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, 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 November
13, 2000, was 3,506,716.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 .......................................3
Consolidated Statements of Operations - Three
and Nine Months Ended September 30, 2000 and 1999...... 5
Consolidated Statements of Cash Flows - Nine
Months Ended September 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 ........ 12
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk................................. 18
Part II Other Information ............................................... 18
Item 2:
Changes in Securities....................... 18
Signatures ............................................. 20
<PAGE>
Item 1: FINANCIAL STATEMENTS
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 576
Accounts receivable:
Trade, less allowance for doubtful
accounts ($335 in 2000 and $274 in 1999) 9,970 6,982
Other 169 125
------ -----
10,139 7,107
Inventories:
Raw materials 818 462
Work in process 528 230
Finished goods 305 126
Supplies 1,432 978
------ -----
3,083 1,796
Prepaid expenses and other current assets 591 815
------ ------
Total current assets 13,813 10,294
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 15,781 12,820
Leasehold improvements 1,670 1,354
------ ------
17,451 14,174
Less accumulated depreciation and amortization (12,301) (11,358)
------ ------
5,150 2,816
GOODWILL, net of accumulated amortization of
$4,220 in 2000 and $3,568 in 1999 12,509 13,161
OTHER ASSETS 295 -
----------- -------------
TOTAL ASSETS $ 31,767 $ 26,271
============ =============
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 368 $ -
Line of credit 3,140 4,208
Accounts payable 2,366 3,682
Accrued expenses 1,487 1,554
Current portion of restructuring accrual 160 384
Current portion of long-term debt 1,427 1,236
Current portion of capital leases 186 186
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Total current liabilities 9,134 11,250
LONG TERM PORTION OF RESTRUCTURING ACCRUAL - 85
LONG-TERM DEBT 2,912 1,737
LONG-TERM PORTION OF CAPITAL LEASES 517 409
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 50,000;
none issued and outstanding - -
Common stock, $ .15 par value; authorized shares, 7,400,000; issued
and outstanding shares, 3,506,025 in 2000 and 2,904,410 in 1999 526 436
Additional paid-in capital 64,928 59,859
Accumulated deficit (46,074) (47,329)
Treasury stock (176) (176)
----------- ---------
Total stockholders' equity 19,204 12,790
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,767 $ 26,271
=========== ==========
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues
Laboratory services $ 9,206 $ 7,944 $ 26,951 $ 23,204
Product sales 2,367 1,130 5,614 2,857
------- ------- -------- --------
11,573 9,074 32,565 26,061
Cost of services 6,164 5,283 17,798 15,508
Cost of sales 687 623 2,059 1,579
------- ------- -------- --------
6,851 5,906 19,857 17,087
------- ------- -------- --------
Gross profit 4,722 3,168 12,708 8,974
Operating expenses
Selling, general and administrative 3,735 2,401 9,882 6,675
Research and development 265 198 820 618
Interest and financing costs 245 220 751 595
Other non-recurring - - - (164)
------ ------ ------ ------
4,245 2,819 11,453 7,724
------ ------ ------ ------
Net income 477 349 1,255 1,250
======= ======= ====== ======
Basic earnings per common share $ 0.15 $ 0.12 $ 0.42 $ 0.43
======== ======= ======= ======
Diluted earnings per common share $ 0.14 $ 0.12 $ 0.39 $ 0.42
======== ======== ======= ======
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
Operating activities
Net income $ 1,255 $ 1,250
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,729 1,625
Gain on sale or retirement of equipment (35) -
Deferred compensation 33
Changes in operating assets and liabilities:
Accounts receivable (3,032) (1,302)
Inventories (1,287) (40)
Prepaid expenses and other current assets 224 (376)
Other assets (52) -
Accounts payable, accrued expenses and other (1,383) (499)
Restructuring accruals (309) (546)
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Net cash (used in) provided by operating activities (2,857) 112
Investing activities
Purchases of equipment and improvements (3,100) (712)
Proceeds from sale of equipment 35 -
Payment for acquisition of business (75) -
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Net cash used in investing activities (3,140) (712)
Financing activities
Checks in excess of bank balance 368 (142)
Net proceeds from sale of common stock 4,949 2
Net proceeds from line of credit, term loans and notes payable 51,474 28,875
Principal payments on capital lease obligations (193) (170)
Principal payments on line of credit, term loans and notes payable (51,177) (27,678)
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Net cash provided by financing activities 5,421 887
------- ------
Increase (decrease) in cash and cash equivalents (576) 287
Cash and cash equivalents at beginning of period 576 -
------- --------
Cash and cash equivalents at end of period $ - $ 287
======= =========
Supplemental noncash activities:
Additions to capital leases $ 301 $ 58
Acquistions:
Fair value of assets acquired 252 -
Cash paid (75) -
Common stock issued (177) -
------- ---------
$ - $ -
======= =========
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month period ended September 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.
