FORM 10-Q |
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 |
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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X The number of shares of Common Stock, $0.15 par value per share, outstanding as of October 25, 2005, was 8,141,245. |
MEDTOX SCIENTIFIC, INC. INDEX |
2 |
PART I FINANCIAL INFORMATIONItem 1: FINANCIAL STATEMENTS (UNAUDITED)MEDTOX SCIENTIFIC, INC. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||||||
REVENUES: | ||||||||||||||
Laboratory services | $ | 12,740 | $ | 10,979 | $ | 36,808 | $ | 32,694 | ||||||
Product sales | 3,773 | 3,494 | 11,239 | 10,426 | ||||||||||
16,513 | 14,473 | 48,047 | 43,120 | |||||||||||
COST OF REVENUES: | ||||||||||||||
Cost of services | 7,783 | 7,055 | 22,758 | 20,638 | ||||||||||
Cost of sales | 1,470 | 1,386 | 4,587 | 4,096 | ||||||||||
9,253 | 8,441 | 27,345 | 24,734 | |||||||||||
GROSS PROFIT | 7,260 | 6,032 | 20,702 | 18,386 | ||||||||||
OPERATING EXPENSES: | ||||||||||||||
Selling, general and administrative | 5,020 | 4,397 | 14,264 | 13,310 | ||||||||||
Research and development | 552 | 354 | 1,788 | 1,189 | ||||||||||
5,572 | 4,751 | 16,052 | 14,499 | |||||||||||
INCOME FROM OPERATIONS | 1,688 | 1,281 | 4,650 | 3,887 | ||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||
Interest expense | (182 | ) | (264 | ) | (620 | ) | (790 | ) | ||||||
Other expense, net | (175 | ) | (99 | ) | (383 | ) | (337 | ) | ||||||
(357 | ) | (363 | ) | (1,003 | ) | (1,127 | ) | |||||||
INCOME BEFORE INCOME TAX EXPENSE | 1,331 | 918 | 3,647 | 2,760 | ||||||||||
INCOME TAX EXPENSE | (506 | ) | (349 | ) | (1,386 | ) | (1,049 | ) | ||||||
NET INCOME | $ | 825 | $ | 569 | $ | 2,261 | $ | 1,711 | ||||||
BASIC EARNINGS PER COMMON SHARE | $ | 0.10 | $ | 0.08 | $ | 0.30 | $ | 0.23 | ||||||
DILUTED EARNINGS PER COMMON SHARE | $ | 0.10 | $ | 0.07 | $ | 0.28 | $ | 0.22 | ||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | ||||||||||||||
Basic | 7,896,777 | 7,444,973 | 7,662,716 | 7,451,174 | ||||||||||
Diluted | 8,324,880 | 7,930,347 | 8,094,210 | 7,806,901 |
See Notes to Consolidated Financial Statements (Unaudited). 3 |
MEDTOX SCIENTIFIC, INC. |
September 30, 2005 | December 31, 2004 | |||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 674 | $ | 263 | ||||
Accounts receivable: | ||||||||
Trade, less allowance for doubtful accounts ($563 in 2005 and $734 in 2004) | 10,828 | 8,084 | ||||||
Other | 183 | 203 | ||||||
Total accounts receivable | 11,011 | 8,287 | ||||||
Inventories | 3,074 | 3,624 | ||||||
Prepaid expenses and other | 973 | 1,293 | ||||||
Deferred income taxes | 1,531 | 1,531 | ||||||
Total current assets | 17,263 | 14,998 | ||||||
BUILDING, EQUIPMENT AND IMPROVEMENTS, net | 17,753 | 16,348 | ||||||
GOODWILL | 15,967 | 15,967 | ||||||
OTHER INTANGIBLE ASSETS, net | 1,326 | 1,608 | ||||||
DEFERRED INCOME TAXES, net | 5,347 | 6,733 | ||||||
OTHER ASSETS | 433 | 306 | ||||||
TOTAL ASSETS | $ | 58,089 | $ | 55,960 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Line of credit | $ | 1,132 | $ | 4,690 | ||||
Accounts payable | 2,109 | 1,661 | ||||||
Accrued expenses | 4,319 | 4,188 | ||||||
Current portion of long-term debt | 1,032 | 1,469 | ||||||
Current portion of capital leases | 24 | 73 | ||||||
Total current liabilities | 8,616 | 12,081 | ||||||
LONG-TERM DEBT, net of current portion | 5,600 | 6,050 | ||||||
OTHER LONG-TERM LIABILITIES | 219 | -- | ||||||
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion | 26 | 40 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY: | ||||||||
Preferred stock, $1.00 par value per share; authorized shares, 50,000; none | ||||||||
issued and outstanding | -- | -- | ||||||
Common stock, $0.15 par value per share; authorized shares, 28,000,000; issued | ||||||||
and outstanding shares, 8,147,745 in 2005 and 7,534,842 in 2004 | 1,222 | 1,130 | ||||||
Additional paid-in capital | 85,690 | 81,693 | ||||||
Deferred stock-based compensation | (331 | ) | (508 | ) | ||||
Accumulated deficit | (42,089 | ) | (44,350 | ) | ||||
Common stock held in trust | (688 | ) | -- | |||||
Treasury stock | (176 | ) | (176 | ) | ||||
Total stockholders' equity | 43,628 | 37,789 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 58,089 | $ | 55,960 | ||||
See Notes to Consolidated Financial Statements (Unaudited). 4 |
MEDTOX SCIENTIFIC, INC. |
Nine Months Ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|
2005 | 2004 | |||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Net income | $ | 2,261 | $ | 1,711 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,364 | 2,332 | ||||||
Provision for losses on accounts receivable | 468 | 210 | ||||||
Loss on sale of equipment | 1 | 7 | ||||||
Deferred compensation | 430 | 336 | ||||||
Deferred income taxes | 1,386 | 1,049 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,192 | ) | (1,079 | ) | ||||
Inventories | 550 | 17 | ||||||
Prepaid expenses and other current assets | 320 | 610 | ||||||
Other assets | (127 | ) | 12 | |||||
Accounts payable and accrued expenses | (99 | ) | (50 | ) | ||||
Net cash provided by operating activities | 4,362 | 5,155 | ||||||
CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (2,781 | ) | (3,447 | ) | ||||
Purchase of customer list | (27 | ) | (169 | ) | ||||
Proceeds from sale of equipment | -- | 46 | ||||||
Net cash used in investing activities | (2,808 | ) | (3,570 | ) | ||||
CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
Net proceeds (payments) on revolving credit facility | (3,558 | ) | 384 | |||||
Proceeds from long-term debt | 300 | -- | ||||||
Principal payments on long-term debt | (1,187 | ) | (2,481 | ) | ||||
Principal payments on capital leases | (63 | ) | (55 | ) | ||||
Purchase of common stock | (688 | ) | -- | |||||
Net proceeds from sale of common stock | 4,172 | 547 | ||||||
Payment of taxes from traded shares | (119 | ) | (149 | ) | ||||
Net cash used in financing activities | (1,143 | ) | (1,754 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 411 | (169 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 263 | 711 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 674 | $ | 542 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 637 | $ | 789 | ||||
Taxes | 189 | 34 | ||||||
Supplemental noncash activities: | ||||||||
Asset additions and related obligations | $ | 678 | -- |
See Notes to Consolidated Financial Statements (Unaudited). 5 |
(In thousands, except per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||
Net income ...................................... | As reported | $ | 825 | $ | 569 | $ | 2,261 | $ | 1,711 | ||||||||
Less: Total stock-based compensation | |||||||||||||||||
expense, net of related tax effect | (33 | ) | (60 | ) | (100 | ) | (214 | ) | |||||||||
Pro forma | 792 | 509 | 2,161 | 1,497 | |||||||||||||
Basic earnings per share............... | As reported | $ | 0.10 | $ | 0.08 | $ | 0.30 | $ | 0.23 | ||||||||
