-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RsDtnoCn9E4mTpgISX7VU26OIJWkdt1h0wvUdJDkw1JoEqrud3rCPMFv0TUMRRck LK9S0wM/84MTDSOhtNIc8A== 0000739944-07-000065.txt : 20071030 0000739944-07-000065.hdr.sgml : 20071030 20071030171228 ACCESSION NUMBER: 0000739944-07-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071030 DATE AS OF CHANGE: 20071030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTOX SCIENTIFIC INC CENTRAL INDEX KEY: 0000739944 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 953863205 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11394 FILM NUMBER: 071200361 BUSINESS ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 BUSINESS PHONE: 6126367466 MAIL ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 FORMER COMPANY: FORMER CONFORMED NAME: EDITEK INC DATE OF NAME CHANGE: 19940902 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL DIAGNOSTICS INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10q3qtr07.htm 10-Q

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2007

 

OR

 

 

( )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period

to

 

Commission file number 1-11394

 

MEDTOX SCIENTIFIC, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

95-3863205

(State or other jurisdiction of

(I.R.S. Employer

incorporation 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [

]

Accelerated filer [

]

Non-accelerated filer [ 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 ]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at October 16, 2007

Common Stock, $0.15 par value per share

 

8,421,850

 

 


MEDTOX SCIENTIFIC, INC.

 

INDEX

 

Page

 

 

Consolidated Statements of Income – Three and

 

Consolidated Balance Sheets – September 30, 2007

 

Consolidated Statements of Cash Flows – Nine

 

 

 

Item 2:

 

Management's Discussion and Analysis of

 

Item 3:

 

 

Item 4:

 

 

 

 

Proceeds

27

 

 

Signatures

28

 

 

 

2

 


PART I  FINANCIAL INFORMATION

Item 1:

FINANCIAL STATEMENTS (UNAUDITED)

 

MEDTOX SCIENTIFIC, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Laboratory services

$ 15,723

 

$ 14,725

 

$ 46,499

 

$ 40,540

Product sales

5,036

 

3,995

 

14,062

 

11,929

 

20,759

 

18,720

 

60,561

 

52,469

 

 

 

 

 

 

 

 

COST OF REVENUES:

 

 

 

 

 

 

 

Cost of services

9,322

 

8,555

 

27,431

 

24,364

Cost of sales

1,936

 

1,525

 

5,310

 

4,585

 

11,258

 

10,080

 

32,741

 

28,949

GROSS PROFIT

9,501

 

8,640

 

27,820

 

23,520

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general and administrative

5,852

 

5,415

 

17,726

 

15,429

Research and development

599

 

579

 

1,964

 

1,570

 

6,451

 

5,994

 

19,690

 

16,999

INCOME FROM OPERATIONS

3,050

 

2,646

 

8,130

 

6,521

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Interest expense

(42

)

(99

)

(139

)

(372)

Other expense, net

(136

)

(143

)

(280

)

(429)

 

(178

)

(242

)

(419

)

(801)

INCOME BEFORE INCOME TAX EXPENSE

2,872

 

2,404

 

7,711

 

5,720

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

(933

)

(928

)

(2,456

)

(2,208)

 

 

 

 

 

 

 

 

NET INCOME

$ 1,939

 

$ 1,476

 

$ 5,255

 

$ 3,512

 

 

 

 

 

 

 

 

BASIC EARNINGS PER COMMON SHARE

$ 0.23

 

$ 0.18

 

$ 0.63

 

$ 0.43

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER COMMON SHARE

$ 0.22

 

$ 0.17

 

$ 0.59

 

$ 0.40

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:

 

 

 

 

 

 

 

Basic

8,397,882

 

8,178,489

 

8,286,551

 

8,161,176

Diluted

9,010,490

 

8,802,279

 

8,891,581

 

8,775,285

See Notes to Consolidated Financial Statements (Unaudited).

 

 

3


MEDTOX SCIENTIFIC, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

September 30,

2007

 

December 31,

2006

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

$

2,003

 

$

1,261

 

Accounts receivable:

 

 

 

 

 

 

Trade, less allowance for doubtful accounts ($318 in 2007 and $280 in 2006)

 

15,191

 

 

10,797

 

Other

 

159

 

 

270

 

Total accounts receivable

 

15,350

 

 

11,067

 

Inventories

 

3,518

 

 

3,538

 

Prepaid expenses and other

 

739

 

 

1,314

 

Deferred income taxes

 

1,527

 

 

1,527

 

Total current assets

 

23,137

 

 

18,707

 

BUILDING, EQUIPMENT AND IMPROVEMENTS, net

 

24,106

 

 

19,572

 

GOODWILL

 

15,967

 

 

15,967

 

OTHER INTANGIBLE ASSETS, net

 

660

 

 

873

 

DEFERRED INCOME TAXES, net

 

2,237

 

 

4,351

 

OTHER ASSETS

 

702

 

 

404

 

TOTAL ASSETS

$

66,809

 

$

59,874

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

$

3,211

 

$

2,164

 

Accrued expenses

 

7,880

 

 

6,037

 

Current portion of long-term debt

 

677

 

 

677

 

Current portion of capital leases

 

6

 

 

14

 

Total current liabilities

 

11,774

 

 

8,892

 

LONG-TERM DEBT, net of current portion

 

1,148

 

 

2,055

 

OTHER LONG-TERM LIABILITIES

 

1,668

 

 

981

 

LONG-TERM PORTION OF CAPITAL LEASES, net of current portion

 

-

 

 

2

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding

 

-

 

 

-

 

Common stock, $0.15 par value; authorized shares, 28,000,000; issued shares, 8,514,281 in

 

 

 

 

 

 

2007 and 8,213,842 in 2006

 

1,276

 

 

1,232

 

Additional paid-in capital

 

85,783

 

 

85,683

 

Accumulated deficit

 

(31,229

)

 

(36,484

)

Common stock held in trust, at cost, 244,127 shares in 2007 and 177,424 shares in 2006

 

(2,611

)

 

(1,487

)

Treasury stock, at cost, 103,431 shares in 2007 and 2006

 

(1,000

)

 

(1,000

)

Total stockholders' equity

 

52,219

 

 

47,944

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

66,809

 

$

59,874

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

4


MEDTOX SCIENTIFIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

Nine Months Ended

 

 

September 30, 2007

 

September 30, 2006

 

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

5,255

 

$

3,512

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

2,910

 

 

2,533

 

Provision for losses on accounts receivable

 

193

 

 

291

 

Loss on sale of equipment

 

40

 

 

36

 

Deferred and stock-based compensation

 

685

 

 

678

 

Deferred income taxes

 

2,114

 

 

1,869

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

(4,476

)

 

(3,264

)

Inventories

 

20

 

 

135

 

Prepaid expenses and other current assets

 

575

 

 

450

 

Other assets

 

(303

)

 

36

 

Accounts payable and accrued expenses

 

2,056

 

 

447

 

Net cash provided by operating activities

 

9,069

 

 

6,723

 

 

 

 

 

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of building, equipment and improvements

 

(6,380

)

 

(3,133

)

Proceeds from sale of equipment

 

-

 

 

21

 

Purchase of customer list

 

-

 

 

(11

)

Net cash used in investing activities

 

(6,380

)

 

(3,123

)

 

 

 

 

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITIES:

 

 

 

 

 

 

Net proceeds on revolving credit facility

 

-

 

 

500

 

Proceeds from long-term debt

 

-

 

 

3,383

 

Principal payments on long-term debt

 

(907

)

 

(6,351

)

Principal payments on capital leases

 

(10

)

 

(12

)

Purchase of common stock for incentive plan

 

(1,124

)

 

(799

)

Purchase of treasury stock

 

-

 

 

(870

)

Net proceeds from sale of common stock

 

320

 

 

271

 

Payment of taxes from traded shares

 

(226

)

 

(192

)

Net cash used in financing activities

 

(1,947

)

 

(4,070

)

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

742

 

 

(470

)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

1,261

 

 

1,312

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

2,003

 

$

842

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

$

145

 

$

347

 

Income taxes, net of refunds received

 

470

 

 

140

 

 

 

 

 

 

 

 

Supplemental noncash activities:

 

 

 

 

 

 

Asset additions and related obligations

 

886

 

 

275

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

5


MEDTOX SCIENTIFIC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2007

 

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 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 and nine-month periods ended September 30, 2007 are not necessarily indicative of the results that may be attained for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

 

New Accounting Standards:

 

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible financial instruments at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for the Company as of January 1, 2008. The Company has not yet evaluated the impact of adopting SFAS No. 159 on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and codifies fair value related guidance previously issued within generally accepted accounting principles. Although this Statement does not require any new fair value measurements, its application may, for some entities, change current practice. SFAS No. 157 is effective for the Company as of January 1, 2008. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 157.