Earnings Per Share: 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 and warrants 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,
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net income (A) $ 477 $ 349 $ 1,255 $ 1,250
Weighted average number of shares
of common stock outstanding (B) 3,237,177 2,903,298 3,019,884 2,902,709
Dilutive effect of stock options
and warrants 233,456 123,171 192,272 99,304
-------- -------- -------- ------
Common stock and common 3,470,633 3,026,469 3,212,156 3,002,013
stock equivalents (C) ========== ========== ========== =========
Net income per share:
Basic (A/B) $ .15 $ .12 $ .42 $ .43
===== ===== ===== =====
Diluted (A/C) $ .14 $ .12 $ .39 $ .42
===== ===== ===== =====
</TABLE>
<PAGE>
Options and warrants to purchase 1,090,759 shares of common stock were
outstanding at September 30, 2000. Of these, 472,801 were dilutive for the three
and nine months ended September 30, 2000 and included in the computation above
while the remaining options and warrants 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 392,458 shares of
common stock were outstanding at September 30, 1999. Of these, 221,500 and
182,500 were dilutive for the three and nine 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 1998, 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 plans to adopt such standard
when required and does not anticipate that it will have a material impact on the
Company's financial position or results of operations.
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 plans to adopt such standard
when required and does not anticipate that it will have a material impact on the
Company's financial position or results of operations.
<PAGE>
NOTE B - ACQUISITION
In August 2000, the Company purchased customer lists and certain other assets of
National Medical Review Offices, Inc. ("NMRO"), a Minnesota-based company
specializing in specimen collection services. The purchase price of
approximately $252,000 included an initial payment of $75,000 in cash plus the
issuance of 15,152 shares of the Company's common stock at $11.69 per share. The
Company accounted for its acquisition of NMRO using the purchase method of
accounting. The following table summarizes the fair value of the NMRO assets
acquired:
Equipment $ 9,000
Non-compete agreement 21,000
Customer lists 222,000
----------
$ 252,000
==========
The Company intends to depreciate the equipment, non-compete agreement, and
customer lists on a straight-line basis over periods of five, three, and twenty
years, respectively.
NOTE C - 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 $700,000, bearing interest at prime + 3%; (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
$2,450,000, for the purchase of capital equipment bearing interest at prime +
1.25%.
Effective September 29, 2000 the Company and Wells Fargo Business Credit amended
the Credit Agreement. The amended Wells Fargo Credit Agreement consists of (i) a
decrease in the overadvance term loan from $1,350,000 to $700,000 (ii) an
increase in the note for the purchases of capital equipment from $1,800,000 to
$2,450,000 (iii) an increase in allowable capital expenditures for the twelve
month period ending December 31, 2000 from $3,000,000 to $5,000,000, and (iv) a
waiver of compliance concerning salaries for the 12 month period ending December
31, 2000.
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.