Pro forma | 0.10 | 0.07 | 0.28 | 0.20 | |||||||||||||
Diluted earnings per share............ | As reported | $ | 0.10 | $ | 0.07 | $ | 0.28 | $ | 0.22 | ||||||||
Pro forma | 0.10 | 0.06 | 0.27 | 0.19 |
6 |
New Accounting Standards – In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 will be effective for the Company on January 1, 2006. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the Company’s statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) will be effective for the Company on January 1, 2006. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 123(R). In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151 was effective on July 1, 2005. The adoption of this statement did not have a material impact on the Company’s results of operations or financial position. 2. SEGMENTS The Company has two reportable segments: Laboratory Services and Product Sales. The Laboratory Services segment consists of MEDTOX Laboratories, Inc. and New Brighton Business Center, LLC. Services provided include forensic toxicology (primarily workplace drugs-of-abuse testing) and Specialty Laboratory Services, which include clinical toxicology, clinical testing for the pharmaceutical industry, pediatric lead testing, heavy metals analyses and courier delivery, and medical surveillance. The Product Sales segment consists of MEDTOX Diagnostics, Inc., which includes point-of-collection testing (POCT) disposable diagnostics devices. Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE®-II, PROFILE®-II A, PROFILE-II ER®, VERDICT®-II, and SURE-SCREEN®, in addition to a variety of agricultural testing products. MEDTOX Diagnostics, Inc. also provides contract manufacturing services in its Food and Drug Administration (FDA) registered/ISO 13845 certified facility. The Company’s reportable segments are strategic business units that offer synergistic, but different products and services. They are managed separately, as each business requires different products, services and marketing strategies. 7 |
In evaluating financial performance, management focuses on income from operations as a segment’s measure of profit or loss. |
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Laboratory Services: | ||||||||||||||
Revenues | $ | 12,740 | $ | 10,979 | $ | 36,808 | $ | 32,694 | ||||||
Depreciation and amortization | 650 | 692 | 1,955 | 1,900 | ||||||||||
Income from operations | 1,365 | 795 | 3,909 | 2,727 | ||||||||||
Segment assets | 44,418 | 41,706 | 44,418 | 41,706 | ||||||||||
Capital expenditures for segment assets | 817 | 675 | 2,509 | 3,152 | ||||||||||
Product Sales: | ||||||||||||||
Revenues | $ | 3,773 | $ | 3,494 | $ | 11,239 | $ | 10,426 | ||||||
Depreciation and amortization | 133 | 144 | 409 | 432 | ||||||||||
Income from operations | 323 | 486 | 741 | 1,160 | ||||||||||
Segment assets | 6,793 | 6,858 | 6,793 | 6,858 | ||||||||||
Capital expenditures for segment assets | 17 | 139 | 272 | 295 | ||||||||||
Corporate (unallocated): | ||||||||||||||
Other expense | $ | (357 | ) | $ | (363 | ) | $ | (1,003 | ) | $ | (1,127 | ) | ||
Deferred tax assets, net | 6,878 | 8,286 | 6,878 | 8,286 | ||||||||||
Consolidated: | ||||||||||||||
Revenues | $ | 16,513 | $ | 14,473 | $ | 48,047 | $ | 43,120 | ||||||
Depreciation and amortization | 783 | 836 | 2,364 | 2,332 | ||||||||||
Income from operations | 1,688 | 1,281 | 4,650 | 3,887 | ||||||||||
Other expense | (357 | ) | (363 | ) | (1,003 | ) | (1,127 | ) | ||||||
Income before income tax expense | 1,331 | 918 | 3,647 | 2,760 | ||||||||||
Total assets | 58,089 | 56,850 | 58,089 | 56,850 | ||||||||||
Capital expenditures for assets | 834 | 814 | 2,781 | 3,447 |
The following is a summary of revenues from external customers for each group of services provided within the Laboratory Services segment: |
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Workplace drugs-of-abuse | $ | 8,242 | $ | 7,228 | $ | 24,303 | $ | 21,050 | ||||||
Other specialty laboratory services | 4,498 | 3,751 | 12,505 | 11,644 | ||||||||||
$ | 12,740 | $ | 10,979 | $ | 36,808 | $ | 32,694 | |||||||
8 |
The following is a summary of revenues from external customers for each group of products and services provided within the Product Sales segment: |
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
POCT products | $ | 3,247 | $ | 2,890 | $ | 9,519 | $ | 8,658 | ||||||
Contract manufacturing services | 483 | 582 | 1,561 | 1,581 | ||||||||||
Other diagnostic products | 43 | 22 | 159 | 187 | ||||||||||
$ | 3,773 | $ | 3,494 | $ | 11,239 | $ | 10,426 | |||||||
3. INVENTORIES Inventories consisted of the following: |
(In thousands) | September 30, 2005 | December 31, 2004 | ||||||
Raw materials | $ | 875 | $ | 984 | ||||
Work in process | 350 | 344 | ||||||
Finished goods | 322 | 627 | ||||||
Supplies, including off-site inventory | 1,527 | 1,669 | ||||||
$ | 3,074 | $ | 3,624 | |||||
4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share: |
(In thousands, except share and per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income (A) | $ | 825 | $ | 569 | $ | 2,261 | $ | 1,711 | ||||||
Weighted average number of basic | ||||||||||||||
common shares outstanding (B) | 7,896,777 | 7,444,973 | 7,662,716 | 7,451,174 | ||||||||||
Dilutive effect of stock options and warrants | ||||||||||||||
computed based on the treasury stock | ||||||||||||||
method using average market price | 428,103 | 485,374 | 431,494 | 355,726 | ||||||||||
Weighted average number of diluted | ||||||||||||||
common shares outstanding (C) | 8,324,880 | 7,930,347 | 8,094,210 | 7,806,901 | ||||||||||
Basic earnings per common share (A/B) | $ | 0.10 | $ | 0.08 | $ | 0.30 | $ | 0.23 | ||||||
Diluted earnings per common share (A/C) | $ | 0.10 | $ | 0.07 | $ | 0.28 | $ | 0.22 | ||||||
Options and warrants to purchase 8,589, 8,589, 8,682 and 1,338,243 shares of common stock were outstanding during the three and nine months ended September 30, 2005 and 2004, respectively, but 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. 9 |