 

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, courier delivery, and specimen collection services. 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, PROFILE-II ER®, PROFILE®-III ER, MEDTOXScan®, VERDICT®-II and SURE-SCREEN®, in addition to a variety of agricultural testing products and other diagnostic tests for the detection of alcohol. MEDTOX Diagnostics, Inc. also provides contract manufacturing services in its Food and Drug Administration (FDA) registered/ISO 13845 certified facility.

 

 

 

6

 


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.

 

(In thousands)

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2007

 

2006

 

2007

 

2006

Laboratory Services:

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

15,723

 

$

14,725

 

$

46,499

 

$

40,540

Depreciation and amortization

 

826

 

 

728

 

 

2,484

 

 

2,153

Income from operations

 

1,973

 

 

2,220

 

 

5,599

 

 

5,019

Segment assets

 

54,391

 

 

47,348

 

 

54,391

 

 

47,348

Capital expenditures for segment assets

 

2,276

 

 

1,390

 

 

5,681

 

 

2,906

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

5,036

 

$

3,995

 

$

14,062

 

$

11,929

Depreciation and amortization

 

151

 

 

122

 

 

426

 

 

380

Income from operations

 

1,077

 

 

426

 

 

2,531

 

 

1,502

Segment assets

 

8,655

 

 

6,640

 

 

8,655

 

 

6,640

Capital expenditures for segment assets

 

309

 

 

100

 

 

699

 

 

225

 

 

 

 

 

 

 

 

 

 

 

 

Corporate (unallocated):

 

 

 

 

 

 

 

 

 

 

 

Other expense

$

(178)

 

$

(242)

 

$

(419)

 

$

(801)

Deferred tax assets, net

 

3,764

 

 

6,242

 

 

3,764

 

 

6,242

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

20,759

 

$

18,720

 

$

60,561

 

$

52,469

Depreciation and amortization

 

977

 

 

850

 

 

2,910

 

 

2,533

Income from operations

 

3,050

 

 

2,646

 

 

8,130

 

 

6,521

Other expense

 

(178)

 

 

(242)

 

 

(419)

 

 

(801)

Income before income tax expense

 

2,872

 

 

2,404

 

 

7,711

 

 

5,720

Total assets

 

66,809

 

 

60,230

 

 

66,809

 

 

60,230

Capital expenditures for assets

 

2,585

 

 

1,490

 

 

6,380

 

 

3,131

              

 

 

 

7

 


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,

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

Workplace drugs-of-abuse

$

10,430

 

$

9,250

 

$

30,400

 

$

26,192

Specialty Laboratory Services

 

5,293

 

 

5,475

 

 

16,099

 

 

14,348

 

$

15,723

 

$

14,725

 

$

46,499

 

$

40,540

 

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,

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

POC on site testing products

$

4,404

 

$

3,450

 

$

12,249

 

$

10,048

Contract manufacturing services

 

389

 

 

380

 

 

1,146

 

 

1,403

Other diagnostic products

 

243

 

 

165

 

 

667

 

 

478

 

$

5,036

 

$

3,995

 

$

14,062

 

$

11,929

                

 

3.

INVENTORIES

 

Inventories consisted of the following:

            

(In thousands)

September 30, 2007

 

December 31, 2006

 

 

 

 

 

 

Raw materials

$

733

 

$

871

Work in process

 

337

 

 

270

Finished goods

 

441

 

 

539

Supplies, including off-site inventory

 

2,007

 

 

1,858

 

$

3,518

 

$

3,538

 

 

 

 

8

 


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,

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

Net income (A)

$

1,939

 

$

1,476

 

$

5,255

 

$

3,512

Weighted average number of basic common shares outstanding (B)

 

8,397,882

 

 

8,178,489

 

 

8,286,551

 

 

8,161,176

Dilutive effect of stock options computed based on the treasury stock method

 

612,608

 

 

623,790

 

 

605,030

 

 

614,109

Weighted average number of diluted common shares outstanding (C)

 

9,010,490

 

 

8,802,279

 

 

8,891,581

 

 

8,775,285

Basic earnings per common share (A/B)

$

0.23

 

$

0.18

 

$

0.63

 

$

0.43

Diluted earnings per common share (A/C)

$

0.22

 

$

0.17

 

$

0.59

 

$

0.40

 

5. INCOME TAXES

 

The Company recorded a $110,000 and $120,000 tax benefit in the second and third quarters of 2007, respectively, due to permanent book to tax differences related to the disqualifying disposition upon the exercise of incentive stock options. In the first quarter of 2007, the Company recorded a $141,000 tax benefit from additional net operating loss carryforwards determined to be available to the Company.

 

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109,” (FIN 48) which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company adopted FIN 48 effective January 1, 2007. The cumulative effect of applying this Interpretation did not result in any adjustment to retained earnings as of January 1, 2007. At September 30, 2007 and January 1, 2007, the Company had $331,000 of unrecognized tax benefits, all of which would affect the effective tax rate if recognized. It is not possible to reasonably estimate any possible change in the unrecognized tax benefits within the next 12 months. The tax years 2001-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

In conjunction with the adoption of FIN 48, the Company began recording income tax related interest expense and interest income in income tax expense in its Consolidated Statements of Income. In prior periods, such interest expense or income was recorded in interest expense or interest income. Penalties, if any, will be recorded as a component of income tax expense. At September 30, 2007 and January 1, 2007, the Company had approximately $73,000 and $53,000, respectively, of accrued interest related to uncertain tax positions included in the Consolidated Balance Sheets.

 

At December 31, 2006, the Company had federal and state net operating loss carryforwards (NOLs) of approximately $16.1 million and $15.7 million, respectively, which are available to offset future taxable income. The Company's federal and state NOLs expire in varying amounts each year from 2007 through 2025 in accordance with applicable federal and state tax regulations and the timing of when the NOLs were incurred.

 

 

9

 


For financial reporting purposes, a state valuation allowance has been recorded to offset deferred tax assets that, more likely than not, will not be realized based on the Company’s filing status in certain states. 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.

 

 

6.

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 the facility’s 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.

 

 

7.

SUBSEQUENT EVENT

 

On October 25, 2007, the Company entered into the Third Amendment to the Credit Agreement with Wells Fargo Bank, National Association (the “Bank”). The Third Amendment modifies certain terms and conditions of the Wells Fargo Credit Agreement as follows:

 

Extends the last day on which the Bank will make advances under the line of credit and the capital equipment note from November 1, 2007 to November 1, 2009.

 

Increases the loan limit for the purchase of capital equipment from $2.0 million to $4.9 million.

 

Removes the financial covenant requiring the maintaining of a current ratio of not less than 1.3 to 1.0 at any time.

 

Increases the financial covenant requiring a tangible net worth of not less than $22,500,000 at any time to $30,000,000 at any time.

 

 

 

10

 


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.

