories (420) (115)
Prepaid expenses and other 38 (204)
Accounts payable, accrued expenses and other (357) (827)
Restructuring accruals (234) (421)
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Net cash (used in) provided by operating activities (1,241) (1,023)
Investing activities
Purchases of equipment and improvements (2,042) (529)
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Financing activities
Checks in excess of bank balance 352 (84)
Net proceeds from sale of common stock 30 2
Net proceeds from line of credit, term loans
and notes payable 31,954 19,061
Principal payments on capital lease obligations (135) (112)
Principal payments on line of credit, term loans
and notes payable (29,494) (17,315)
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Net cash provided by financing activities 2,707 1,552
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Increase in cash and cash equivalents (576) -
Cash and cash equivalents at beginning of period 576 -
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Cash and cash equivalents at end of period $ - $ -
=============================================
Supplemental non cash activities:
During the six months ended June 30, 2000 and June 30, 1999, the Company entered
into capital lease agreements totaling $297,600 and $58,300, respectively.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
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, 2000 are not
necessarily indicative of the results that may be attained for the entire year.
These interim 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, 1999.
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.
<TABLE>
In thousands, except share and per share amounts
<CAPTION>
Three months ended Six months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Income (A) $481 $741 $778 $901
Weighted average number of shares 2,915,610 2,903,502 2,910,044 2,902,414
of common stock outstanding (B)
Dilutive effect of stock options 134,484 30,386 137,105 23,193
---------- --------- --------- ---------
Common stock and common 3,050,094 2,933,888 3,047,149 2,925,607
stock equivalents (C) ========= ========= ========= =========
Net income per share:
Basic (A/B) $ .17 $ .26 $ .27 $ .31
===== ===== ===== =====
Diluted (A/C) $ .16 $ .25 $ .26 $ .31
===== ===== ===== =====
</TABLE>
<PAGE>
Earnings Per Share: Options to purchase 438,959 shares of common stock were
outstanding at June 30, 2000. Of these, 248,500 and 303,001 were dilutive for
the three and six months, respectively, and included in the computation above
while the remaining options were not included in the computation of diluted
earnings per share as their exercise prices were greater than the average market
price of the common shares. Options to purchase 371,416 shares of common stock
were outstanding at June 30, 1999. Of these, 62,500 were dilutive for the three
and six months, and included in the computation above while the remaining
options were not included in the computation of diluted earnings per share as
their exercise prices were greater than the average market prices of the common
shares.
Reclassification: Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 presentations.
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 and 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.
Revenue Recognition: In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". SAB No. 101 summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to selected revenue
recognition issues. SAB No. 101 is to be implemented by the Company no later
than the fourth quarter of fiscal 2000. The Company is currently reviewing SAB
No. 101 and its effects on the financial statements, but does not expect it to
have a significant effect on its financial position or results of its
operations.
NOTE B - DEBT
On January 14, 1998, the Company entered into a Credit Security Agreement (the
"Wells Fargo Credit Agreement") with Wells Fargo Business Credit (Wells Fargo).
The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of
$3,185,000, bearing interest at prime + 1.25%: (ii) an overadvance term loan of
up to $1,350,000, bearing interest at prime + 4%; (iii) a revolving line of
credit equal to the lesser of $6,000,000 or 85% of the Company's eligible trade
accounts receivable, bearing interest at prime + 1%, and (iv) a note of up to
$1,800,000, for the purchase of capital equipment bearing interest at prime +
1.25%.
<PAGE>
The Company has received $575,000 from private placements of subordinated debt.
The notes require payment of the principal amounts on December 31, 2001.
Interest at 12% per annum is paid semi-annually on June 30 and December 31. In
connection with the issuance of the subordinated notes, the Company issued
warrants to purchase a number of shares of common stock equal to 25% of the face
amount of the subordinated notes divided by an exercise price of $3.25 per
share.
The Company has determined the value of the warrants at the dates of the grants
to be $56,000. 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 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 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, Inc. Services provided include forensic
toxicology, clinical toxicology, heavy metals analyses, courier delivery, and
medical surveillance.
In evaluating financial performance, management focuses on income as a segment's
measure of profit or loss.