5. INCOME TAXES At December 31, 2004, the Company had federal and state net operating loss carryforwards (NOLs) of approximately $26.1 million and $28.2 million, respectively, which are available to offset future taxable income. The Company’s federal and state NOLs expire in varying amounts each year from 2005 through 2023 in accordance with applicable federal and state tax regulations and the timing of when the NOLs were incurred. For financial reporting purposes, a valuation allowance has been recorded to offset deferred tax assets that, more likely than not, will not be realized based on the Company’s projected future taxable income, the timing of expiring NOLs, and the Company’s tax planning strategies. Section 382 of the Internal Revenue Code restricts the annual utilization of certain NOLs incurred prior to a change in ownership. However, such limitation is not expected to impair the realization of these NOLs. In the future, subsequent revisions to the estimated net realizable value of these deferred tax assets could cause the provision for income taxes to vary significantly from period to period, although the Company’s cash payments would remain unaffected until the benefit of the NOLs is completely utilized or expires unused. At September 30, 2005, the Company had a valuation allowance on deferred tax assets of $0.9 million, which represents the portion of its NOL carryforwards that will more likely than not expire unused in 2006 and future years. 6. STOCKHOLDERS’ EQUITY Conversion of Warrants — In connection with the Company’s private placements in July and August 2000, the Company issued warrants, exercisable for an aggregate of 1,120,439 shares of its common stock for a five-year period from the time of issuance at an exercise price of $6.75. The Company issued a total of 604,589 shares of its common stock in 2005, upon exercise of such warrants, resulting in proceeds of approximately $4.1 million. The remaining shares underlying the exercised warrants were issued in December 2004. Warrants exercisable for an aggregate of 511,219 shares expired in July or August 2005 without being exercised. Deferred Compensation Plan— In December 2004, the Company adopted the Long-Term Incentive Plan (LTIP) to provide performance based compensation to selected executives. Under the LTIP, an executive becomes eligible for an annual long-term incentive contribution amount based upon performance objectives established by the Compensation Committee of the Board of Directors. Annual contribution amounts are subject to a three-year restriction period with a risk of forfeiture if a participant terminates service prior to becoming vested. Participants may elect to allocate LTIP awards in investment options authorized by the Committee, including shares of the Company’s stock. The Compensation Committee determined the total 2005 contribution amount to be $688,000 allocated among all participants. All LTIP participants elected to allocate their 2005 contribution amounts to Company stock, and accordingly, the future payment of benefits will be settled by delivery of a fixed number of shares of stock. To fund the 2005 contribution amount, the Company purchased $688,000 or 94,874 shares of its own stock from June through September 2005, which was contributed to a grantor trust. Of the total stock purchased, 59,000 shares were purchased in the open market and 35,874 shares were purchased from an officer of the Company (at the closing market price on the American Stock Exchange on August 4, 2005). The acquired stock was recorded as unearned compensation in the equity section of the consolidated balance sheet. In accordance with EITF 97-14, “Accounting for Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested,” the deferred compensation in the form of the Company’s stock was recorded at historical cost and classified as Common Stock Held in Trust. The Company will record compensation expense on a straight-line basis over the three-year vesting period (April 1, 2005 through March 31, 2008 for the 2005 contribution amount per the LTIP agreement), which is recorded as a deferred compensation obligation in the Other Long-Term Liability section of the balance sheet. The Company recorded approximately $57,000 and $115,000 of compensation expense during the three and nine months ended September 30, 2005, respectively, in conjunction with the LTIP. 10 |
7. CONTINGENCIES Leases —The Company leases offices and facilities and office equipment under certain operating leases, which expire on various dates through March 2016. Under the terms of the facility leases, a pro rata share of operating expenses and real estate taxes are charged as additional rent. Legal — The Company is party to various legal proceedings arising in the normal course of business activities, none of which, in the opinion of management, are expected to have a material adverse impact on the Company’s consolidated financial position or results of operations. 11 |
o | increased competition, including price competition |
o | changes in general economic and business conditions, both nationally and internationally, which can influence the level of job growth and, in turn, the level of pre-employment drug screening activity |
o | changes in business strategy or development plans |
o | technological, evolving industry standards, or regulatory developments that could affect or delay the sale of our products |
o | risks and uncertainties with respect to our patents and proprietary rights including: |
12 |
o | other companies challenging our patents |
o | patents issued to other companies that may harm our ability to do business |
o | other companies designing around technologies we have developed |
o | our inability to obtain appropriate licenses from third parties |
o | our inability to protect our trade secrets |
o | risk of infringement upon the proprietary rights of others |
o | our inability to prevent others from infringing on our proprietary rights |
o | our inability to obtain sufficient financing to continue to sustain or expand our operations |
o | changes in demand for our services and products by our customers |
o | our failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers |
o | adverse results in litigation matters |
o | our ability to attract and retain experienced and qualified personnel |
o | losses due to bad debt |
The above listing should not be construed as exhaustive; we cannot predict all the factors that could cause results to differ materially from those indicated by the forward looking statements. Executive OverviewWe are engaged primarily in distinct, but very much related, businesses, which for financial reporting purposes are divided into two reportable segments: Laboratory Services and Product Sales. For financial information relating to our segments, see Note 2 of Notes to the Consolidated Financial Statements. Laboratory Services Our “Laboratory Services” business segment includes the activities of our wholly-owned subsidiary, MEDTOX Laboratories, Inc. MEDTOX Laboratories, Inc. principally engages in forensic toxicology (primarily laboratory testing for identification of drugs-of-abuse), providing these services to private and public companies, drug treatment counseling centers, occupational health clinics and hospitals, as well as third party administrators. Our “Specialty Laboratory Services” operations consist of clinical toxicology, clinical testing for the pharmaceutical industry (e.g., central laboratory services, bioanalytical and pharmacokinetic testing), and analysis of heavy and trace metals. We provide these services to hospitals, clinics, HMOs and small to mid-sized biotech and pharmaceutical companies and other laboratories. Testing is conducted using methodologies that include various immunoassays, gas liquid chromatography, gas chromatography/mass spectrometry and high performance liquid chromatography with tandem mass spectrometry. 13 |