 

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:

 

 

increased competition, including price competition

 

 

changes in demand for our services and products by our customers

 

 

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

 

 

technological or regulatory developments, evolving industry standards, that could affect or delay the sale of our products

 

 

our ability to attract and retain experienced and qualified personnel

 

 

risks and uncertainties with respect to our patents and proprietary rights, including:

 

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

 

 

 

11

 


 

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

 

 

our inability to obtain sufficient financing to continue to sustain or expand our operations

 

 

adverse results in litigation matters

 

 

our inability to continue to develop innovative products and services

 

 

an unforeseen decrease in the acceptance of current new products and services

 

 

flucuations in clinical trial activities

 

The following additional factors could cause actual results to differ materially from those indicated by the forward looking statements contained in this Form 10-Q:

 

 

The failure of the pace of reader installations to accelerate in 2008 after the slowing of installations in the third quarter of 2007 and the projected continued slowing of installations in the fourth quarter of 2007 due to design and software modifications to improve the reader’s performance.

 

 

The expected increase in sales of POCT products fails to materialize.

 

 

Our inability to continue the revenue growth, improved gross margins and reduced selling, general and administrative expenses attained in the first three quarters of 2007.

 

The above listings 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 Overview

 

 

Our Business

 

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.

 

 

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

 

 

 

12

 


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.

 

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.

 

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 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®-III, PROFILE-II ER®, PROFILE®-III ER, MEDTOXScan® Reader, VERDICT®-II, and SURE-SCREEN® products, in addition to a variety of agricultural testing products and 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 Laboratory Services, Drugs-of-Abuse Business

 

In the past, we have experienced a decrease in testing volume from our existing workplace drugs-of-abuse clients, which we primarily attributed to lower new job creation and reduced employee turnover caused by economic uncertainties. In the first nine months of 2007, testing volume from our existing workplace drugs-of-abuse clients was slightly higher than the prior year period. However, 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. As the number of firms marketing diagnostic tests has grown, we have experienced increased price competition for certain diagnostic testing devices, particularly in the probation, parole and rehabilitation market.

 

 

 

13

 


Our Strategy

 

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 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. In 2006, we expanded our number of sales representatives from 19 to 35. The increase in sales representatives has increased our business from new accounts in 2007 and helps offset risks from uncertain economic conditions that may result in 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. Our LEAN and Six-Sigma initiatives support this effort 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.”

 

Driving Innovation

 

We have introduced a number of innovative products and services.

 

In 2006, we developed and introduced MEDTOXScan®, an electronic reader, which we provide to hospitals for use with our PROFILE-II ER® and PROFILE®-III ER POCT devices in hospital laboratories and emergency rooms. As of September 30, 2007, we had 368 readers that have been placed with clients in the hospital market for use or evaluation. As a result of our experience with a significant installed base and customer feedback, we have initiated certain device design and software modifications to improve the reader’s performance. These initiatives slowed installation of readers in the third quarter and this impact will likely continue into the fourth quarter. We anticipate the pace of installations to accelerate in 2008 after we release the enhanced version of the reader, although we cannot assure that this acceleration will materialize.

 

In 2005, we developed and introduced eChain®, our web-based electronic chain-of-custody and donor tracking system. We currently have over 1,300 clinics and collection sites utilizing eChain® throughout the country. These sites serve as the basis for our marketing campaign offering eChain® to national clients.

 

 

 

14

 


In 2005, we also introduced SURE-SCREEN®, our lower detection level POCT device targeted for the government and rehabilitation markets and our PROFILE®-III device, an integrated cup and testing device for sale to the workplace drug testing market.

 

ClearCourse™, another innovative solution we offer, is a comprehensive drug testing program that combines four essential components: Drug Abuse Recognition System (DARS™) training, SURE-SCREEN® on-site drug screening devices, laboratory based confirmation testing and WEBTOX® online data management.

 

Critical Accounting Policies

 

We 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, 2006. Note that the preparation of the interim, unaudited consolidated financial statements included in 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 revenues 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:

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customers' current creditworthiness, as determined by management’s review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that have been identified. While such credit losses have generally been within our historical expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have occurred in the past. Our consolidated trade accounts receivable balance at September 30, 2007 was $15.2 million, net of allowance for doubtful accounts of $0.3 million.

 

Revenue Recognition:

Revenues from Laboratory Services are recognized as earned when we have performed the applicable laboratory testing services and the results have been sent to our customers or posted to our secure website.

 

Some of our Laboratory Services revenues for certain types of tests are billed to third-party payers including insurance companies, state Medicaid and Medicare agencies. These payers 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 payers in situations where incorrect billing information was

 

 

 

15

 


submitted to us by the customer. Historically, the amounts of such incorrect billings have not been material. We estimate a discount on the billings for these tests and recognize revenues and related accounts receivable at a net amount, after discount, in order to state revenues and accounts receivable at the amount expected to be paid. While we believe that estimated discounts and the related net revenues 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 contracted rates with payers and historical discounts when estimating future discounts on a monthly basis.

 

Revenues from Product Sales are recognized FOB shipping point net of an allowance for estimated returns. When shipment occurs, the sales price is fixed and determinable, and collection of the resulting receivable is reasonably assured.

 

Off-Site Supplies Inventory:

Off-site supplies represent collection kits and forms located at collection sites throughout the United States used by Laboratory Services’ customers to submit specimens for testing services. These inventories are recorded at the lower of historical cost or market. At September 30, 2007, off-site inventory was $1.2 million. The process for valuing off-site inventory involves making significant assumptions regarding the average time that a collection site uses the inventory, as well as the amount of inventory expected to be scrapped.

 

Goodwill and Other Intangible Assets:

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and between annual test dates in certain circumstances. We perform our annual impairment test for goodwill and other intangible assets in the fourth quarter of each year. In assessing the recoverability of goodwill and other intangible assets, projections regarding estimated future cash flows and other factors are made to determine the fair value of the respective assets. If these estimates or related projections change in the future, we may be required to record impairment charges for these assets in future periods.

 

Accounting for Income Taxes:

As part of the process of preparing the unaudited consolidated interim financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and tax planning strategies, and to the extent management believes that recovery is not likely, we must establish a valuation allowance. To the extent we increase or decrease the valuation allowance in a period, we must include an expense or benefit within the tax provision in the consolidated statement of operations.

 

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 December 31, 2006, we had a state valuation allowance on deferred tax assets of approximately $57,000, which represents the portion of certain state NOL carryforwards that will more likely than not expire unused in future years. The valuation allowance is based on management’s estimate of future taxable income and the period over which NOLs will be recoverable. 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.

 

 

 

16

 


We account for uncertain tax positions in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”). The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 5 of Notes to the Consolidated Financial Statements for additional detail on our uncertain tax positions.

 

Results of Operations

 

In evaluating our financial performance, our management has primarily focused on three objectives: maximizing operating income, increasing our cash flows and strengthening 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 2007, we were able to achieve solid revenue growth and reduced selling, general and administrative (SG&A) expense as a percentage of revenues, but we experienced a decrease in gross margins in the quarter resulting primarily from reduced revenues from our higher-margin testing related to clinical trials. During the first nine months of this year, we made positive strides on all three fronts.