<TABLE>
Segment Information
(Dollars in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
<S> <C> <C> <C> <C>
Laboratory Services:
Net Sales 9,460 8,210 17,745 15,260
Segment Income 419 710 704 943
Segment Assets 26,488 24,189 26,488 24,189
Product Sales:
Net Sales 1,856 942 3,247 1,727
Segment Income (Loss) 62 31 74 (42)
Segment Assets 2,975 1,616 2,975 1,616
Total:
Net Sales 11,316 9,152 20,992 16,987
Income 481 741 778 901
Segment Assets 29,463 25,805 29,463 25,805
</TABLE>
<PAGE>
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. The Company, while denying any infringement, settled the case by paying
United States Drug Testing Laboratories $17,500 and issuing United States Drug
Testing Laboratories 2,500 shares of common stock. The Company had previously
accrued for this contingency. Under the MEDTOX Laboratories acquisition
agreement, pursuant to which the Company originally acquired MEDTOX
Laboratories, Inc., the sellers of MEDTOX Laboratories, Inc. agreed to remain
liable for any and all damages for any patent infringement which was alleged to
have occurred prior to the closing of the Company's purchase of MEDTOX
Laboratories, Inc. The acquisition agreement also provided for the sellers to
indemnify and hold the Company harmless from and against any damages, loss,
liability or expense, including reasonable attorneys' fees and court costs in
connection with any infringement which was alleged to have occurred before the
closing date. It is the Company's opinion that it is entitled to recover $79,000
in damages from the sellers in accordance with the above referenced provisions
of the acquisition agreement as a result of the settlement with United States
Drug Testing Laboratories in 1999. The Company has made a formal demand on the
sellers and plans to commence an arbitration proceeding against the sellers if
payment is not made.
On January 31, 1997, the Company filed suit in Federal District Court
in Minnesota against a majority stockholder and two former outside directors
alleging violation of Section 16(b) of the Securities and 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 dismissed the Company's complaint and 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 U.S. District Court found the defendants had violated
Section 16(b) and ordered the defendants to pay the Company damages of $551,000
plus interest. The parties are currently engaged in pre-trial discovery on
additional claims and counterclaims between the parties regarding the same basic
transactions. A February 2001 trial date has been set by the court to resolve
these remaining matters. It is likely that one or both parties may appeal the
results of the trial court depending on the final result. The Company has not
recorded a receivable for this amount due to the uncertainty of the matter.
On March 10, 2000, the Company was served with a copy of a complaint
filed against the Company in the Circuit Court of Cook County, Illinois, by the
Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff is alleging
that the Company interfered with various contractual relationships of the
Plaintiff in connection with the referral of certain customers to the Company by
other defendants previously sued by the Plaintiff in the same action. There is
currently pending before the court, a motion to dismiss the complaint against
the Company on the basis that the Plaintiff has failed to state a cause of
<PAGE>
action against the Company, since, among other things, the contractual
relationship in question appears to have been terminated prior to the time that
the Company became involved with the customers in question. In addition, the
other defendants in the action are contractually obligated to indemnify the
Company against any damages arising out of any claim of contractual interference
by the Company in connection with the referral of the customers to the Company
by such defendants. For these reasons, management does not expect the ultimate
resolution of this matter to have a material impact on the Company's financial
condition or results of operations.
NOTE E - SUBSEQUENT EVENTS
On July 31, 2000 the Company completed a private equity financing through the
sale, exclusively to accredited investors, of 450,000 units at a gross aggregate
price of $4,500,000, or $10.00 per unit, resulting in net proceeds of
approximately $4,040,000 after deducting agents' commissions of $440,000 and
other estimated expenses. Each unit consisted of one share of common stock and
one five-year warrant to purchase one additional share of common stock at an
exercise price of $12.50. In connection with the private placement, the Company
also issued five-year warrants to the placement agent to purchase 45,000 shares
of common stock at an exercise price of $12.50 per share.
On August 4, 2000 the Company closed on the purchase of certain assets from
NMRO, Inc. in exchange for $75,000 in cash plus 15,152 shares of common stock of
the Company.
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)
statements of assumptions underlying other statements and statements about the
Company or its business.
<PAGE>
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, 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, heavy metals analyses,
courier delivery and medical surveillance. 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 transitioning these operating units into a broader service
organization by coupling the 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 courier services, medical 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, 2000 Compared to Three Months Ended June 30, 1999
Laboratory Services
Revenues from Laboratory Services for the three months ended June 30, 2000 were
$9,460,000 as compared to $8,210,000 for the three months ended June 30, 1999.