<PAGE>
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 D - PRIVATE EQUITY PLACEMENT
During the third quarter of 2000, the Company completed a private equity
placement through the sale, exclusively to accredited investors, of 550,000
units at a gross aggregate price of $5,500,000, or $10.00 per unit, resulting in
net proceeds of approximately $4,877,800 after deducting agents' commissions of
$550,000 and other estimated expenses. Each unit consisted of one share of
common stock and one 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 warrants to the placement agent to purchase 55,000 shares of
common stock at an exercise price of $12.50 per share. The warrants are
currently exercisable and expire five years from the date of issuance.
NOTE E - SEGMENTS
The Company has two reportable segments: Product Sales and Lab Services. The
Product Sales segment includes 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>
<CAPTION>
Segment Information
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Laboratory Services:
Net Sales 9,206 7,944 26,951 23,204
Segment Income (Loss) (56) 302 648 1,245
Segment Assets 27,937 23,775 27,937 23,775
Product Sales:
Net Sales 2,367 1,130 5,614 2,857
<PAGE>
Segment Income 533 47 607 5
Segment Assets 3,830 1,918 3,830 1,918
Total:
Net Sales 11,573 9,074 32,565 26,061
Income 477 349 1,255 1,250
Total Assets 31,767 25,693 31,767 25,693
</TABLE>
NOTE F - 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 initiated steps to commence
an arbitration proceeding against the sellers seeking payment of the $79,000.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority stockholder ("Morgan Capital") 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 June 3, 1999 the U.S. District Court found that Morgan Capital had
violated Section 16(b) and ordered the defendants to pay the Company damages of
$551,000 plus interest. On or about September 30, 2000 the parties entered into
a Stipulation and Mutual Release dismissing with prejudice all claims and
counterclaims between the parties regarding the transaction other then the
Section 16(b) claim against the former stockholder, Morgan Capital, along with
an Escrow Agreement requiring Morgan Capital to deposit into escrow 72,500
shares of publicly registered common stock of the Company as collateral to
secure payment by Morgan Capital of the judgment to be entered in favor of the
Company in the amount of $675,000 plus any post-judgment interest. The Federal
<PAGE>
District Court entered such judgment in favor of the Company on October 17,
2000. Morgan Capital must now appeal the Federal District Court's decision to
the Eighth Circuit Court of Appeals before November 20,2000, or pay the
judgment, or attempt to negotiate a final settlement of the matter with the
Company. The Company has not recorded a receivable for this amount due to the
continuing 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. The
parties are now engaged in pretrial discovery and it is too early in that
process to develop any sense at to how the matter might ultimately be resolved.
The Company has filed a cross claim against the other defendants in the
litigation based on such defendants' contractually obligation to indemnify the
Company against any damages, costs or expense (including attorney fees) incurred
by the Company, 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 this reason, 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.
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 September 30, 2000 Compared to Three Months Ended September
30, 1999
Laboratory Services
Revenues from Laboratory Services for the three months ended September 30, 2000
were $9,206,000 as compared to $7,944,000 for the three months ended September
30, 1999. The increase of $1,262,000 or 15.9% was primarily attributable to an
8.4% increase in both net revenue per laboratory test and the number of tests.
The gross margin from the revenues generated from the laboratory services was
33.0% for the three months ended September 30, 2000 as compared to a gross
margin of 33.5% for the same period in 1999. The slight decline in gross margin
was primarily attributable to a one-time reduction in net revenues from an
increase in pass through expenses incurred on behalf of our clients and paid to
third-party collection sites, partially offset by the increase in net revenue
per laboratory test noted above.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $2,757,000 compared to $2,070,000 for the three months
ended September 30, 1999. The increase of $687,000 or 33.2% in 2000 was
primarily the result of increased salaries and sales expenses as the Company
continues to upgrade the management team and sales force.
Interest and financing costs for the Laboratory Services segment increased to
$226,000 for the three months ended September 30, 2000 from $205,000 during the
same period of 1999, reflecting higher debt levels and increasing interest
rates.