 

Revenues

                

 

Three Months Ended

Quarter-over-Quarter

 

September 30,

2007

% of Revenues

September 30,

2006

% of Revenues

 

$ Change

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laboratory Services

$ 15,723

75.7%

$ 14,725

78.7%

 

$ 998

7%

 

 

 

 

 

 

 

 

Product Sales

5,036

24.3%

3,995

21.3%

 

1,041

26%

 

 

 

 

 

 

 

 

 

$ 20,759

100.0%

$ 18,720

100.0%

 

$ 2,039

11%

 

 

Nine Months Ended

Year-over-Year

 

September 30,

2007

% of Revenues

September 30,

2006

% of Revenues

 

$ Change

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laboratory Services

$ 46,499

76.8%

$ 40,540

77.3%

 

$ 5,959

15%

 

 

 

 

 

 

 

 

Product Sales

14,062

23.2%

11,929

22.7%

 

2,133

18%

 

 

 

 

 

 

 

 

 

$ 60,561

100.0%

$ 52,469

100.0%

 

$ 8,092

15%

 

 

 

 

17

 


Our Laboratory Services segment includes revenues from workplace drugs-of-abuse testing and revenues from Specialty Laboratory Services. Our revenues from workplace drugs-of-abuse testing grew 13% and 16% for the three and nine month periods ended September 30, 2007, respectively. This growth was driven by an increase in sample volume from new client relationships, partially offset by a slight decrease in the average price per testing specimen. 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.

 

Revenues from our Specialty Laboratory Services for the three months ended September 30, 2007 decreased 3% to $5.3 million due to a decline in testing for clinical trial services. For the nine months ended September 30, 2007, revenues from our Specialty Laboratory Services increased 12% to $16.1 million due to strong growth in testing for our clinical trial services business and a higher average revenue per test during the first and second quarters. Revenues from clinical trial services can fluctuate from quarter-to-quarter based on the project nature, size, and the actual timing of clinical trials. In the third quarter, our pharmaceutical company clients rescheduled over $500,000 of testing into future quarters due to slower than anticipated patient enrollment. While we continue to add new clients in clinical trial services, we are also experiencing significant repeat business from existing clients. In the first quarter of 2007, we also entered into a strategic relationship with a European laboratory which gives us access to strategically located laboratories throughout Europe, Asia, India, South America, South Africa and Australia, thus enabling us to provide laboratory clinical trial services for international trials. This relationship is non-exclusive and does not include any specified testing volumes or commitments.

 

In the Product Sales segment, sales of POCT products, which consists of the PROFILE®-II, PROFILE-II ER®, PROFILE®-III ER, PROFILE®-II A, PROFILE®-III, VERDICT®-II and SURE-SCREEN® on-site test kits and other ancillary products for the detection of abused substances, increased 28% to $4.4 million and 22% to $12.2 million for the three and nine months ended September 30, 2007, respectively. This growth primarily reflected strong sales of PROFILE®-III ER, SURE-SCREEN® and PROFILE®-III devices. Overall, pricing for our POCT devices was stable during these periods. We are also continuing our introduction of our MEDTOXScan® reader for use with our PROFILE-II ER® and PROFILE®-III ER devices in the hospital market. As of September 30, 2007, we had 368 readers that have been placed with clients in the hospital market for use or evaluation. As a result of our experience with a significant installed base and customer feedback, we have initiated certain device design and software modifications to improve the reader’s performance. These initiatives slowed installation of readers in the third quarter and this impact will likely continue into the fourth quarter. The reduction in the placement of readers did not have a negative impact on the financial performance of the Product Sales segment during the quarter.

 

Additionally, in the Product Sales segment, sales of contract manufacturing services were relatively flat at $0.4 million for the three months ended September 30, 2007. For the nine months ended September 30, 2007, sales of contract manufacturing services decreased 18%, or $0.3 million, to $1.1 million. During the first quarter of 2007, our largest client experienced a product recall, unrelated to the component that we provide them. The recall has caused them to experience a loss of market share and consequently lower demand for our services. After an analysis of this product category, we have concluded that it has diminishing opportunities for us, and we will exit the contract manufacturing services business over the next 12 to 18 months. Based on the expected increased sales of higher-margin POCT products, we do not anticipate a significant impact on our results of operations from exiting this business.

 

 

 

18

 


Gross Profit

 

 

Three Months Ended

 

Quarter-over-Quarter

 

September 30,

2007

% of Revenues

September 30,

2006

% of Revenues

 

$ Change

%

Change

Cost of Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services

$ 9,322

59.3%*  

$ 8,555

58.1%*  

 

$ 767

9%

 

 

 

 

 

 

 

 

Cost of Sales

1,936

38.4%**

1,525

38.2%**

 

411

27%

 

 

 

 

 

 

 

 

 

$ 11,258

54.2%

$ 10,080

53.8%

 

$ 1,178

12%

 

 

*

Cost of services as a percentage of Laboratory Services revenues

 

**

Cost of sales as a percentage of Product Sales revenues

 

 

Nine Months Ended

 

Year-over-Year

 

September 30,

2007

% of Revenues

September 30,

2006

% of Revenues

 

$ Change

%

Change

Cost of Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services

$ 27,431

59.0%*  

$ 24,364

60.1%*  

 

$ 3,067

13%

 

 

 

 

 

 

 

 

Cost of Sales

5,310

37.8%**

4,585

38.4%**

 

725

16%

 

 

 

 

 

 

 

 

 

$ 32,741

54.1%

$ 28,949

55.2%

 

$ 3,792

13%

 

 

*

Cost of services as a percentage of Laboratory Services revenues

 

**

Cost of sales as a percentage of Product Sales revenues

 

Consolidated gross margin was 45.8% and 45.9% of revenues for the three and nine months ended September 30, 2007, respectively, compared to 46.2% and 44.8% of revenues for the same periods in 2006.

 

Laboratory Services gross margin was 40.7% for the three months ended September 30, 2007, down from 41.9% in the same period of 2006. The decrease in gross margin resulted primarily from reduced revenues from our higher-margin testing related to clinical trials. For the nine months ended September 30, 2007, gross margin from Laboratory Services increased to 41.0%, up from 39.9% in the prior year period. The margin improvement was primarily attributable to increased revenues from additional testing volume through our existing infrastructure, as well as an increase in higher margin testing relating to clinical trials.

 

Gross margin from Product Sales was 61.6% for the three months ended September 30, 2007, down slightly from 61.8% in the same period of 2006. For the nine months ended September 30, 2007, gross margin from Product Sales increased to 62.2%, up from 61.6% in the prior year period. For the nine months ended September 30, 2007, margins were positively impacted by a shift in sales mix towards the higher-margin POCT devices and away from lower-margin contract manufacturing services, which occurred during the first quarter of 2007.

 

 

 

 

19

 


Operating Expenses

 

 

Three Months Ended

 

Quarter-over-Quarter

 

September 30, 2007

% of Revenues

September 30, 2006

% of Revenues

 

$ Change

% Change

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and

administrative

$ 5,852

28.2%

$ 5,415

28.9%

 

$ 437

8%

 

 

 

 

 

 

 

 

Research and

development

599

2.9%

579

3.1%

 

20

4%

 

 

 

 

 

 

 

 

 

$ 6,451

31.1%

$ 5,994

32.0%

 

$ 457

8%

 

 

 

 

Nine Months Ended

 

Year-over-Year

 

September 30, 2007

% of Revenues

September 30, 2006

% of Revenues

 

$ Change

% Change

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and

administrative

$ 17,726

29.3%

$ 15,429

29.4%

 

$ 2,297

15%

 

 

 

 

 

 

 

 

Research and

development

1,964

3.2%

1,570

3.0%

 

394

25%

 

 

 

 

 

 

 

 

 

$ 19,690

32.5%

$ 16,999

32.4%

 

$ 2,691

16%

 

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased to $5.9 million, or 28.2% of revenues for the three months ended September 30, 2007, compared to $5.4 million, or 28.9% for the same period in 2006. For the nine months ended September 30, 2007, SG&A expenses increased to $17.7 million, or 29.3% of revenues, compared to $15.4 million, or 29.4% of revenues for the same period in 2006. The increased spending reflects an increase in sales and marketing and information technology expense.

