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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, 2004

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 July 26, 2004, was 4,961,926.

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, 2004 and 2003 3 
 
                           Consolidated Balance Sheets - June 30, 2004
                           and December 31, 2003 4 
 
                           Consolidated Statements of Cash Flows - Six
                           Months Ended June 30, 2004 and 2003 5 
 
                           Notes to Consolidated Financial Statements 6 
 
                  Item 2:
 
                           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations 11 
 
                  Item 3:
 
                           Quantitative and Qualitative Disclosure
                           About Market Risk 21 
 
                  Item 4:
 
                           Controls and Procedures 21 
 
Part II       Other Information 22 
 
                  Item 1: Legal Proceedings 22 
                  Item 2: Changes in Securities, Use of Proceeds and Issuer  
                               Purchases of Equity Securities 22 
                  Item 3: Defaults upon Senior Securities 22 
                  Item 4: Submission of Matters to a Vote of Securities Holders 22 
                  Item 5: Other Information 22 
                  Item 6: Exhibits and Reports on Form 8-K 22 
 
                           Signatures 23 
                           Exhibit Index 24 

2

PART I    FINANCIAL INFORMATION

Item 1:     FINANCIAL STATEMENTS (UNAUDITED)

MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)


Three Months Ended Six Months Ended
June 30, 2004
June 30, 2003
June 30, 2004
June 30, 2003
REVENUES:                    
   Laboratory services   $ 11,497   $ 10,085   $ 21,715   $ 19,619  
   Product sales    3,567    3,072    6,932    6,009  
     15,064    13,157    28,647    25,628  
COST OF REVENUES:  
  Cost of services    7,053    6,735    13,583    13,202  
  Cost of sales    1,398    1,357    2,710    2,621  
     8,451    8,092    16,293    15,823  
GROSS PROFIT    6,613    5,065    12,354    9,805  
   
OPERATING EXPENSES:  
   Selling, general and administrative    4,646    4,460    8,913    8,721  
   Research and development    426    419    835    832  
     5,072    4,879    9,748    9,553  
INCOME FROM OPERATIONS    1,541    186    2,606    252  
   
OTHER INCOME (EXPENSE):  
   Interest expense    (260 )  (296 )  (526 )  (595 )
   Other expense, net    (106 )  (140 )  (238 )  (234 )
     (366 )  (436 )  (764 )  (829 )
INCOME (LOSS) BEFORE INCOME TAX   
(EXPENSE) BENEFIT    1,175    (250 )  1,842    (577 )
   
INCOME TAX (EXPENSE) BENEFIT    (447 )  --    (700 )  124  
NET INCOME (LOSS)   $ 728   $ (250 ) $ 1,142   $ (453 )
BASIC EARNINGS (LOSS) PER COMMON SHARE   $ 0.15   $ (0.05 ) $ 0.23   $ (0.09 )
DILUTED EARNINGS (LOSS) PER COMMON SHARE   $ 0.14   $ (0.05 ) $ 0.22   $ (0.09 )
WEIGHTED AVERAGE NUMBER OF SHARES  
   OUTSTANDING:  
          Basic    4,967,752    4,926,708    4,972,464    4,920,317  
          Diluted    5,216,937    4,926,708    5,184,551    4,920,317  
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,
2004
December 31,
2003
ASSETS            
CURRENT ASSETS:  
   Cash and cash equivalents   $ 336   $ 711  
   Accounts receivable:  
         Trade, less allowance for doubtful accounts ($533 in 2004 and $372 in 2003)    9,149    7,922  
         Other    150    145  
         Note receivable from related party    --    300  
             Total accounts receivable    9,299    8,367  
   Inventories    3,641    3,564  
   Deferred income taxes    1,258    1,258  
   Prepaid expenses and other    1,015    1,406  
             Total current assets    15,549    15,306  
BUILDING, EQUIPMENT AND IMPROVEMENTS, net    16,418    15,092  
GOODWILL    15,967    15,967  
OTHER INTANGIBLE ASSETS, net    1,804    1,836  
DEFERRED INCOME TAXES, net    7,377    8,077  
OTHER ASSETS    185    240  
TOTAL ASSETS   $ 57,300   $ 56,518  
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:  
   Line of credit   $ 4,881   $ 5,126  
   Accounts payable    2,898    2,236  
   Accrued expenses    3,796    3,649  
   Current portion of long-term debt    2,493    2,725  
   Current portion of capital leases    77    73  
             Total current liabilities    14,145    13,809  
LONG-TERM DEBT, net of current portion    6,765    7,526  
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion    73    113  
 
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, 4,961,449 in 2004 and 4,977,221 in 2003    744    746  
   Additional paid-in capital    81,511    81,666  
   Deferred stock-based compensation    (733 )  (995 )
   Accumulated deficit    (45,029 )  (46,171 )
   Treasury stock    (176 )  (176 )
             Total stockholders' equity    36,317    35,070  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 57,300   $ 56,518  
See Notes to Consolidated Financial Statements (Unaudited).
 
4

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

Six Months Ended
June 30,
2004
June 30,
2003
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:            
   Net income (loss)   $ 1,142   $ (453 )
   Adjustments to reconcile net income (loss) to net cash provided by  
           operating activities:  
      Depreciation and amortization    1,496    1,400  
      Provision for losses on accounts receivable    140    393  
      Loss on sale of equipment    7    --  
      Deferred compensation    230    265  
      Deferred income taxes    700    --  
      Changes in operating assets and liabilities:  
         Accounts receivable    (1,072 )  (317 )
         Inventories    (77 )  651  
         Prepaid expenses and other current assets    391    106  
         Other assets    (99 )  147  
         Accounts payable and accrued expenses    809    (849 )
                Net cash provided by operating activities    3,667    1,343  
   
CASH FLOWS USED IN INVESTING ACTIVITIES:   
    Capital expenditures    (2,633 )  (1,609 )
    Proceeds from sale of equipment    46    --  
                Net cash used in investing activities    (2,587 )  (1,609 )
   
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:   
    Net proceeds from sale of common stock    25    26  
    Net proceeds on revolving credit facility    (245 )  394  
    Proceeds from long-term debt    --    1,641  
    Principal payments on long-term debt    (1,050 )  (1,344 )
    Principal payments on capital leases    (36 )  (49 )
    Payment of taxes from traded shares    (149 )  --  
              Net cash provided by (used in) financing activities    (1,455 )  668  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    (375 )  402  
   
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    711    439  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 336   $841  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
   Cash paid for:  
          Interest   $ 526   $588  
See Notes to Consolidated Financial Statements (Unaudited).   

5

MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004

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-month period ended June 30, 2004 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, 2003.

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 has elected the continued use of APBO No. 25.

Had the Company determined compensation expense 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, 2004
June 30, 2003
June 30, 2004
June 30, 2003