Medtox Scientific 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period to
Commission file number 1-11394
MEDTOX SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
MEDTOX SCIENTIFIC, INC.
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
See Notes to Consolidated Financial Statements (Unaudited).
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MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
See Notes to Consolidated Financial Statements (Unaudited).
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MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements (Unaudited).
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MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Period Ended March 31, 2012
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 U.S 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 three month period ended March 31, 2012 are not necessarily indicative of the results that may be attained for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
On January 1, 2012, the Company adopted new accounting guidance on the presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain health care entities. This guidance requires certain health care entities to change the presentation of their statement of income by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Results for the three month period ended March 31, 2011 have been restated in accordance with this new guidance, which resulted in a $639,000 decrease in revenues and selling, general and administrative expenses.
Patient Service Revenue, Accounts Receivable and Allowance for Doubtful Accounts - Patient accounts receivable are reported at realizable value, net of allowance for doubtful accounts. In evaluating the collectibility of accounts receivable, the Company analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, the Company analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary. For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), the Company records a provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates, if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged against the allowance for doubtful accounts.
The Company’s allowance for doubtful accounts was 42% of net patient accounts receivable at March 31, 2012, compared to 44% of net patient accounts receivable at December 31, 2011. The Company’s writeoffs, net of recoveries were $906,000 for the three months ended March 31, 2012, compared to $305,000 for the same period of 2011. The increase in write-offs was the result of writing off claims earlier based on historical collection experience.
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The Company’s process for determining the appropriate level of the allowance for doubtful accounts involves judgment, and considers such factors as the age of the underlying receivables, specific account reviews, historical collection experience, and other external factors that could affect the collectability of its receivables. Revisions to the allowance for doubtful accounts are recorded as an adjustment to bad debt expense within net revenues. Accounts are written off against the allowance for doubtful accounts when they are deemed to be uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.
The Company recognizes net patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. For uninsured patients, the Company recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy).
Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows:
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 (NBBC). Services provided include drugs-of-abuse testing services; clinical & other laboratory services, which include clinical toxicology, clinical testing for occupational health clinics, clinical testing for physician offices, pediatric lead testing, heavy metals analyses, prescription management testing, courier delivery, and medical surveillance; and clinical trial services which include central laboratory services, assay development, bio-analytical, bio-equivalence and pharmacokinetic testing. The Product Sales segment, which includes POCT (point-of-collection testing) disposable diagnostic devices, consists of MEDTOX Diagnostics, Inc. Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE®-II, PROFILE®-II A, PROFILE®-III A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-V, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, and EZ-SCREEN® Cup, in addition to a variety of other diagnostic tests for the detection of alcohol. MEDTOX Diagnostics 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 different products and services. They are managed separately as each business requires different products, services and marketing strategies.
In evaluating financial performance, management focuses on income from operations as a segment’s measure of profit or loss.
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The following is a summary of revenues from external customers for each group of products and services provided within the Product Sales segment:
Inventories consisted of the following:
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
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5. INCOME TAXES
At December 31, 2011, the Company had federal net operating loss carryforwards (NOLs) of approximately $1.1 million, which are available to offset future taxable income. The Company's federal NOLs expire in varying amounts each year from 2029 through 2030 in accordance with applicable federal tax regulations and the timing of when the NOLs were incurred. 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. The Company anticipates fully utilizing its NOLs and expects an increase in income tax payments in 2012.
Leases - The Company leases offices and facilities and office equipment under certain operating leases, which expire on various dates through October 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.
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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations and future estimates, future financial position or results, and future plans and objectives of management. Those statements in this Form 10-Q containing the words “believes”, “anticipates”, “plans”, “expects”, and similar expressions constitute forward looking statements, although not all forward looking statements contain such identifying words. Examples of forward looking statements include, but are not limited to (i) projections of, or statements regarding, future revenues, income or loss, earnings or loss per share, capital expenditures, capital structure, pricing, income tax payments and usage of NOLs, margins and other financial items, (ii) statements regarding our plans and objectives and the impacts thereof, including planned introductions of new products and services, estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, controlling costs, and pursuing synergistic acquisitions, (iii) estimates of market sizes and market opportunities, (iv) statements regarding economic conditions, (v) statements regarding our reliance on expected positive cash flow from operations and our Line of Credit to fund future working capital and asset purchases, the sufficiency of our capital resources to fund our planned operations through 2012, and our belief 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, and (vi) statements of assumptions underlying other statements and statements about our business.