 

Research and Development Expenses. Research and development expenses increased 4% and 25%, respectively, to $0.6 million and $2.0 million for the three and nine months ended September 30, 2007. The increase in the year-to-date period was primarily due to increased laboratory assay development expense in support of testing for clinical trials in our Laboratory Services segment. The increase was also driven by increased product development expense related to the introduction of the MEDTOXScan® reader and other peripheral materials related to the reader, as well as continuing software development upgrades in our Product Sales segment.

 

Other Expense

 

Other income and expense consists primarily of interest expense and the operating results associated with our building rental activities. These expenses decreased 26% and 48%, respectively, to $178,000 and $419,000 for the three and nine months ended September 30, 2007. The improvement resulted primarily from lower interest

 

 

 

20

 


expense related to a reduction in average debt levels. The lower expense in the year-to-date period was also due to the resolution of a previously reserved rent receivable at the New Brighton Business Center.

 

Income Taxes

 

We recorded a tax provision for the three and nine months ended September 30, 2007 based upon an effective tax rate of 32.5% and 31.9%, respectively, compared to an effective tax rate of 38.6% for the comparable periods in 2006. The lower rate in the three and nine months ended September 30, 2007 resulted from a permanent book to tax difference related to the disqualifying disposition upon the exercise of incentive stock options. The lower rate in the nine months ended September 30, 2007 was also due to a $141,000 tax benefit from additional net operating loss carryforwards determined to be available to the Company.

 

At September 30, 2007, we had a valuation allowance on deferred tax assets of approximately $57,000, which represents the portion of certain state net operating loss (NOL) carryforwards that will more likely than not expire unused in future years. Should operating results in 2007 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.

 

Liquidity and Capital Resources

 

Our working capital requirements have been funded primarily by various combinations of operations and cash received from debt financing. Cash and cash equivalents were $2.0 million at September 30, 2007 compared to $1.3 million at December 31, 2006.

 

Net cash provided by operating activities was $9.1 million for the nine months ended September 30, 2007 compared to $6.7 million for the same period of 2006. This increase was primarily due to an improvement in our operating results with only a minimal corresponding cash payment of income taxes. We experienced an increase in accounts payable and accrued expenses, primarily due to the timing of scheduled payments, which was offset by a larger increase in our trade receivables from December 31, 2006 to September 30, 2007 compared to December 31, 2005 to September 30, 2006. The significant increase in accounts receivable at September 30, 2007 was primarily due to strong August and September, 2007 sales and the timing of cash receipts.

 

Net cash used in investing activities, consisting primarily of capital expenditures, was $6.4 million for the nine months ended September 30, 2007 compared to $3.1 million for the same period of 2006. These expenditures consisted of equipment purchased and costs incurred to continue to improve efficiencies and reduce operating costs within our Laboratory Services and Product Sales businesses. In addition, in the first nine months of 2007, we invested in instrumentation and capacity in our clinical trials services business.

 

Net cash used in financing activities was $1.9 million for the nine months ended September 30, 2007, compared to $4.1 million in the prior year period. The change was primarily due to the refinancing of a portion of our mortgage loan in March 2006 (see below).

 

In the first nine months of 2007, we repurchased 32,929 shares of our common stock in the open market and 33,774 shares of our common stock from an officer and director of our Company for a combined total cost of $1.1 million. The shares repurchased were used to fund our Long-Term Incentive Plan. In the first nine months of

 

 

 

21

 


2006, we repurchased a total of 115,463 shares at a cost of $1.1 million. Of the total shares repurchased, 82,550 shares were acquired in the open market at a cost of $0.8 million and contributed to our Long-Term Incentive Plan. The remaining 32,913 shares were repurchased in the open market at a cost of $0.3 million and are being held in treasury.

 

In March of 2006, we refinanced a portion of our mortgage loan. On March 16, 2006, we entered into a Term Note (the "Note") with the Wells Fargo Bank, National Association (the "Bank") to refinance, on March 31, 2006, a portion of the outstanding balance of $5.4 million on our mortgage loan with Principal Life Insurance Company ("Principal"). We financed the March 2001 purchase of the building complex, where our Laboratory Services segment and other commercial tenants are located, with the mortgage loan from Principal. The mortgage loan had a term of ten years and was being repaid based on a 20 year amortization schedule at a fixed interest rate of 7.23% for the first five years. In accordance with the provisions of the mortgage loan, Principal had the option to adjust the interest rate, effective March 1, 2006, or to call the loan due on March 31, 2006. We elected not to accept the interest rate adjustment and refinanced $3.4 million with the Bank over a five year term in monthly installments of approximately $56,000 plus interest, commencing May 1, 2006. Interest is calculated at either (i) a variable rate of 0.5% below the prime rate or (ii) a fixed rate of 1.9% above LIBOR in effect on the first day of the applicable fixed rate term. We paid the remaining outstanding mortgage loan balance of approximately $2.0 million using approximately $1.8 million of our Line of Credit and $0.2 million of cash.

 

We are party to a credit security agreement (the "Wells Fargo Credit Agreement") with the Bank. The Wells Fargo Credit Agreement, as amended through September 30, 2007, consists of:

 

(i) a revolving line of credit ("Line of Credit"), payable on demand, of up to $8.0 million bearing interest at either a fluctuating rate of 0.5% below the Bank’s prime rate or at a fixed rate of 1.9% above LIBOR, as defined and calculated by the Bank, in effect on the first day of the applicable fixed rate term; and

 

(ii) a note or notes aggregating up to $2.0 million (loan limit) for the purchase of capital equipment bearing interest at either a rate of 0.25% below the Bank’s prime rate or at a fixed rate for a period of one, two, three, or four years at a rate of 2.25% in excess of the then current yield on U.S. Treasury Securities, adjusted to a constant maturity equal to such fixed rate period.

 

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 0.125% 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 Agreement also requires us to comply with certain financial covenants, including maintaining, on a consolidated basis:

 

A Current Ratio not less than 1.3 to 1.0 at any time, with “Current Ratio” defined as total current assets divided by total current liabilities.

 

 

 

22

 


Tangible Net Worth not less than $22,500,000 at any time, with “Tangible Net Worth” defined as the aggregate of total stockholders’ equity plus subordinated debt less any intangible assets.

 

Total Liabilities divided by Tangible Net Worth not greater than 1.75 to 1.0 at any time, with “Total Liabilities” defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with “Tangible Net Worth” as defined above.

 

A Debt Service Coverage Ratio not less than 1.5 to 1.0 as of each fiscal quarter end, determined on a rolling four-quarter basis, with “Debt Service Coverage Ratio” defined as the aggregate of net income before non-cash tax expense plus depreciation expense and amortization expense, divided by the aggregate of the current maturity of long-term debt for the previous four fiscal quarters plus current capital lease obligations for the previous four fiscal quarters.

 

On July 31, 2007, we entered into the Second Amendment to the Credit Agreement with the Bank, which modifies certain terms and conditions of the Wells Fargo Credit Agreement and removes the financial covenant limiting capital expenditures to $5.0 million in any fiscal year.

 

On October 25, 2007, we entered into the Third Amendment to the Credit Agreement with the Bank, which modifies certain terms and conditions of the Wells Fargo Credit Agreement as follows:

 

Extends the last day on which the Bank will make advances under the line of credit and the capital equipment note from November 1, 2007 to November 1, 2009.

 

Increases the loan limit for the purchase of capital equipment from $2.0 million to $4.9 million.

 

Removes the financial covenant requiring the maintaining of a current ratio of not less than 1.3 to 1.0 at any time.

 

Increases the financial covenant requiring a tangible net worth of not less than $22,500,000 at any time to $30,000,000 at any time.

 

We are relying on expected positive cash flows from operations and our Line of Credit to fund our future working capital and asset purchases. At September 30, 2007, we had total borrowing capacity of $8.0 million on our line of credit. We did not have an outstanding balance on our line of credit at September 30, 2007. The outstanding balance on our line of credit at June 30, 2007 of $0.9 million was repaid during the three month period ended September 30, 2007.