The increase of $1,250,000 or 15.2% was primarily attributable to a 7.9%
increase in net revenue per laboratory test and a 9.8% increase in the number of
tests.
The gross margin from the revenues generated from the laboratory services was
35.6% for the three months ended June 30, 2000 as compared to a gross margin of
34.4% for the same period in 1999. The increase in gross margin is primarily
attributable to increased net revenue per test.
Selling, general and administrative expenses for the three months ended June 30,
2000 were $2,598,000 compared to $2,009,000 for the three months ended June 30,
1999. The increase of $589,000 or 29.3% in 2000 was primarily the result of
increased wages and sales expenses as the Company continues to upgrade the
management team and sales force.
The Laboratory Services segment for the three months ended June 30, 2000
incurred interest and financing costs of $259,000, compared to costs of $183,000
incurred during the three months ended June 30, 1999 primarily as a result of
higher debt levels and increasing interest rates.
As a result of the above, net income for the Laboratory Services segment of the
Company for the three months ended June 30, 2000 was $419,000, compared to the
net income of $546,000, net of a one time gain of $164,000 resulting from a
favorable legal settlement, for the three months ended June 30, 1999.
Product Sales
Revenues from Product Sales for the three months ended June 30, 2000 increased
97.0% to $1,856,000 as compared to $942,000 for the three months ended June 30,
1999. The increase was primarily attributable to continued growth of the
VERDICT(R) and PROFILE(R) product lines.
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 136.9% to 1,329,000
for the three months-ended June 30, 2000 compared to sales of $561,000 for the
same period in 1999. The increase in product sales is primarily due to the sales
and marketing efforts for the Company's second-generation test kits,
PROFILE(R)-II and VERDICT(R)-II. The Company is continuing to develop new
<PAGE>
products in this area and plans to introduce its Emergency Room (ER) panel in
the latter part of 2000.
Product sales from agricultural diagnostic products increased 109.9% to $149,000
for the three months ended June 30, 2000 compared to $71,000 in 1999. The
primary reason for the increase of $78,000 was the result of increased purchases
by the USDA of 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 21.9% to $378,000 for the three months ended June 30, 2000
compared to $310,000 in 1999. This increase was due to increased revenue from
both historical and new customers.
Gross margins from Product Sales for the three months ended June 30, 2000 were
56.4% compared to 41.8% for the three months ended June 30, 1999. The increase
in gross margin from product sales was due to higher marginal profit at the
increased sales volumes.
Selling, general and administrative expenses for Products Sales during the three
months ended June 30, 2000 were $751,000 compared to $245,000 for the three
months ended June 30, 1999. The increase of $506,000 or 206.5% was primarily the
result of increased expenses as the Company continues to upgrade the management
team and sales force.
Research and development expenses incurred for Product Sales during the three
months ended June 30, 2000 were $216,000 as compared to $103,000 for the same
period in 1999. The increase of $113,000 or 109.7% was primarily the result of
the costs associated with new product development efforts for on-site and other
ancillary products.
As a result of the above, net income for the Product Sales segment of the
Company for the three months ended June 30, 2000 was $62,000, compared to
$31,000 for the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Laboratory Services
Revenues from Laboratory Services for the six months ended June 30, 2000 were
$17,745,000 as compared to $15,260,000 for the six months ended June 30, 1999.
The increase of $2,485,000 or 16.3% was primarily attributable to an 8.0%
increase in laboratory tests and a 10.0% increase in average revenue per test
from value added services.
The gross margin from the revenues generated from the laboratory services was
<PAGE>
34.4% for the six months ended June 30, 2000 as compared to a gross margin of
33.0% for the same period in 1999.
Selling, general and administrative expenses for the six months ended June 30,
2000 were $4,772,000 compared to $3,748,000 for the six months ended June 30,
1999. The increase of $1,024,000 or 27.3% was primarily the result of increased
expenses as the Company continues to upgrade the management team and sales
force.
The Laboratory Services segment for the six months ended June 30, 2000 incurred
interest and financing costs of $468,000, compared to costs of $342,000 incurred
during the six months ended June 30, 1999. The increase was primarily a result
of higher debt levels and increasing interest rates.