The forward looking statements contained in this Form 10-Q are based on our current expectations, assumptions, estimates and projections about our Company and its businesses. All such forward looking statements involve significant risks and uncertainties, including those risks identified in the next paragraph, many of which are beyond our control. Although we believe that the assumptions underlying our forward looking statements are reasonable, any of the assumptions could prove inaccurate. Actual results may differ materially from those indicated by the forward looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward looking statements to reflect actual results or changes in assumptions, expectations, or projections. In addition, our financial and performance outlook concerning future revenues, margins, earnings, earnings per share, and other operating or performance results does not include the impact of any future acquisitions, future acquisition-related expenses or accruals, or any future restructuring or other charges that may occur from time to time due to management decisions and changing business circumstances and conditions.
The following is a listing of some of the important factors that could cause actual results to differ materially from those indicated by the forward looking statements contained in this Form 10-Q:
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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.
We 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 (unaudited).
Our “Laboratory Services” business segment includes the activities of our wholly-owned subsidiary, MEDTOX Laboratories, Inc. MEDTOX Laboratories, Inc. engages in drugs-of-abuse testing services, providing these services to private and public companies, drug treatment counseling centers, criminal justice facilities, occupational health clinics and hospitals, as well as third party administrators.
MEDTOX Laboratories, Inc. also provides clinical and other laboratory services which consist of clinical toxicology, clinical testing for occupational health clinics, and heavy metal, trace element and solvent analyses. We provide these services to hospitals, clinics, HMOs 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. We recently expanded our clinical & other laboratory services to include laboratory tests used by physicians and other healthcare providers for the purpose of diagnosing or treating disease or illness or the assessment of health in humans. Testing is performed on blood, body fluids or tissues. Our comprehensive clinical laboratory services include clinical chemistry, hematology, coagulation, urinalysis, immunology/serology (viruses, infectious diseases, immune system), immunohematology (blood typing, antibody screens), microbiology (bacteria, parasites), anatomical pathology/cytology (tissue biopsies, cancer), molecular diagnostics (infectious diseases, genetic disorders) and sub-specialties of these categories. We also provide services in the areas of logistics management, data management and program management. These services support our underlying business of laboratory analysis and provide added value to our clients.
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MEDTOX Laboratories, Inc. also provides clinical trial services which includes central laboratory services, assay (test) development, bio-analytical, bio-equivalence and pharmacokinetic testing. Central laboratory services include tests that are used to monitor the safety and efficacy of a drug. These tests or “safety labs” include tests that are performed in our general clinical laboratory and pathology laboratory such as clinical chemistries (liver function, kidney function, cardiac and bone), hematology (blood count), immunology (immune status), and flow cytometry (cell identification). Assay development, bio-analytical and bio-equivalence studies are performed in our bio-analytical laboratory. These tests are conducted using methodologies such as immunoassay, gas chromatography, high performance liquid chromatography, gas chromatography/mass spectrometry and tandem mass spectrometry. Clients for our clinical testing services include clinical trial sponsors (pharmaceutical and biotech companies), clinical research organizations (CROs), research organizations, and investigators with trial management, patient recruitment/enrollment and site management.
The NBBC is a wholly-owned limited liability company formed for the sole purpose of acquiring the facilities in St. Paul, Minnesota, where our Laboratory Services administrative offices and laboratory operations are located.
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 POCT diagnostic drug screening devices, such as our PROFILE®-II, PROFILE®-II A, PROFILE®-III A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-IV, PROFILE®-V, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, and EZ-SCREEN® Cup, in addition to other diagnostic tests for the detection of alcohol. 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 facilities.