 

In the short term, we believe that the aforementioned resources will be sufficient to fund our planned operations through 2007. While there can be no assurance that the available capital will be sufficient to fund our future operations beyond 2007, 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 the 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.

 

 

 

23

 


Disclosures about Contractual Obligations and Commercial Commitments

 

The following table aggregates all contractual commitments and commercial obligations that affect the Company’s financial condition and liquidity position as of September 30, 2007:

 

 

 

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)

$ 2,021

 

$ 794

 

$ 1,227

 

$ -

 

$ -

 

 

 

 

 

 

 

 

 

 

Capital lease obligations (1)

6

 

6

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Operating leases

4,699

 

766

 

1,875

 

996

 

1,062

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

$ 6,726

 

$ 1,566

 

$ 3,102

 

$ 996

 

$ 1,062

 

(1)

Amounts include interest payments based upon contractual or prevailing interest rates.

 

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 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.

 

Seasonality

 

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.

 

Impact of New Accounting Standards

 

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose,

 

 

 

24

 


at specified election dates, to measure eligible financial instruments at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for us as of January 1, 2008. We have not yet evaluated the impact of adopting SFAS No. 159 on our financial position or results of operations.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and codifies fair value related guidance previously issued within generally accepted accounting principles. Although this Statement does not require any new fair value measurements, its application may, for some entities, change current practice. SFAS No. 157 is effective for us as of January 1, 2008. We are currently in the process of evaluating the impact of the adoption of SFAS No. 157.

 

 

 

 

 

 

 

 

 

25

 


Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There have been no material changes in our market risk during the quarter ended September 30, 2007. For additional information refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.

 

Item 4: CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls 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 to ensure that information that is required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms.

 

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.

 

 

 

 

 

26

 


PART II     OTHER INFORMATION

 

ITEM 1

LEGAL PROCEEDINGS.

Inapplicable

 

ITEM 1A

RISK FACTORS. There have been no material changes to our risk factors during the three and nine months ended September 30, 2007. For additional information refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.

 

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Inapplicable

 

ITEM 3

DEFAULTS UPON SENIOR SECURITIES. Inapplicable

 

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable

 

ITEM 5

OTHER INFORMATION. On October 25, 2007, MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. entered into the Third Amendment to the Credit Agreement with Wells Fargo Bank, National Association (the “Bank”). The Third Amendment modifies certain terms and conditions of the Wells Fargo Credit Agreement as follows:

 

 

Extends the last day on which the Bank will make advances under the line of credit and the capital equipment note from November 1, 2007 to November 1, 2009.

 

 

Increases the loan limit for the purchase of capital equipment from $2.0 million to $4.9 million.

 

 

Removes the financial covenant requiring the maintaining of a current ratio of not less than 1.3 to 1.0 at any time.

 

 

Increases the financial covenant requiring a tangible net worth of not less than $22,500,000 at any time to $30,000,000 at any time.

 

The foregoing description of the Third Amendment is qualified by the provisions of the Third Amendment, which is filed herewith as Exhibit 10.30 and incorporated herein by reference.

 

ITEM 6

EXHIBITS. See Exhibit Index on page following signature page

 

 

 

 

 

27

 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

MEDTOX SCIENTIFIC, INC

 

Signature

Title

Date

/s/ Richard J. Braun

President, Chief Executive Officer, and

October 30, 2007

Richard J. Braun

Chairman of the Board of Directors (Principal Executive Officer)

 

 

 

 

/s/ Kevin J. Wiersma

Vice President and Chief Financial Officer

October 30, 2007

Kevin J. Wiersma

(Principal Financial Officer)

 

 

 

 

/s/ Steven J. Schmidt

Vice President, Finance

October 30, 2007

Steven J. Schmidt

(Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

28

 


EXHIBIT INDEX

MEDTOX SCIENTIFIC, INC.

FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2007

 

 

Exhibit

 

Number

Description

 

 

3.1

Bylaws of the Registrant, as amended. (Incorporated by reference to exhibit 3.1 filed with the Registrant’s Report on Form 10-K dated December 31, 2005).

 

 

3.2

Restated Certificate of Incorporation, as amended. (Incorporated by reference to exhibit 3.2 filed with the Registrant’s Report on Form 10-K dated December 31, 2005).

 

 

3.3

Amended Certificate of Designations of Preferred Stock (Series A Convertible Preferred Stock) of the Registrant, filed with the Delaware Secretary of State on January 29, 1996 (incorporated by reference to Exhibit 3.1 filed with the Registrant’s report on Form 8-K dated January 30, 1996).

 

 

4.1

Rights Agreement dated September 18, 1998 between the Registrant and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 filed with the Registrant’s Report on Form 8-K dated September 21, 1998).

 

 

10.1

Second Amendment dated December 31, 1986 to Exclusive License Agreement amending and restating exclusive license granted by the Registrant to Disease Detection International, Inc. (incorporated by reference to Exhibit 10.25 filed with the Registration Statement on Form S-1 dated August 26, 1987, Commission File No. 33-15543).

 

 

10.2

Agreement regarding rights to “MEDTOX” name dated as of January 30, 1996 between the Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.38 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 1995.)**

 

 

10.3

Registrant’s Restated Equity Compensation Plan dated May 10, 2000. (Incorporated by reference to exhibit 10.46 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2000.)**

 

 

10.4

Purchase and Sale Agreement dated July 27, 2000 by and between the Registrant and NMRO, Inc. (Incorporated by reference to exhibit 10.48 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2000).

 

 

10.5

Registration Rights Agreement dated July 31, 2000 among the Registrant, certain investors, and Miller, Johnson, & Kuehn, Inc. (“MJK”). (Incorporated by reference to exhibit 10.50 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2000).**

 

 

10.6

Purchase and Sale Agreement dated December 29, 2000 by and between MEDTOX Laboratories, Inc. and PHL-OPCO, LP. (Incorporated by reference to exhibit 10.52 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2000).

 

 

10.7

Employment Agreement dated January 1, 2003, between the Registrant and Richard J. Braun. (Incorporated by reference to exhibit 10.59 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2002).**

 

 

 

 

29

 


 

10.8

Amended and Restated Nova Building Lease dated November 1, 2003 by and between Powell Enterprises and MEDTOX Diagnostics, Inc. (Incorporated by reference to exhibit 10.23 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2003).

 

 

10.9

Purchase and Sale Agreement dated July 1, 2003 by and between MEDTOX Laboratories, Inc. and CoxHealth. (Incorporated by reference to exhibit 10.26 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2003).

 

 

10.10

Registrant’s Supplemental Executive Retirement Plan dated December 21, 2004. (Incorporated by reference to exhibit 10.2 filed with the Registrant’s Report on Form 8-K dated December 22, 2004).**

 

 

10.11

Registrant’s Long-Term Incentive Plan as Amended dated July 27, 2005. (Incorporated by reference to exhibit 10.1 filed with the Registrant’s Report on Form 8-K dated July 28, 2005).**

 

 

10.12

Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005. (Incorporated by reference to exhibit 10.1 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.13

Revolving Line of Credit Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005. (Incorporated by reference to exhibit 10.2 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.14

Security Agreement: Equipment between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005. (Incorporated by reference to exhibit 10.3 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.15

Continuing Security Agreement: Rights to Payment and Inventory between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005. (Incorporated by reference to exhibit 10.4 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.16

Term Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated December 1, 2005. (Incorporated by reference to exhibit 10.5 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.17

Agreement and Acknowledgment of Security Interest between Wells Fargo Bank, MEDTOX Diagnostics, Inc., and Powell Enterprises, Inc. dated December 1, 2005. (Incorporated by reference to exhibit 10.6 filed with the Registrant’s Report on Form 8-K dated December 6, 2005).