As a result of the above, net income (loss) for the Laboratory Services segment
of the Company for the three months ended September 30, 2000 was ($56,000)
compared to the net income of $302,000 for the three months ended September 30,
1999.
Product Sales
Revenues from Product Sales for the three months ended September 30, 2000
increased 109.5% to $2,367,000 as compared to $1,130,000 for the three months
ended September 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 168.0% to $1,946,000
for the three months-ended September 30, 2000 compared to sales of $726,000 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 decreased 51.5% to $82,000
for the three months ended September 30, 2000 compared to $169,000 in 1999. The
primary reason for the decrease of $87,000 was the result of decreased 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 44.3% to $339,000 for the three months ended September 30,
2000 compared to $235,000 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 September 30, 2000
were 71.0% compared to 44.9% for the three months ended September 30, 1999. The
improvement in gross margin was primarily due to an increased mix of higher
margin products and efficiencies gained in the production facility.
Selling, general and administrative expenses for Products Sales during the three
months ended September 30, 2000 were $978,000 compared to $331,000 for the three
months ended September 30, 1999. The increase of $647,000 or 195.5% was
primarily the result of increased expenses as the Company continues to upgrade
the management team and sales force. The increased sales level also contributed
to the higher selling, general and administrative expenses.
Research and development expenses incurred for Product Sales during the three
months ended September 30, 2000 were $150,000 as compared to $115,000 for the
same period in 1999. The increase of $35,000 or 30.4% 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 September 30, 2000 was $533,000, compared to
$47,000 for the three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
Laboratory Services
Revenues from Laboratory Services for the nine months ended September 30, 2000
were $26,951,000 as compared to $23,204,000 for the nine months ended September
30, 1999. The increase of $3,747,000 or 16.2% was primarily attributable to an
8.4% increase in laboratory tests and a 9.2% increase in average revenue per
test.
<PAGE>
The gross margin from the revenues generated from Laboratory Services was 34.0%
for the nine months ended September 30, 2000 as compared to a gross margin of
33.2% for the same period in 1999.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $7,529,000 compared to $5,819,000 for the nine months ended
September 30, 1999. The increase of $1,710,000 or 29.4% was primarily the result
of increased salaries and sales expenses as the Company continues to upgrade the
management team and sales force.
Interest and financing costs for the Laboratory Services segment increased to
$694,000 for the nine months ended September 30, 2000 from $547,000 during the
same period of 1999, reflecting 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 nine months ended September 30, 2000 was $648,000, compared to
the net income of $1,245,000 for the nine months ended September 30, 1999.
Product Sales
Revenues from Product Sales for the nine months ended September 30, 2000
increased 96.5% to $5,614,000 as compared to $2,857,000 for the nine months
ended September 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 145.4% to $4,258,000
for the nine months ended September 30, 2000 compared to sales of $1,735,000 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 decreased 12.9% to $344,000
for the nine months ended September 30, 2000 compared to $395,000 in 1999. The
primary reason for the decrease of $51,000 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 39.2% to $1,012,000 for the nine months ended September 30,
2000 compared to $727,000 in 1999. This increase was due to increased revenues
from both historical customers and new customers added in 2000.
Gross margins from Product Sales for the nine months ended September 30, 2000
were 63.3% compared to 44.7% for the nine months ended September 31, 1999. The
<PAGE>
increase in gross margin was primarily due to an increased mix of higher margin
products and efficiencies gained in the production facility.
Selling, general and administration expenses for Products Sales during the nine
months ended September 30, 2000 were $2,353,000, compared to $856,000 for the
nine months ended September 30, 1999. The increase of $1,497,000 or 174.9% was
primarily the result of increased expenses as the Company continues to upgrade
the management team and sales force. The increased sales level also contributed
to the higher selling, general and administrative expenses.