Key Trends Influencing Our Operating Results
Our 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:
Economic Uncertainties Causing Variability in Testing Volumes in the Drugs-of-Abuse Business
In the first quarter of 2012, testing volume from our existing workplace drugs-of-abuse clients was lower than in the prior year period, which we primarily attributed to lower new job creation and reduced employment levels and corresponding drops in hiring caused by economic uncertainties. We feel economic uncertainties may continue to cause variability in our workplace drugs-of-abuse testing volume in the foreseeable future.
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. We have continued to experience increased price competition for certain diagnostic testing devices, particularly in the probation, parole and rehabilitation market.
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Our strategy is to drive profitable growth by building market share, leveraging our existing infrastructure and technical expertise, and driving innovation. We maintain a disciplined culture, focused on the successful execution of our strategy and plans.
Building Market Share
We have solid niche positions in large markets, relative to our size, that allow us to build market share by offering high quality products and services that are delivered rapidly, priced competitively, and supported by excellent customer service and value-added services. Our value-added services include data management, collection site management, training, technical support and expertise, as well as review of drug testing policies for clients.
Our success in penetrating new accounts has represented a significant component of our growth in market share. Over the past few years, we have expanded our number of sales representatives which has increased our business from new accounts and helps offset risks from uncertain economic conditions that may cause lower activity from existing workplace drugs-of-abuse clients.
Leveraging Existing Infrastructure and Technical Expertise
We leverage our existing infrastructure and technical expertise to facilitate top line growth and improve operating margins.
We expanded our clinical laboratory capabilities to include clinical and anatomic pathology, microbiology, molecular diagnostics, and other specialized testing capabilities. This expansion leverages existing capabilities and opens up new revenue opportunities by offering full-service testing capabilities to the physician office market.
Our LEAN and Six-Sigma initiatives support our effort to leverage existing infrastructure by improving quality and productivity, cutting costs, and increasing throughput. LEAN is a highly disciplined process that helps us focus on reducing waste and eliminating unnecessary steps in our business processes. Our Six-Sigma initiatives address quality and variability within processes. While all key departments in the Laboratory Services and Product Sales segments have now been through initial LEAN processes, as an organization we recognize that LEAN is an ongoing philosophy, not a project to be “finished.”
We have continuously introduced a number of innovative products and services, including:
In 2011, we introduced a new “self-contained” rapid drug testing device, the EZ-SCREEN® Cup. This cup can be used in both the government and workplace markets. Designed to meet the needs of non-laboratory personnel in order to easily run a drug test with minimal urine handling, the new cup also reduces the chance of specimens leaking during transit to the laboratory due to a new lid design.
We have also continued the expansion of our prescription management business. We offer a comprehensive testing program serving this market under the name ToxAssure®.
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Critical Accounting Policies
There were no significant changes to our critical accounting policies during the quarter ended March 31, 2012 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
Results of Operations
In evaluating our financial performance, our management has primarily focused on the following objectives: revenue growth, maximizing operating income, increasing our cash flows and strengthening our balance sheet. The first two of these objectives are 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 margin and reduced selling, general and administrative (SG&A) expense as a percentage of revenues. As discussed below, during the first quarter of 2012, we made positive strides on all three fronts.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Our Laboratory Services segment includes revenues from drugs-of-abuse testing services, clinical & other laboratory services and clinical trial services. Revenues for the three months ended March 31, 2011 reflect the adjustment of $639,000 for the adoption of new accounting guidance for patient service bad debt. See Note 1 of Notes to Consolidated Financial Statements (unaudited).
Our revenues from drugs-of-abuse testing increased 10% to $10.6 million in the first quarter of 2012 due to strong revenue growth from new clients of 14%, partially offset by a 4% decline in revenues from existing clients. Revenues from our existing client base continue to be negatively impacted by economic conditions. While economic conditions may continue to have a negative impact on laboratory drugs-of-abuse testing volumes from our existing client base, we have demonstrated a consistent ability to add new business year over year. Pricing for our workplace drugs-of-abuse testing services tends to be fairly stable overall; however, the average price per testing specimen can vary slightly from quarter-to-quarter. Test price can vary by client based on the percentage of samples that test positive for drugs-of-abuse and the average number of samples per shipment.