 

 

10.18

Term Note between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.23 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2005).

 

 

10.19

Continuing Guaranty between New Brighton Business Center, LLC and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.24 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2005).

 

 

 

30

 


 

 

10.20

First Amendment to Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.25 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2005).

 

 

10.21

Negative Pledge Agreement between New Brighton Business Center, LLC and Wells Fargo Bank dated March 16, 2006. (Incorporated by reference to exhibit 10.26 filed with the Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2005).

 

 

10.22

Employment Agreement dated December 27, 2006, between the Registrant and B. Mitchell Owens. (Incorporated by reference to exhibit 10.1 filed with the Registrant’s Report on Form 8-K dated January 4, 2007).**

 

 

10.23

Employment Agreement dated December 27, 2006, between the Registrant and Susan E. Puskas. (Incorporated by reference to exhibit 10.2 filed with the Registrant’s Report on Form 8-K dated January 4, 2007).**

 

 

10.24

Employment Agreement dated December 27, 2006, between the Registrant and James A. Schoonover. (Incorporated by reference to exhibit 10.3 filed with the Registrant’s Report on Form 8-K dated January 4, 2007).**

 

 

10.25

Employment Agreement dated December 27, 2006, between the Registrant and Kevin J. Wiersma. (Incorporated by reference to exhibit 10.4 filed with the Registrant’s Report on Form 8-K dated January 4, 2007).**

 

 

10.26

Registrant’s Executive Incentive Compensation Plan dated December 27, 2006. (Incorporated by reference to exhibit 10.5 filed with the Registrant’s Report on Form 8-K dated January 4, 2007).**

 

 

10.27

Commercial Lease between MEDTOX Laboratories, Inc. and St. Paul Properties, Inc. dated July 28, 2000. (Incorporated by reference to exhibit 10.2 filed with the Registrant’s Report on Form 8-K dated May 30, 2007).

 

 

10.28

Amendment to Lease between MEDTOX Laboratories, Inc. and St. Paul Properties, Inc. dated May 25, 2007. (Incorporated by reference to exhibit 10.1 filed with the Registrant’s Report on Form 8-K dated May 30, 2007).

 

 

10.29

Second Amendment to Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated July 31, 2007. (Incorporated by reference to exhibit 10.29 filed with the Registrant’s Report on Form 10-Q dated July 31, 2007).

 

 

10.30

Third Amendment to Credit Agreement between MEDTOX Scientific, Inc., MEDTOX Diagnostics, Inc., and MEDTOX Laboratories, Inc. and Wells Fargo Bank dated October 25, 2007. *

 

 

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.*

 

 

 

31

 


 

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.*

 

 

*

Filed herewith

 

**

Denotes a management contract or compensatory plan or arrangement

 

 

 

 

32

 

 

EX-10 2 ex10-30q307.htm EXHIBIT 10.30

Exhibit 10.30

 

THIRD AMENDMENT TO CREDIT AGREEMENT

THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of October 25, 2007, by and between MEDTOX SCIENTIFIC, INC., MEDTOX DIAGNOSTICS, INC. and MEDTOX LABORATORIES, INC., each a Delaware corporation (each individually, a "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). Each reference herein to "Borrower" shall mean each and every party, collectively and individually, defined above as a Borrower.

RECITALS  

WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 1, 2005, as amended from time to time ("Credit Agreement").

WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

1.        Section 1.1 (a) is hereby amended by deleting "November 1, 2007" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "November 1, 2009." with such change to be effective upon the execution and delivery to Bank of a promissory note dated as of October 25, 2007 (which promissory note shall replace and be deemed the Revolving Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change.

2.          Section 1.2 (a) is hereby amended (a) by deleting "November 1, 2007" as the last day on which Bank will make advances under the Loan Limit, and by substituting for said date "November 1, 2009," and (b) by deleting "Two Million Dollars ($2,000,000)" as the maximum principal amount available under the Loan Limit, and by substituting for said amount "Four Million Nine Hundred Thousand Dollars ($4,900,000)".

 

 

3.

Section 1.2 (b) is hereby deleted in its entirety, and the following substituted therefor:

 

"(b)      Limitation on Borrowings. Each request for an advance under the Loan Limit shall be accompanied by Borrower's written statement as to the use of the proceeds of such advance and the source of repayment therefor and a copy of the invoice for the equipment being financed. Each such advance shall be subject to Bank's prior approval, which shall be at Bank's sole discretion, of the stated purpose and source of repayment. Each advance under the Loan Limit shall be available to a maximum of eighty percent (80%) of the purchase price of new equipment and a maximum of seventy five percent (75%) of the purchase price of used equipment (less insurance, freight, delivery, interest, taxes, installation, licenses, and similar costs)."

 


4.        Section 4.9 is hereby deleted in its entirety, and the following substituted therefor:

"SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition, on a consolidated basis, as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending December 31, 2007:

(a)           Tangible Net Worth not less than $30,000,000.00 at any time, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets.

(b)           Total Liabilities divided by Tangible Net Worth not greater than 1.75 to 1.0 at any time, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above.

(c)           Debt Service Coverage Ratio not less than 1.5 to 1.0 as of each fiscal quarter end, determined on a rolling 4-quarter basis, with "Debt Service Coverage Ratio" defined as the aggregate of Net income before non-cash tax expense plus depreciation expense and amortization expense, divided by the aggregate of the current maturity of long-term debt for the previous four fiscal quarters plus current capital lease obligations for the previous four fiscal quarters."

5.          Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.

6.          Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.

 


IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.

 

 

WELLS FARGO BANK,

MEDTOX SCIENTIFIC, INC.

NATIONAL ASSOCIATION

 

 

By: /s/ Kevin J. Wiersma

By: /s/ Steven P. Johnson

Title: V.P./CFO

Steve P. Johnson, Vice President

 

MEDTOX DIAGNOSTICS, INC.

 

By:

/s/ Kevin J. Wiersma

Title: V.P./CFO

 

MEDTOX LABORATORIES, INC.

 

By: /s/ Kevin J. Wiersma

Title: V.P./CFO       


WAIVER OF LANDLORD OR MORTGAGEE

This Agreement is made and entered into as of October 25, 2007, by and between WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and New Brighton Business Center, LLC (hereinafter, "Landlord," "Mortgagee" or "Fee Owner").

1.         Landlord, Mortgagee or Fee Owner hereby consents to the security interest heretofore, now or hereafter to be granted to Bank in the following described goods (collectively, the "Goods"):

accounts receivable and other rights to payment, general intangibles, inventory and equipment

now or at any time hereafter affixed to or installed or kept on or at that certain real property located at 1238 Anthony Road, Burlington, North Carolina, the legal description of which is set forth on Exhibit A attached hereto and incorporated herein by this reference (the "Property").

2.         Landlord, Mortgagee or Fee Owner agrees that the Goods are and shall at all times remain personal property even though they may be affixed to or installed or resting upon the Property.

3.          Landlord, Mortgagee or Fee Owner hereby waives all right, title, claim or interest in or to the Goods by reason of the Goods being attached to or installed or resting upon the Property and hereby grants to Bank permission to enter onto the Property and remove the Goods therefrom at any reasonable time.

4.          Bank agrees to reimburse Landlord, Mortgagee or Fee Owner for the cost of repair of any physical damage to the Property caused by Bank's entry thereon and removal of the Goods, but not for any diminution in value of the Property caused by the absence of the Goods so removed or by any necessity of replacing them. Landlord, Mortgagee or Fee Owner further waives any right to require Bank to provide security for the performance of this obligation.

 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.

