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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
                    Washington, D.C. 20549                    

(Mark One)

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

For the quarterly period ended June 30, 2003

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
incorporated or organization) Identification No.)


402 West County Road D, St.Paul, Minnesota
 55112
(Address of principal executive offices) (Zip Code)




Registrant's telephone number including area code:                                    (651) 636-7466


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       X       No           

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes            No       X     

The number of shares of Common Stock, $.15 par value, outstanding as of August 6, 2003, was 4,939,821.



MEDTOX SCIENTIFIC, INC.

INDEX


Page
Part I        Financial Information:  
 
                  Item 1: Financial Statements (Unaudited)
 
                           Consolidated Statements of Operations - Three and Six
                           Months Ended June 30, 2003 and 2002 3 
 
                           Consolidated Balance Sheets - June 30, 2003
                           and December 31, 2002 4 
 
                           Consolidated Statements of Cash Flows - Six
                           Months Ended June 30, 2003 and 2002 5 
 
                           Notes to Consolidated Financial Statements 6 
 
                  Item 2:
 
                           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations 12 
 
                  Item 3:
 
                           Quantitative and Qualitative Disclosure
                           About Market Risk 23 
 
                  Item 4:
 
                           Evaluation of Disclosure Controls and Procedures 23 
 
Part II       Other Information 25 
 
                  Item 1: Legal Proceedings 25 
                  Item 2: Changes in Securities 25 
                  Item 3: Defaults on Senior Securities 25 
                  Item 4: Submission of Matters to a vote of Securities Holders 25 
                  Item 5: Other Information 25 
                  Item 6: Exhibits and Reports on Form 8-K 25 
 
                           Signatures 27 
                           Exhibit Index 28 


2


PART I    FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS (UNAUDITED)

MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)


Three Months Ended Six Months Ended
June 30, 2003
 June 30, 2002
 June 30, 2003
 June 30, 2002
REVENUES:                    
   Laboratory services   $ 10,085   $ 10,540   $ 19,619   $ 19,877  
   Product sales    3,072    3,378    6,009    6,392  
     13,157    13,918    25,628    26,269  
   
COST OF REVENUES:  
  Cost of services    6,735    6,724    13,202    13,080  
  Cost of sales    1,357    1,272    2,621    2,361  
     8,092    7,996    15,823    15,441  
   
GROSS PROFIT    5,065    5,922    9,805    10,828  
   
OPERATING EXPENSES:  
   Selling, general and administrative    4,460    4,237    8,721    8,015  
   Research and development    419    304    832    578  
     4,879    4,541    9,553    8,593  
   
INCOME FROM OPERATIONS    186    1,381    252    2,235  
   
OTHER INCOME (EXPENSE):  
   Interest expense, net    (296 )  (340 )  (595 )  (693 )
   Other expense, net    (140 )  (33 )  (234 )  (49 )
     (436 )  (373 )  (829 )  (742 )
INCOME (LOSS) BEFORE INCOME TAX BENEFIT    (250 )  1,008    (577 )  1,493  
   
INCOME TAX BENEFIT    --    --    124    --  
   
NET INCOME (LOSS)   $ (250 ) $ 1,008   $ (453 ) $ 1,493  
   
BASIC EARNINGS (LOSS) PER COMMON SHARE   $ (0.05 ) $ 0.21   $ (0.09 ) $ 0.31  
   
DILUTED EARNINGS (LOSS) PER COMMON SHARE   $ (0.05 ) $ 0.20   $ (0.09 ) $ 0.29  
   
WEIGHTED AVERAGE NUMBER OF     SHARES OUTSTANDING:  
          Basic    4,926,708    4,792,279    4,920,317    4,788,576  
          Diluted    4,926,708    5,145,718    4,920,317    5,086,791  

See Notes to Consolidated Financial Statements (Unaudited).