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Revenues in our clinical and other laboratory services increased 25% to $9.2 million in the first quarter of 2012 due to continued strong growth generated by our expanded clinical laboratory capabilities and diversification initiatives, including testing for prescription management.
Revenues in clinical trial services decreased 6% to $2.4 million in the first quarter of 2012 compared to a very strong first quarter of 2011. Revenues from clinical trial services can fluctuate from quarter-to-quarter based on the project nature, size, and the actual timing of clinical trials.
Our Product Sales segment includes revenues from point-of-collection on site testing products (POCT), contract manufacturing services and other diagnostic products. Sales of POCT products, which consist of the PROFILE®-II, PROFILE®-II A, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-III, PROFILE®-III A, PROFILE®-V, VERDICT®-II and SURE-SCREEN®, and EZ-SCREEN® Cup on-site test kits and other ancillary products for the detection of abused substances, increased 15% to $5.6 million in the first quarter of 2012. The increase was due to an increase in revenues in the workplace drugs-of-abuse and government markets with our newly introduced EZ-SCREEN® cup device and increased sales of Profile®-V sold into the hospital market with our MEDTOXScan® Reader. Overall, pricing for our POCT devices was slightly higher than the prior year period.
Sales of contract manufacturing services increased 20% to $0.6 million in the first quarter of 2012. We have been phasing out of this business. However, our one remaining customer was unable to convert to internal manufacturing at December 31, 2011 and purchased $0.6 million of product in the first quarter of 2012 to have inventory while they convert internally. The equipment related to this product line has now been sold and shipped to the customer and we have finally exited this business in April 2012.
Cost of Revenues and Gross Margin
* Cost of services as a percentage of Laboratory Services revenues
** Cost of sales as a percentage of Product Sales revenues
Consolidated gross margin increased to 41.5% of revenues in the first quarter of 2012, compared to 39.1% of revenues for the same period in 2011.
Laboratory Services gross margin was 36.5% in the first quarter of 2012, up from 33.6% in the first quarter of 2011. The increase in gross margin was due to a change in test mix and an increase in volume. Gross margin from Product Sales increased to 58.5% in the first quarter of 2012, up slightly from 58.2% in the same period of 2011.
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Selling, General and Administrative Expenses>. Selling, general and administrative (SG&A) expenses increased to $8.8 million, or 30.8% of revenues in the first quarter of 2012, compared to $8.0 million, or 31.8% of revenues in the first quarter of 2011. The increase was primarily due to increased sales and marketing expenses and increased incentive-based compensation. SG&A expenses for the three months ended March 31, 2011 reflect the adjustment of $639,000 for the adoption of new accounting guidance for patient service bad debt. See Note 1 of Notes to Consolidated Financial Statements (unaudited).
Research and Development Expenses. >Research and development expenses increased 16% to $689,000 in the first quarter of 2012 and were held constant at 2.4% of revenues. The increase was due to increased spending for on-going projects in both our Product Sales and Laboratory Services segments.
Liquidity and Capital Resources
Our working capital requirements have been funded primarily by various combinations of profitable operations and cash received from our revolving credit facility. Cash and cash equivalents at March 31, 2012 were $7.0 million, compared to $5.3 million at December 31, 2011.
Net cash provided by operating activities was $2.7 million for the three months ended March 31, 2012 compared to $1.3 million for the same period of 2011. The increase in the first quarter of 2012 was attributable to an increase in net earnings, excluding non-cash charges such as depreciation and amortization, deferred compensation, deferred income taxes and provision for losses on accounts receivable.
Net cash used in investing activities, consisting of capital expenditures, was $1.0 million for the three months ended March 31, 2012 compared to $1.1 million for the same period of 2011. In both periods, these expenditures included equipment purchased and costs incurred to upgrade equipment, improve efficiencies and increase service levels to our clients.
We anticipate fully utilizing our net operating loss carryforwards and expect an increase in income tax payments in 2012.