The Laboratory Services segment also includes New Brighton Business Center, LLC, a wholly-owned limited liability company formed for the sole purpose of acquiring the facilities in St. Paul, Minnesota, where our Laboratory Services segment’s administrative offices and laboratory operations are located. These facilities include other commercial tenants that have individual leases with terms of up to ten years. Product Sales Our “Product Sales” business segment consists of our wholly-owned subsidiary, MEDTOX Diagnostics, Inc. MEDTOX Diagnostics, Inc. is engaged in the development manufacturing and distribution of a variety of point-of-collection testing (POCT) diagnostic drug screening devices, such as our PROFILE®-II, PROFILE®-II A, PROFILE-II ER®, VERDICT®-II, and SURE-SCREEN® products, in addition to a variety of agricultural testing products. MEDTOX Diagnostics, Inc. also provides contract manufacturing services, such as coagulation market controls. The operations of the Product Sales segment are located in Burlington, North Carolina, where we maintain the offices, research and development laboratories, production operations and warehouse/distribution. Key Trends Influencing Our Operating ResultsOur management believes that there are several notable trends that are currently influencing, and are expected in the foreseeable future to continue to influence, our operating results. These include: Consolidation in the Laboratory Services, Drugs-of-Abuse Business The laboratory services, drugs-of-abuse industry is consolidating, with the consolidation being driven by customers’ desires to minimize the number of laboratories they work with, the need for operating efficiencies in the form of critical mass (testing volumes), required investment levels and government regulation. Given the competitive environment, we are increasingly seeking to differentiate ourselves through our technology and value-added services, such as data management, collection site management, training, and technical support and expertise. Increased POCT Diagnostic Device Test Competition We have experienced increased competition with respect to our POCT diagnostic tests from systems and products developed by others, many of whom compete solely on price. As the number of firms marketing diagnostic tests has grown, we have experienced increased price competition for certain diagnostic testing devices. Our StrategyWe believe that the combined operations of our Laboratory Services business and on-site test kits manufactured by the Product Sales segment have created synergy in the marketing of comprehensive, on-site and laboratory testing programs to a common customer base. Our management has positioned us to offer a full line of products and services for the substance abuse testing and occupational medicine marketplace, including on-site tests for the detection of substance of abuse drugs, Substance Abuse Mental Health Services Administration (SAMHSA) certified laboratory testing (screening and confirmation), biological monitoring of occupational toxins, consultation, and logistic, data management and program management services. 14 |
Our strategy is to build market share by offering the highest quality products and services, delivered rapidly, priced competitively and supported by value-added services for customers. These services include data management, collection site management, training, technical support and expertise, as well as policy review. In the data management area, we have a new service in development—e-Chain®, the first multi-purpose electronic chain-of-custody system in the market. Also in development is MEDTOXScan™, an electronic reader for our devices for use in hospital laboratories and emergency rooms. Recently, we introduced SURE-SCREEN®, a cup-based POCT device with significantly lower detection levels for eight drugs-of-abuse, into the forensic markets where FDA 510(k) marketing clearance is not required. On October 25, 2005, we received FDA 510(k) clearance for our SURE-SCREEN® device and will now be able to expand the markets into which it is sold. Specific markets to which SURE-SCREEN® will be targeted are, probation, parole, drug rehabilitation, hospital emergency departments, physician office clinics, laboratories, and corporate clients interested in lower detection levels for pre-employment testing. In the fourth quarter, we will also be introducing an integrated cup and testing device for sale to the workplace drug testing market. This new device will be in the same format as SURE-SCREEN®, with the higher detection levels typically used in the workplace drugs-of-abuse market. We have committed to improve productivity and quality in our organization through LEAN and Six-Sigma processes. Our LEAN initiatives are designed to improve quality and productivity, cut costs and increase throughput. The LEAN process has already been implemented in our forensic laboratory and Product Sales segment, with measurable improvements in streamlining work flow. We are currently in the process of implementing LEAN initiatives in our Specialty Labs and Sales organization. Six-Sigma is a highly disciplined process that helps us focus on reducing waste and eliminating unnecessary steps in our business processes. We have implemented Six-Sigma across the organization addressing quality and variability in processes. Critical Accounting PoliciesWe have identified the policies outlined below as critical to understanding our business and results of operations. The listing is not intended to be a comprehensive list of all accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 on Form 10-K for the year ended December 31, 2004. Note that the preparation of this Form 10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Our critical accounting policies are as follows: Accounts Receivable: 15 |
Some of our Laboratory Services revenues for certain types of tests are billed to third-party payors including insurance companies, state Medicaid and Medicare agencies. These payors pay for such services at established amounts, which are typically lower than gross amounts billed by us. However, the tests are sometimes billed directly to patients or other parties and paid at the gross amount billed for these tests. In addition, billings for the tests are occasionally re-billed to alternative payors in situations where incorrect billing information was submitted to us by the customer. We estimate a discount on the billings for these tests, and recognize revenue and related accounts receivable at a net amount, after discount, in order to state revenue and accounts receivable at the amount expected to be paid. While we believe that estimated discounts and the related net revenue and net accounts receivable from these testing services are materially correct, there can be differences in amounts ultimately paid compared to estimated amounts. These differences are recorded upon payment and may affect previously recorded amounts. We consider historical discounts when estimating future discounts on a monthly basis. Off-Site Supplies Inventory: Goodwill and Other Intangible Assets: Accounting for Income Taxes: 16 |
Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. Our deferred tax assets primarily consist of certain net operating losses (NOLs) carried forward. At September 30, 2005, we had a valuation allowance on deferred tax assets of $0.9 million, which represents the portion of our NOL carryforwards that will more likely than not expire unused in 2006 and future years. The valuation allowance is based on management’s estimate of future taxable income, the period over which NOLs will be recoverable, and tax planning strategies. In the future, subsequent revisions to the estimated net realizable value of these deferred tax assets could cause the provision for income taxes to vary significantly from period to period, although our cash payments would remain unaffected until the benefit of the NOLs is completely utilized or expires unused. Results of OperationsIn evaluating our financial performance, our management has primarily focused on three objectives: maximizing operating income, increasing our cash flows and improving our balance sheet. The first of these objectives is discussed in this section. The other two are addressed under “Liquidity and Capital Resources.” To maximize our operating income, we have sought revenue growth, improved gross margins and reduced selling, general and administrative (SG&A) expense as a percentage of revenues. As discussed below, during the third quarter of 2005 we were able to achieve solid revenue growth and improved gross margins. During the first nine months of this year, we have made positive strides on all three fronts. Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 Revenues |
Three Months Ended | Quarter over Quarter | |||||||||||||||||||
September 30, 2005 | % of Total Revenues | September 30, 2004 | % of Total Revenues | $ Change | % Change | |||||||||||||||
Revenues: | ||||||||||||||||||||
Laboratory Services | $ | 12,740 | 77 | .2% | $ | 10,979 | 75 | .9% | $ | 1,761 | 16 | % | ||||||||
Product Sales | 3,773 | 22 | .8% | 3,494 | 24 | .1% | 279 | 8 | % | |||||||||||
Total Revenues | $ | 16,513 | 100 | .0% | $ | 14,473 | 100 | .0% | $ | 2,040 | 14 | % | ||||||||
Total revenues increased by 14% for the three months ended September 30, 2005 compared to the corresponding period of the prior year. Our Laboratory Services revenues were $12.7 million, approximately 77% of total revenues in the quarter (a slight increase compared to the third quarter of 2004). 17 |
In the Laboratory Services segment, revenues from workplace drugs-of-abuse testing increased 14% in the third quarter of 2005 compared to the corresponding period of the prior year due to an increase in sample volume, partially offset by a decrease in the average price per testing specimen. Pricing for our workplace drugs-of-abuse testing services tends to be stable overall; however, the average price per testing specimen can vary slightly from quarter to quarter depending on client mix. Test price can vary by client based on the amount of confirmation testing and transportation charges associated with the client’s workplace drugs-of-abuse samples. Our increased sample volume during the quarter was from both new and existing customers across a broad customer base and resulted from the execution of our business strategy. Revenues from our Specialty Laboratory Services increased 20% to $4.5 million in the third quarter due to strong growth in testing for our clinical trial services.Overall, our clinical trial services have grown steadily from quarter to quarter during 2005. However, revenues from these services can fluctuate from quarter to quarter depending on the actual timing of clinical trials as shown in the table below: Revenues from Specialty Laboratory Services: |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||
Revenues: | ||||||||||||||
2005 | $ | 3,775 | $ | 4,232 | $ | 4,498 | NA | |||||||
2004 | 3,737 | 4,156 | 3,751 | $ | 3,661 |
In the Product Sales segment, sales of POCT products, which consists of the PROFILE®-II, PROFILE-II ER®, PROFILE®-II A, VERDICT®-II and SURE-SCREEN®on-site test kits and other ancillary products for the detection of abused substances, increased 12% to $3.2 million in the third quarter of 2005. This growth reflected strong sales of PROFILE®-II products, which grew 14% from the prior year period. Sales within the VERDICT®-II product line to government clients for probation, parole and rehabilitation were flat with the prior year period. During the quarter, we also continued the introduction of our new lower detection POCT device (SURE-SCREEN®) into the forensic market. Sales of contract manufacturing services, microbiological and associated products decreased 17% to $0.5 million in the quarter and were impacted by the timing of the placement of orders from our two existing clients for these services. Product sales from agricultural diagnostic products were up $21,000, or 96%, due to increased purchases by the U.S. Department of Agriculture (USDA). The USDA’s need for our products varies from year-to-year and sales to the USDA are expected to fluctuate accordingly. 18 |
Gross Profit |
Three Months Ended | Quarter over Quarter | |||||||||||||||||||
September 30, 2005 | % of Revenues | September 30, 2004 | % of Revenues | $ Change | % Change | |||||||||||||||
Cost of Revenues: | ||||||||||||||||||||
Cost of Services | $ | 7,783 | 61 | .1% | $ | 7,055 | 64 | .3% | $ | 728 | 10 | % | ||||||||
Cost of Sales | 1,470 | 39 | .0% | 1,386 | 39 | .7% | 84 | 6 | % | |||||||||||
Total Cost of | ||||||||||||||||||||
Revenues | $ | 9,253 | 56 | .0% | $ | 8,441 | 58 | .3% | $ | 812 | 10 | % | ||||||||
Consolidated gross margin increased to 44.0% of revenues for the third quarter of 2005, compared to 41.7% of revenues for the same period in 2004. The increase was driven by improvement in both Laboratory Services’ and Product Sales’ gross margins. Laboratory Services gross margin was 38.9% for third quarter of 2005, up from 35.7% for the same period in 2004. The margin improvement was attributable to increased revenues from additional testing volume through the current infrastructure. We also continued the implementation of LEAN initiatives within our Specialty Laboratory Services. Gross margin from Product Sales improved slightly to 61.0% for the third quarter of 2005, from 60.3% in the comparable period of 2004. Our margin benefited from increased volume and from the elimination of costs incurred earlier in the year associated with the transition to a new and improved product format for our PROFILE®-II product line. We also continued the implementation of LEAN initiatives in our manufacturing processes of our diagnostics operation. Operating Expenses |