3


MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)


June 30,
2003
 December 31,
2002
ASSETS            
CURRENT ASSETS:  
   Cash and cash equivalents   $ 841   $ 439  
   Accounts receivable:  
        Trade, less allowance for doubtful accounts ($505 in 2003 and $1,125 in 2002)    9,022    9,155  
        Other    300    243  
             Total accounts receivable    9,322    9,398  
   Inventories    3,744    4,395  
   Deferred income taxes    964    849  
   Prepaid expenses and other    1,063    1,169  
             Total current assets    15,934    16,250  
BUILDING, EQUIPMENT AND IMPROVEMENTS, net    15,308    14,769  
GOODWILL    15,967    15,967  
OTHER INTANGIBLE ASSETS, net    1,967    2,218  
DEFERRED INCOME TAXES, net    8,373    8,488  
OTHER ASSETS    217    363  
TOTAL ASSETS   $ 57,766   $ 58,055  
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:  
   Line of credit   $ 4,739   $ 4,345  
   Accounts payable    3,491    3,966  
   Accrued expenses    3,111    3,485  
   Current portion of long-term debt    2,434    2,285  
   Current portion of capital leases    68    83  
             Total current liabilities    13,843    14,164  
LONG-TERM DEBT, net of current portion    9,052    8,822  
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion    151    185  
   
STOCKHOLDERS' EQUITY:  
   Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and    --    --  
         outstanding
   Common stock, $0.15 par value; authorized shares, 14,400,000; issued and  
         outstanding shares, 4,937,542 in 2003 and 4,814,001 in 2002    741    722  
   Additional paid-in capital    81,475    80,699  
   Deferred stock-based compensation    (1,003 )  (498 )
   Accumulated deficit    (46,317 )  (45,863 )
   Treasury stock    (176 )  (176 )
             Total stockholders' equity    34,720    34,884  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 57,766   $ 58,055  

See Notes to Consolidated Financial Statements (Unaudited).

4



MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)


Six Months Ended
June 30, 2003
 June 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:            
   Net income (loss)   $ (453 ) $ 1,493  
   Adjustments to reconcile net income (loss) to net cash provided by  
           operating activities:  
      Depreciation and amortization    1,400    1,241  
      Provision for losses on accounts receivable    393    183  
      Deferred compensation    265    182  
      Changes in operating assets and liabilities:  
         Accounts receivable    (317 )  (2,327 )
         Inventories    651    107  
         Prepaid expenses and other current assets    106    119  
         Other assets    147    (17 )
         Accounts payable and accrued expenses    (849 )  (420 )
                Net cash provided by operating activities    1,343    561  
   
CASH FLOWS FROM INVESTING ACTIVITIES:   
    Capital expenditures    (1,609 )  (2,309 )
   
CASH FLOWS FROM FINANCING ACTIVITIES:   
    Net proceeds from sale of common stock    26    66  
    Net proceeds on revolving credit facility    394    2,108  
    Proceeds from long-term debt    1,641    1,103  
    Principal payments on long-term debt    (1,344 )  (1,227 )
    Principal payments on capital leases    (49 )  (141 )
              Net cash provided by financing activities    668    1,909  
   
INCREASE IN CASH AND CASH EQUIVALENTS    402    161  
   
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    439    67  
   
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 841   $ 228  
   
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
   Cash paid for:  
          Interest   $ 588   $ 669  

See Notes to Consolidated Financial Statements (Unaudited).

5


MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003

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 six-month period ended June 30, 2003 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, 2002.

Stock-Based Compensation — Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” requires companies to measure employee stock compensation plans and non-employee stock-based compensation based on the fair value method of accounting. However, for stock compensation granted to employees, SFAS No. 123 allows the alternative of continued use of Accounting Principles Board Opinion (APBO) No. 25, “Accounting for Stock Issued to Employees,” with pro forma disclosure of net income and earnings per share determined as if the fair value method had been applied in measuring compensation cost. The Company elected the continued use of APBO No. 25.

Had the Company determined compensation expense based on the fair value at the grant date for its stock options under SFAS No. 123, (as amended by SFAS No.148), the Company’s net income (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below:

(In thousands, except per share data)


Three Months Ended Six Months Ended
June 30, 2003
 June 30, 2002
 June 30, 2003
 June 30, 2002
Net income (loss)......................................     As reported     $ (250 ) $ 1,008   $ (453 ) $ 1,493  
    Less: Total stock-based compensation  
     expense, net of related tax effect        (152 )  (147 )  (249 )  (301 )
    Pro forma    (402 )  861    (702 )  1,192  
   
Basic earnings (loss) per share..............   As reported