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Net cash provided by financing activities was $29,000 for the three months ended March 31, 2012 compared to net cash used in financing activities of $428,000 in the prior year period. In the first three months of 2011, we repurchased 88,975 shares of our common stock in the open market for $1.4 million which were placed in trust to fund our Long-Term Incentive Plan. In the first three months of 2011, we also received net proceeds from our line of credit of $1.0 million.
We are a party to a credit security agreement (the "Wells Fargo Credit Agreement") with Wells Fargo Bank, National Association (the “Bank”) maturing on August 31, 2013. The Wells Fargo Credit Agreement, as amended, consists of a revolving line of credit ("Line of Credit") of up to $12.0 million bearing interest at a fluctuating rate of 1.95% above the daily three month LIBOR, as defined and calculated by the Bank.
Subject to certain conditions, the Wells Fargo Credit Agreement also provides for the issuance of letters of credit which, if drawn upon, would be deemed advances under the Line of Credit. We are required to pay a fee equal to 0.25% per annum on the average daily unused amount of the Line of Credit. We have granted the Bank a first priority security interest in all of the Company’s accounts receivable, other rights to payment, general intangibles, inventory, and equipment to secure all indebtedness of the Company to the Bank.
Extensions of credit under the Wells Fargo Credit Agreement are subject to certain conditions. The Wells Fargo Credit Agreement also requires us to comply with certain financial covenants, including maintaining, on a consolidated basis:
We were in compliance with all of the financial covenants under the Wells Fargo Credit Agreement at March 31, 2012.
We are relying on expected positive cash flow from operations and our Line of Credit to fund our future working capital and asset purchases. At March 31, 2012, we had total borrowing capacity of $12.0 million on our Line of Credit. We did not have an outstanding balance on our Line of Credit at March 31, 2012.
In the short term, we believe that the aforementioned resources will be sufficient to fund our planned operations through 2012. While there can be no assurance that the available capital will be sufficient to fund our future operations beyond 2012, 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 revenues from sales of our existing products and services, (iii) developing new products and services, as well as (iv) selectively pursuing 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.
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Off-Balance Sheet Transactions
The Company does 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 the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Inflation and Changing Prices
The impact of inflation and changing prices on the Company has been primarily limited to salary, laboratory and operating supplies, fuel charges and rent increases and has historically not been material to the Company’s operations. In the future, the Company may not be able to increase the prices of laboratory testing by an amount sufficient to cover the cost of inflation, although the Company is 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.
The Company believes that the laboratory testing business is subject to seasonal fluctuations in pre-employment screening. These seasonal fluctuations include reduced volume in the 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 flows.
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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in our market risk during the quarter ended March 31, 2012. For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 4: CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1A: RISK FACTORS.> There have been no material changes to our risk factors during the quarter ended March 31, 2012. For additional information refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.
Executive Salaries for 2012
On February 13, 2012, the Compensation Committee of the Board of Directors of the Company (the “Committee”) approved 2012 base salaries for the executive officers, effective April 1, 2012, as set forth below:
Target Financial Objectives for Fiscal Year 2012 under the Annual Incentive Plan and Long Term Incentive Plan
On February 13, 2012, the Committee approved weighted target financial objectives for the Company’s 2012 Annual Incentive Plan and Long-Term Incentive Plan (LTIP). Awards will be based on the target payouts set forth below, which are expressed as a percentage of base salary. Specific payments to individuals could exceed the following targets if the Company achieves more than 100% of its target financial objectives, but in no event will the Annual Incentive Payment or LTIP individually exceed two times base salary.
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Employees must be employed by the Company as of December 31, 2012, and at the time of the awards in order to participate in the Plans, and awards may be adjusted on a pro rata basis to the extent any employee is employed for only a portion of the year 2012. The Chief Executive Officer will recommend individual awards for all participating employees (except for the Chief Executive Officer) for approval by the Committee based on an assessment of each individual’s performance. The Committee may approve or disapprove any recommended awards in whole or in part in its sole discretion. The Committee shall determine the award for the Chief Executive Officer based on an assessment of his performance for 2012.
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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.
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MEDTOX SCIENTIFIC, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2012
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