As a result of the above, net income for the Laboratory Services segment of the
Company for the six months ended June 30, 2000 was $704,000, compared to the net
income of $779,000 net of a one time gain of $164,000 resulting from a favorable
legal settlement, for the six months ended June 30, 1999.
Product Sales
Revenues from Product Sales for the six months ended June 30, 2000 increased
88.0% to $3,247,000 as compared to $1,727,000 for the six months ended June 30,
1999. The increase was primarily attributable to continued growth of the
VERDICT(R) and PROFILE(R) product lines.
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 129.4% to $2,312,000
for the six months ended June 30, 2000 compared to sales of $1,008,000 in 1999.
The increase in product sales is primarily due to the sales and marketing
efforts for the Company's second-generation test kits, PROFILE(R)-II and
VERDICT(R)-II.
Product sales from agricultural diagnostic products increased 15.9% to $262,000
for the six months ended June 30, 2000 compared to $226,000 in 1999. The primary
reason for the increase of $36,000 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 36.8% to $673,000 for the six months ended June 30, 2000
compared to $492,000 in 1999. This increase was due to increased revenues from
both historical customers and new customers added in 2000.
<PAGE>
Gross margins from Product Sales for the six months ended June 30, 2000 were
57.7% compared to 44.6% for the six months ended June 30, 1999. 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, 2000 were $1,375,000, compared to $526,000 for the six
months ended June 30, 1999. The increase of $849,000 or 161.4% was primarily the
result of increased expenses as the Company continues to upgrade the management
team and sales force.
Research and development expenses incurred for Product Sales during the six
months ended June 30, 2000 were $388,000 as compared to $256,000 for the same
period in 1999. The increase of $132,000 or 51.6% was primarily the result of
the costs associated with new product development for on-site and other
ancillary products.
For the six months ended June 30, 2000, the Product Sales segment incurred
interest and financing costs of $38,000 as compared to $33,000 for the same
period in 1999. The increase of $5,000 or 15.2% was primarily the result of
higher debt levels and increasing interest rates.
As a result of the above, net income for the Product Sales segment of the
Company for the six months ended June 30, 2000 was $74,000 compared to the net
loss of ($42,000) for the six months ended June 30, 1999.
Material Changes in Financial Condition
Laboratory Services
As of June 30, 2000 net accounts and notes receivable for Laboratory Services
were $7,995,000 compared to $6,318,000 at December 31, 1999. This increase of
$1,677,000 or 26.5% was primarily the result of higher sales for the quarter
ended June 30, 2000 as compared to quarter ended December 31, 1999.
At June 30, 2000, Laboratory Services had total debt obligations of $8,889,000
compared to a total balance of $6,489,000 at December 31, 1999. The increase of
$2,400,000 or 37.0% was primarily the result of increased borrowing, from which
the proceeds were used to finance investing activities such as capital
expenditures, primarily laboratory equipment, in the second quarter of 2000.
Product Sales
At June 30, 2000, net accounts receivable for Product Sales were $1,299,000,
compared to $789,000 at December 31, 1999. This increase of $510,000 or 64.6%
was primarily due to higher sales in the quarter ended June 30, 2000 as compared
to the quarter ended December 31, 1999.
<PAGE>
Inventories were $1,155,000 at June 30, 2000 compared to $818,000 at December
31, 1999. The increase of $337,000, or 41.1% is primarily attributable to the
increase in forecasted sales for the third quarter of 2000.
At June 30, 2000, the Product Sales segment had total debt obligations of
$753,000, compared to a total balance of $692,000 owed at December 31, 1999. The
increase of $61,000, or 8.8%, was the result of higher debt levels and
increasing interest rates.
Liquidity and Capital Resources
Cash received from operations and debt financing have been the primary sources
of funding for the working capital requirements of the Company. At June 30,
2000, the Company had total availability of $6,243,000 on its line of credit of
which $4,829,000 was borrowed, leaving a net availability of $1,414,000.
In addition to the Company's present financing sources, in July 2000, the
Company obtained gross proceeds of $4,500,000 of equity financing through
private placement of 450,000 shares and warrants. See Note E.