 

WELLS FARGO BANK,

NATIONAL ASSOCIATION

 

By: /s/ Steve P. Johnson

Steven P. Johnson

Vice President

 

LANDLORD, MORTGAGEE OR FEE OWNER:

 

By:/s/ Kevin J. Wiersma

Name: Kevin J. Wiersma

Title: V.P./CFO

 

This Instrument was drafted by:

 

WELLS FARGO BANK,

NATIONAL ASSOCIATION

1740 Broadway

Denver, Colorado 80274

 

OBTAIN NOTARY ACKNOWLEDGMENTS

 


Acknowledged by: K.W.

 

EXHIBIT A

 

Legal Description of the Land

 

New Brighton II:

 

PARCEL 1:

That part of the North 253.16 feet of the South 1100.0 feet of Section 32, Township 30 North, Range 23 West of the 4th Principal Meridian, lying Westerly of the Westerly Right of Way line of U.S. Interstate Highway No. 35W as described in Final Certificate Document No. 1695522, and lying Easterly of the Easterly Right of Way line of Minnesota Transfer Railway Co. Said property being a part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota.

 

PARCEL 2:

That part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota lying Westerly and Southerly of the following described line:

 

Beginning at a point on the South line of Section 32, Township 30 North, Range 23 West, distant 677.15 feet West of the Southeast corner of said Section 32; thence run Northeasterly at an angle of 82 degrees 22 minutes 53 seconds with said South section line 1233.54 feet; thence run Northwesterly at right angles 500 feet and terminating, except the Southerly 1100 feet of said Section 32, and except the Easterly 168 feet thereof; subject to United States Pipe Line Tract, said tract being 33 feet in width the centerline of which is described as follows:

 

Beginning at a point on the Easterly line of said Section 32, 867.2 feet Southerly of the Northeast corner of the Southeast Quarter of said Section 32; thence South 57 degrees 31 minutes West, 1147.7 feet, more or less, to a point on the Easterly right of way line, Minnesota Transfer Railway and there terminating, said point being 1118.0 feet due North of the South line of said Section 32.

 

PARCEL 3:

That part of the South 356.94 feet of Section 32, Township 30 North, Range 23 West of the 4th Principal Meridian, lying Westerly of the Westerly Right of Way line of U.S. Interstate Highway No. 35W as described in Final Certificate, Document No. 1695522, and lying Easterly of the Easterly Right of Way line of Minnesota Transfer Railway Co., said property being a part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota.

 

Together with the Easements created by Declaration of Easements and Partial Releases of Mortgages dated as of December 1, 1983, recorded January 12, 1984, as Document No. 2206885, as shown on survey prepared by Mark D. Kemper of Kemper & Associates, Inc. certified on November 3, 1998.

 

New Brighton I:

 

That part of the North 489.9 feet of the South 846.84 feet of Section 32, Township 30 North, Range 23 West of the 4th Principal Meridian, lying westerly of the westerly right-of-way line of U.S. Interstate Highway No. 35W as described in Final Certificate Document No. 1695522, and lying easterly of the easterly right-of-way line of Minnesota Transfer Railway Co., said property being a part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota.

 

Together with the easements created by Declaration of Easements and Partial Releases of Mortgages dated as of December 1, 1983, recorded January 12, 1984, as Document No. 2206885.

 


Corporate Acknowledgement  

 

STATE OF: Minnesota  

 

COUNTY OF: Hennepin  

 

On this 25th day of October, 2007, before me personally came Steven P. Johnson of Wells Fargo Bank N.A. to me known, who, being by me duly sworn, did depose and say that he is respectively the Vice President of the National Association.

 

My commission expires January 31st, 2010,

/s/ John M. Budziszewski

 

Notary Public

 

 

 

STATE OF: Minnesota  

 

COUNTY OF: Ramsey  

 

The foregoing instrument was acknowledged before me on this 25th day of October, 2007, by Kevin J. Wiersma the Vice President and CFO of MEDTOX Scientific, Inc., on behalf of the corporation.

 

My commission expires January 31st, 2010,

/s/ Paula K. Perry

 

Notary Public

 

 


REVOLVING LINE OF CREDIT NOTE

WELLS FARGO

$8,000,000.00

Minneapolis, Minnesota

October 25, 2007

 

FOR VALUE RECEIVED, the undersigned Medtox Scientific, Inc., Medtox Diagnostics, Inc. and Medtox Laboratories, Inc. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Minneapolis RCBO, Sixth and Marquette, Minneapolis, MN 55479, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $8,000,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

 

 

1.

DEFINITIONS:

 

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

1.1    "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in Minnesota are authorized or required by law to close.

1.2   "Fixed Rate Term" means a period commencing on a Business Day and continuing for 1, 2, 3, 6 or 12, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $100,000.00; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.

1.3     "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR Reserve Percentage.

(a) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(b) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term.

1.4 "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

 


2.      INTEREST:

2.1       Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (a) at a fluctuating rate per annum 0.50000% below the Prime Rate in effect from time to time, or (b) at a fixed rate per annum determined by Bank to be 1.90000% above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

2.2      Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (a) the interest rate option selected by Borrower; (b) the principal amount subject thereto; and (c) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (i) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than 3 Business Days after such notice is given, and (ii) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it's sole option but without obligation to do so, accepts Borrower's notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied.

2.3      Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (a) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (b) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

2.4       Payment of Interest. Interest accrued on this Note shall be payable on the 1st day of each month, commencing November 1, 2007.

 


2.5       Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note.

 

3.

BORROWING AND REPAYMENT:

3.1       Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of the Credit Agreement between Borrower and Bank defined below; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on November 1, 2009.

3.2       Advances. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (a) Richard J. Braun or Kevin J. Wiersma, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.

3.3       Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.

4.

PREPAYMENT:

4.1       Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

4.2       LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:

(a) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

 


(b) Subtract from the amount determined in (a) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

(c) If the result obtained in (b) for any month is greater than zero, discount that difference by LIBOR used in (b) above.

 

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.000% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

 

5.

EVENTS OF DEFAULT:

 

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 1, 2005, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note.

6.

MISCELLANEOUS:

6.1       Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

6.2       Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

6.3       Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota.

 


IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

Medtox Scientific, Inc.

By:

/s/ Kevin J. Wiersma

Title: V.P./CFO

Medtox Diagnostics, Inc.

By:

/s/ Kevin J. Wiersma

Title: V.P./CFO

Medtox Laboratories, Inc.

By:

/s/ Kevin J. Wiersma

Title: V.P./CFO

 

 

 

EX-31 3 ex31-1q3.htm EXHIBIT 31.1

EXHIBIT 31.1

 

CERTIFICATIONS

 

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

 

 

I, Richard J. Braun, Chief Executive Officer, certify that:

 

1. I have reviewed this report on Form 10-Q of MEDTOX Scientific, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 30, 2007

By: /s/ Richard J. Braun

 

Richard J. Braun

Chief Executive Officer

 

 

 

 

33

 


 

EX-31 4 ex31-2q3.htm EXHIBIT 31.2

EXHIBIT 31.2

 

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

 

 

I, Kevin J. Wiersma, Chief Financial Officer, certify that:

 

1. I have reviewed this report on Form 10-Q of MEDTOX Scientific, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: October 30, 2007

By: /s/ Kevin J. Wiersma

 

Kevin J. Wiersma

Chief Financial Officer

 

 

 

34

 


 

EX-32 5 ex32-1q3.htm EXHIBIT 32.1

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2007 as filed with the Securities and Exchange Commission (the “Report”), I, Richard J. Braun, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)                       The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)                       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: October 30, 2007

By: /s/ Richard J. Braun

 

Richard J. Braun

Chief Executive Officer

 

 

 

35

 


 

EX-32 6 ex32-2q3.htm EXHIBIT 32.2

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2007 as filed with the Securities and Exchange Commission (the “Report”), I, Kevin J. Wiersma, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)                       The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)                       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

                

Dated: October 30, 2007

By: /s/ Kevin J. Wiersma

 

Kevin J. Wiersma

Chief Financial Officer

 

 

 

 

36

 

 

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