Three Months Ended | Quarter over Quarter | |||||||||||||||||||
September 30, 2005 | % of Total Revenues | September 30, 2004 | % of Total Revenues | $ Change | % Change | |||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling, general and | ||||||||||||||||||||
administrative | $ | 5,020 | 30 | .4% | $ | 4,397 | 30 | .4% | $ | 623 | 14 | % | ||||||||
Research and | ||||||||||||||||||||
development | 552 | 3 | .3% | 354 | 2 | .4% | 198 | 56 | % | |||||||||||
Total Operating | ||||||||||||||||||||
Expenses | $ | 5,572 | 33 | .7% | $ | 4,751 | 32 | .8% | $ | 821 | 17 | % | ||||||||
Operating expenses increased in the third quarter of 2005, but were held constant as a percentage of revenues. The increase reflected a continued increased investment in sales and marketing, information technology and research and development activities. 19 |
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $5.0 million in the third quarter of 2005 compared to $4.4 million in the third quarter of 2004, but remained constant at 30.4% of revenues. The increase in spending reflects the continued increased investment in sales and marketing and information technology, as well as higher bad debt expense. Our increased sales and marketing expense was primarily associated with higher performance-based compensation related to the increase in revenues. Bad debt expense, although up slightly in the third quarter, is anticipated to continue to run at our historical level of around 1% of revenues for the year. Research and Development Expenses. Research and development expenses increased $0.2 million, or 56%, to $0.6 million in the third quarter of 2005 primarily due to continued spending for significant development projects in our Product Sales segment. During the quarter, we continued to make substantial progress on development of an electronic reader (MEDTOXScan™) with production units scheduled to be available late in the first quarter of 2006. The MEDTOXScan™ is expected to be utilized with our devices in the hospital laboratory and emergency room market. Other ExpenseOther income and expense consists primarily of interest expense and the net expenses associated with our building rental activities. Other expenses of $0.4 million in the third quarter of 2005 were comparable to the third quarter of last year. Interest expense was down due to lower average debt levels, which was offset by reduced net operating results of New Brighton Business Center, LLC. Income TaxesWe recorded a tax provision for the three months ended September 30, 2005 and September 30, 2004 based upon an effective tax rate of 38%. At September 30, 2005, we had a valuation allowance on deferred tax assets of $0.9 million, which represents the portion of our net operating loss (NOL) carryforwards that will more likely than not expire unused in 2006 and future years. Should operating results for the remainder of 2005 and future years differ from expectations, the valuation allowance against the NOL carryforwards and the related deferred tax asset may require adjustment in future periods. 20 |
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004 Revenues |
Nine Months Ended | Period over Period | |||||||||||||||||||
September 30, 2005 | % of Total Revenues | September 30, 2004 | % of Total Revenues | $ Change | % Change | |||||||||||||||
Revenues: | ||||||||||||||||||||
Laboratory Services | $ | 36,808 | 76 | .6% | $ | 32,694 | 75 | .8% | $ | 4,114 | 13 | % | ||||||||
Product Sales | 11,239 | 23 | .4% | 10,426 | 24 | .2% | 813 | 8 | % | |||||||||||
Total Revenues | $ | 48,047 | 100 | .0% | $ | 43,120 | 100 | .0% | $ | 4,927 | 11 | % | ||||||||
Total revenues increased 11% to $48.0 million for the nine months ended September 30, 2005 compared to the corresponding period of the prior year. In the Laboratory Services segment, revenues from workplace drugs-of-abuse testing increased 15% in the first nine months of 2005 compared to the corresponding period of the prior year due to increased sample volume and stable pricing for our testing services. The increased sample volume was from both new and existing customers across a broad customer base and resulted from the execution of our business strategy. Client and prospect interest in our development of our eChain® system for enhanced electronic results reporting and sample and donor tracking remains strong and significant progress on the development of eChain®was made during the year. In addition, during the first quarter of 2005, we entered into contracts for collection and testing services with two of the largest national third-party administrators. Revenues from our Specialty Laboratory Services increased 7% with an increase in sample volume from clinical trial services partially offset by reduced sample volume from therapeutic drug monitoring as hospitals and other laboratories brought certain types of this testing in-house last year. The decline in therapeutic drug monitoring samples has resulted in a lower average price for our Specialty Laboratory Services year over year. Pricing for our Specialty Laboratory Services has stabilized during the current year from quarter to quarter. In the Product Sales segment, sales of POCT products, which consists of the PROFILE®-II, PROFILE-II ER®, PROFILE®-II A, VERDICT®-II, and SURE-SCREEN®on-site test kits and other ancillary products for the detection of abused substances, increased 10% to $9.5 million during the first nine months of 2005. This growth reflected strong sales of PROFILE®-II products, which grew 14% from the prior year period. Sales within the VERDICT®-II product line to government clients for probation, parole and rehabilitation were down 1% from the prior year period. During the second quarter, we also began selling our new lower detection POCT device (SURE-SCREEN®) into the forensic market. Sales of contract manufacturing services, microbiological and associated products decreased 1% to $1.6 million in the first nine months of 2005. Product sales from agricultural diagnostic products were down $28,000, or 15%, due to decreased purchases by the U.S. Department of Agriculture (USDA). The USDA’s need for our products varies from year-to-year and sales to the USDA are expected to fluctuate accordingly. 21 |
Gross Profit |
Nine Months Ended | Period over Period | |||||||||||||||||||
September 30, 2005 | % of Revenues | September 30, 2004 | % of Revenues | $ Change | % Change | |||||||||||||||
Cost of Revenues: | ||||||||||||||||||||
Cost of Services | $ | 22,758 | 61 | .8% | $ | 20,638 | 63 | .1% | $ | 2,120 | 10 | % | ||||||||