The Company believes that the aforementioned capital will be sufficient to fund
the Company's planned operations through the remainder of 2000. While there can
be no assurance that the available capital will be sufficient to fund the future
operations of the Company beyond 2000, 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.
However, 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.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
------ ----------------------------------------------------------
Market risk is the risk that the Company will incur losses due to adverse
changes in interest rates or currency exchange rates and prices. The Company's
primary market risk exposures are to changes in interest rates. During 1999 and
through June 30, 2000, the Company did not have sales denominated in foreign
currencies nor did it have any subsidiaries located in foreign countries. As
such, the Company is not exposed to market risk associated with currency
exchange rates and prices.
<PAGE>
The Company had $575,000 of subordinated notes outstanding as of June 30, 2000
and December 31, 1999, at a fixed interest rate of 12% per annum. The Company
also had capital leases at various fixed rates. These financial instruments are
subject to interest rate risk and will increase or decrease in value if market
interest rates change.
The Company had approximately $8.9 million and $6.6 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of June 30, 2000 and December 31, 1999, respectively. The debt under the
Wells Fargo Credit Agreement is held at variable interest rates. The Company has
cash flow exposure on its committed and uncommitted line of credit and long-term
debt due to its variable prime rate pricing. At June 30, 2000 and December 31,
1999, a 1% change in the prime rate would not materially increase or decrease
interest expense or cash flows.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS. See Part I, Note D
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ITEM 2 CHANGES IN SECURITIES.
On July 31, 2000 the Company completed a private equity financing through the
sale of 450,000 units at a gross aggregate price of $4,500,000, or $10.00 per
unit, resulting in net proceeds of approximately $4,040,000 after deducting
agents' commissions of $440,000 and other estimated expenses. Each unit
consisted of one share of common stock and one five-year warrant to purchase one
additional share of common stock at an exercise price of $12.50. The sale of
securities was made to "accredited investors" as defined in Rule 501(a) of
Regulation D and in reliance on Regulation D and Section 4(2) under the
Securities Act of 1933, as amended. Miller Johnson & Kuehn, Inc. of Minneapolis,
MN acted as the Company's agent in the private placement. In connection with the
private placement, the Company also issued five-year warrants to the placement
agent to purchase 45,000 shares of common stock at an exercise price of $12.50
per share. As part of the financing, the Company also entered into a
Registration Rights Agreement, pursuant to which the Company agreed to file a
registration statement on Form S-3 within 30 days covering the resale of shares
of the Company's common stock issued on July 31, 2000 and the shares to be
issued pursuant to the warrants.
The Company intends to use the net proceeds from this offering for general
working capital purposes, including product and capacity expansion to support
the Company's increasing sales and to take advantage of new expansion
opportunities that have been presented to the Company. Until such time, the
proceeds were used to repay $4,040,000 on its outstanding revolving line of
credit with Wells Fargo Business Credit on August 1, 2000.
<PAGE>
On August 4, 2000 the Company closed on the purchase of certain assets from
NMRO, Inc. in exchange for $75,000 in cash plus 15,152 shares of common stock of
the Company. The sale of securities was made pursuant to an exemption from
registration under Regulation D and Section 4(2) under the Securities Act of
1933, as amended.
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
------ -----------------------------
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
------ -----------------------------------------------------
The Annual Meeting (The "2000 Annual Meeting") of stockholders of the Company
was held on May 10, 2000. At that meeting, Samuel C. Powell and Miles E. Efron
were elected to serve on the Board of Directors of the Company until their
respective successors are duly elected.
By a vote of 988,932 shares in favor, 143,780 shares against, with 4,461 shares
abstaining, the stockholders of the Company approved an amendment to the Equity
Compensation Plan to increase the number of shares authorized to be issued under
the Plan to 16% of the outstanding shares of the Company as set forth in the
Proxy Statement.
During the second quarter of 2000, no other matters were submitted to a vote of
the securities holders of the Company.
ITEM 5 OTHER INFORMATION. Inapplicable
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
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a. Exhibits: Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K: Inapplicable
<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 14, 2000
MEDTOX SCIENTIFIC, INC.
By: /s/ Richard J. Braun
----------------------------------------
Richard J. Braun, Chief Executive Officer
By: /s/ James B. Lockhart
-----------------------------------------
James B. Lockhart, Chief Financial Officer