Research and development expenses incurred for Product Sales during the nine
months ended September 30, 2000 were $538,000 as compared to $371,000 for the
same period in 1999. The increase of $167,000 or 45.0% was primarily the result
of the costs associated with new product development for on-site and other
ancillary products.
For the nine months ended September 30, 2000, the Product Sales segment
incurred interest and financing costs of $57,000 as compared to $48,000 for the
same period in 1999. The increase of $9,000 or 18.8% 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 nine months ended September 30, 2000 was $607,000 compared to
the net income of $5,000 for the nine months ended September 30, 1999.
Material Changes in Financial Condition
Laboratory Services
As of September 30, 2000 net accounts and notes receivable for Laboratory
Services were $8,433,000 compared to $6,318,000 at December 31, 1999. This
increase of $2,115,000 or 33.5% was primarily the result of higher sales for the
quarter ended September 30, 2000 as compared to quarter ended December 31, 1999.
Inventories for Laboratory Services were $1,432,000 at September 30, 2000
compared to $978,000 at December 31, 1999. The increase of $454,000 or 46.4% is
primarily attributable to additional supplies (forms, labels, and collection
kits) shipped to new and existing collection sites to support a projected
increase in sales volume in 2001. During the quarter, the Company also revised
its assumptions for calculating off-site inventory located at collection sites
throughout the United States. The revised assumptions reduced the amount of
expected scrap inventory and changed the projected time that a collection site
uses the collection kits from three months to twelve months.
<PAGE>
Product Sales
At September 30, 2000, net accounts receivable for Product Sales were
$1,706,000, compared to $789,000 at December 31, 1999. This increase of $917,000
or 116.2% was primarily due to higher sales in the quarter ended September 30,
2000 as compared to the quarter ended December 31, 1999.
Inventories were $1,651,000 at September 30, 2000 compared to $818,000 at
December 31, 1999. The increase of $833,000, or 101.8% is primarily attributable
to the increase in forecasted sales for the fourth quarter of 2000.
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 September 30,
2000, the Company had total availability of $6,000,000 on its line of credit of
which $3,140,000 was borrowed, leaving a net availability of $2,860,000.
During the third quarter of 2000, the Company completed a private equity
placement through the sale, exclusively to accredited investors, of 550,000
units at a gross aggregate price of $5,500,000, or $10.00 per unit, resulting in
net proceeds of approximately $4,877,800 after deducting agents' commissions of
$550,000 and other estimated expenses. Each unit consisted of one share of
common stock and one warrant to purchase one additional share of common stock at
an exercise price of $12.50.
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.
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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
<PAGE>
primary market risk exposures are to changes in interest rates. During 1999 and
through September 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.
The Company had $575,000 of subordinated notes outstanding as of September 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 $6.7 million and $6.6 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of September 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 September 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 F
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ITEM 2 CHANGES IN SECURITIES.
In the third quarter of 2000 the Company completed a private equity placement
through the sale of 550,000 units at a gross aggregate price of $5,500,000, or
$10.00 per unit, resulting in net proceeds of approximately $4,877,800 after
deducting agents' commissions of $550,000 and other estimated expenses. Each
unit consisted of one share of common stock and one warrant to purchase one
additional share of common stock at an exercise price of $12.50. The warrants
are currently exercisable and expire five years from the date of issuance.
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 55,000 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 in the third quarter 2000
and the shares to be issued pursuant to the warrants.
<PAGE>
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 $4,929,000 on its outstanding revolving line of
credit with Wells Fargo Business Credit.
In August 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 at $11.69 per share. 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
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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. Inapplicable
------ -----------------------------------------------------
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: November 14, 2000
MEDTOX SCIENTIFIC, INC.
By: /s/ Richard J. Braun
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Richard J. Braun, Chief Executive Officer
By: /s/ James B. Lockhart
------------------------------------------
James B. Lockhart, Chief Financial Officer