Cost of Sales | 4,587 | 40 | .8% | 4,096 | 39 | .3% | 491 | 12 | % | |||||||||||
Total Cost of | ||||||||||||||||||||
Revenues | $ | 27,345 | 56 | .9% | $ | 24,734 | 57 | .4% | $ | 2,611 | 11 | % | ||||||||
Consolidated gross margin increased to 43.1% of revenues for the nine months ended September 30, 2005, compared to 42.6% of revenues for the same period in 2004. The increase was due to improvement in Laboratory Services’ gross margin, partially offset by a decline in Product Sales’ gross margin. Laboratory Services gross margin was 38.2% for the nine months ended September 30, 2005, up from 36.9% for the same period in 2004. The margin improvement was attributable to increased revenues from additional testing volume through the current infrastructure. We also continued the implementation of LEAN initiatives within our Specialty Laboratory Services. Gross margin from Product Sales declined to 59.2% for the nine months ended September 30, 2005, from 60.7% in the comparable period of 2004, largely due to the impact of costs associated with the transition to a new and improved product format for our PROFILE®-II product line during the first half of the year. The new product began shipping late in the first quarter of 2005. We also continued the implementation of LEAN initiatives in our manufacturing processes of our diagnostics operation. Operating Expenses |
Nine Months Ended | Period over Period | |||||||||||||||||||
September 30, 2005 | % of Total Revenues | September 30, 2004 | % of Total Revenues | $ Change | % Change | |||||||||||||||
Operating Expenses: | ||||||||||||||||||||
Selling, general and | ||||||||||||||||||||
Administrative | $ | 14,264 | 29 | .7% | $ | 13,310 | 30 | .9% | $ | 954 | 7 | % | ||||||||
Research and | ||||||||||||||||||||
Development | 1,788 | 3 | .7% | 1,189 | 2 | .7% | 599 | 50 | % | |||||||||||
Total Operating | ||||||||||||||||||||
Expenses | $ | 16,052 | 33 | .4% | $ | 14,499 | 33 | .6% | $ | 1,553 | 11 | % | ||||||||
22 |
Operating expenses increased in the first nine months of 2005, but were down slightly as a percentage of revenues. The increase reflected a continued increased investment in sales and marketing, information technology and research and development activities. Selling, General and Administrative Expenses.Selling, general and administrative expenses were $14.3 million, or 29.7% of revenues in the first nine months of 2005, compared to $13.3 million, or 30.9% of revenues in same period of 2004. The lower percentage reflects the increase in revenue on marginally higher year-over-year expenses. The increase in spending reflects the continued increased investment in sales and marketing and information technology, as well as higher bad debt expense. Our increased sales and marketing expense was primarily associated with higher performance-based compensation related to the increase in revenues. Although bad debt expense increased slightly in the third quarter, it is anticipated to continue to run at our historical level of around 1% of revenues for the entire year. Research and Development Expenses.Research and development expenses increased $0.6 million, or 50%, to $1.8 million in the first nine months of 2005 primarily due to continued spending for significant development projects in our Product Sales segment. During the year, we completed enhancements to PROFILE®-II, PROFILE®-II A, and PROFILE-II ER® products that shorten run times, darken line intensity, improve readability and extend the positive result hold time; filed a 510(k) application with the FDA for SURE-SCREEN®, which is a POCT device intended to provide significantly lower detection levels for eight commonly abused drugs, initially targeted at the probation, parole and rehabilitation markets; and made substantial progress on development of an electronic reader (MEDTOXScan™) expected to be utilized with our devices in the hospital laboratory and emergency room market. Other ExpenseOther income and expense consists primarily of interest expense and the net expenses associated with our building rental activities. These expenses decreased 11% to $1.0 million in the first nine months of 2005. The decrease was primarily due to lower interest expense, reflecting a reduction in average debt levels, partially offset by reduced net operating results from our building rental activities. Income TaxesWe recorded a tax provision for the nine months ended September 30, 2005 and September 30, 2004 based upon an effective tax rate of 38%. At September 30, 2005, we had a valuation allowance on deferred tax assets of $0.9 million, which represents the portion of our net operating loss (NOL) carryforwards that will more likely than not expire unused in 2006 and future years. Should operating results for the remainder of 2005 and future years differ from expectations, the valuation allowance against the NOL carryforwards and the related deferred tax asset may require adjustment in future periods. 23 |
Liquidity and Capital ResourcesOur working capital requirements have been funded primarily by various combinations of profitable operations, cash received from debt financing, and the sale of equity securities. Cash and cash equivalents at September 30, 2005 were $0.7 million, compared to $0.3 million at December 31, 2004. Net cash provided by operating activities was $4.4 million for the nine months ended September 30, 2005 compared to $5.2 million for the same period of 2004. The decrease was primarily due to a significant increase in accounts receivable from December 31, 2004 to September 30, 2005 due to strong August and September 2005 sales. Our days sales outstanding was at 60 days for the third quarter of 2005 compared to 58 days in the third quarter of last year. Net cash used in investing activities, consisting primarily of capital expenditures, was $2.8 million for the nine months ended September 30, 2005 compared to $3.6 million in the same period of 2004. The increased spending in 2004 reflects equipment purchased and costs incurred in redesigning the laboratory operations to improve operating efficiencies. Net cash used in financing activities was $1.1 million for the nine months ended September 30, 2005, compared to $1.8 million in the prior year period. In 2005, we received proceeds of approximately $4.1 million from the exercise of warrants to acquire 604,589 common shares issued in connection with our private placements in July and August 2000. Of the 604,589 total shares issued in 2005, 590,700 were issued in the third quarter. The warrants were exercisable for a five-year period from the time of issuance at an exercise price of $6.75. In July or August 2005, warrants exercisable for an aggregate of 511,219 shares expired without being exercised. The proceeds received from the exercise of such warrants were used to reduce the amount outstanding on our revolving credit facility during the third quarter. In 2005, we purchased 59,000 shares of our common stock in the open market and 35,874 shares of our common stock from an officer of our Company for a total cost of $688,000. The acquired stock was contributed to our Long-Term Incentive Plan. We also made payments on long-term debt of $1.2 million and $2.5 million during the nine months ended September 30, 2005 and 2004, respectively. We are party to a credit security agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. (Wells Fargo). The Wells Fargo Credit Agreement, as amended, consists of (i) a revolving line of credit, payable on demand, of not more than $8.0 million or 85% of our eligible trade accounts receivable bearing interest at prime + 1%; and (ii) a capex note of up to $1.5 million for the purchase of capital equipment bearing interest at prime + 0.75%. According to the terms of the agreement, the capex note may be amended, supplemented or restated from time to time and is generally done so on an annual basis. The Wells Fargo Credit Agreement requires us to comply with certain financial covenants, including a minimum annual debt service coverage ratio and minimum quarterly pre-tax net income levels. It also sets a maximum quarterly level for capital expenditures, as well as a limitation on the year-over-year increase in compensation of any director, shareholder or consultant. At September 30, 2005, we were in compliance with the financial covenants of the Wells Fargo Credit Agreement. 24 |
We are relying on expected positive cash flow from operations and our line of credit to fund our future working capital and asset purchases. The amount available on the revolving line of credit is based primarily on the receivables of the Company and, as such, varies with accounts receivable. As of September 30, 2005, we had total borrowing capacity of $8.0 million on our line of credit, of which $1.1 million was borrowed, leaving a net availability of $6.9 million. In the short term, we believe that the aforementioned capital will be sufficient to fund our planned operations through the remainder of 2005. While there can be no assurance that the available capital will be sufficient to fund our future operations beyond 2005, we believe that future profitable operations, as well as access to additional capital through debt or equity financings, will be the primary means for funding our operations for the long term. We continue to follow a plan which includes (i) aggressively monitoring and controlling costs, (ii) increasing revenue from sales of our existing products and services (iii) developing new products and services, as well as (iv) continuing to selectively pursue synergistic acquisitions to increase our critical mass. However, there can be no assurance that costs can be controlled, revenues can be increased, financing may be obtained, acquisitions successfully consummated, or that we will be profitable. Disclosures about Contractual Obligations and Commercial CommitmentsThe following table aggregates all contractual commitments and commercial obligations that affect our financial condition and liquidity position as of September 30, 2005: |
Payments Due by Period | |||||||||||||||||
(In thousands) | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | ||||||||||||
Long-term debt (1) | $ | 10,365 | $ | 1,476 | $ | 2,088 | $ | 1,174 | $ | 5,627 | |||||||
Capital lease obligations (1) | 55 | 27 | 28 | -- | -- | ||||||||||||
Operating leases | 4,969 | 732 | 1,643 | 825 | 1,769 | ||||||||||||
Total contractual obligations | $ | 15,389 | $ | 2,235 | $ | 3,759 | $ | 1,999 | $ | 7,396 | |||||||
(1) Amounts include interest payments based upon contractual or prevailing interest rates. Off-Balance Sheet TransactionsWe do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 25 |
Impact of Inflation and Changing PricesThe impact of inflation and changing prices has been primarily limited to salary, laboratory and operating supplies and rent increases and has historically not been material to our operations. In the future, we may not be able to increase the prices of laboratory testing by an amount sufficient to cover the cost of inflation, although we are responding to these concerns by refocusing the laboratory operations towards higher margin testing (including clinical and pharmaceutical trials) as well as emphasizing the marketing, sales and operations of the Product Sales business. SeasonalityWe believe that the laboratory testing business is subject to seasonal fluctuations in pre-employment screening. These seasonal fluctuations include reduced volume in the summer months, year-end holiday periods, and other major holidays. In addition, inclement weather may have a negative impact on volume thereby reducing net revenues and cash flow. Impact of New Accounting StandardsIn May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 will be effective for the Company on January 1, 2006. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the Company’s statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) will be effective for the Company on January 1, 2006. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 123(R). In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151 was effective on July 1, 2005. The adoption of this statement did not have a material impact on the Company’s results of operations or financial position. 26 |
PART II OTHER INFORMATIONITEM 1 LEGAL PROCEEDINGS. Inapplicable ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Issuer Purchases of Equity Securities |
Period | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
July 1-31, 2005 | 3,000 | $ | 6 | .98 | - | - | ||||||||
August 1-31, 2005 | 70,374 | $ | 7 | .41 | - | - | ||||||||
September 1-30, 2005 | 8,000 | $ | 7 | .10 | - | - | ||||||||
Total | 81,374 | $ | 7 | .36 | ||||||||||
SIGNATURESPursuant 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. |
Signature | Title | Date |
---|---|---|
/s/ Richard J. Braun | President, Chief Executive Officer, and | November 2, 2005 |
Richard J. Braun | Chairman of the Board of Directors | |
(Principal Executive Officer) | ||
/s/ Kevin J. Wiersma | Vice President and Chief Financial Officer | November 2, 2005 |
Kevin J. Wiersma | (Principal Financial Officer) | |
/s/ Angela M. Lacis | Controller | November 2, 2005 |
Angela M. Lacis | (Principal Accounting Officer) |
29 |
EXHIBIT INDEXMEDTOX SCIENTIFIC, INC. FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2005 |
Exhibit number | Description |
---|---|
31.1 | Section 302 Certification of Chief Executive Officer pursuant to the Sarbanes-Oxley Act of 2002. |
31.2 | Section 302 Certification of Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. |
32.1 | Section 906 Certification of Chief Executive Officer pursuant to the Sarbanes-Oxley Act of 2002. |
32.2 | Section 906 Certification of Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. |
30 |