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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 March 31, 2005

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 April 21, 2005, was 7,541,883.

MEDTOX SCIENTIFIC, INC.

INDEX

Page
Part I        Financial Information:  
 
                  Item 1: Financial Statements (Unaudited)
 
                           Consolidated Statements of Operations - Three
                           Months Ended March 31, 2005 and 2004 3 
 
                           Consolidated Balance Sheets - March 31, 2005
                           and December 31, 2004 4 
 
                           Consolidated Statements of Cash Flows - Three
                           Months Ended March 31, 2005 and 2004 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: Unregistered Sales of Equity Securities and Use of Proceeds 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 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
March 31, 2005
March 31, 2004
REVENUES:            
   Laboratory services     $ 11,148   $ 10,218  
   Product sales       3,541     3,365  
        14,689     13,583  
COST OF REVENUES:    
  Cost of services       7,225     6,530  
  Cost of sales       1,506     1,312  
        8,731     7,842  
GROSS PROFIT       5,958     5,741  
     
OPERATING EXPENSES:    
   Selling, general and administrative       4,348     4,267  
   Research and development       598     409  
        4,946     4,676  
INCOME FROM OPERATIONS       1,012     1,065  
     
OTHER INCOME (EXPENSE):    
   Interest expense       (211 )   (266 )
   Other expense, net       (122 )   (132 )
        (333 )   (398 )
INCOME BEFORE INCOME TAX EXPENSE       679     667  
     
INCOME TAX EXPENSE       (258 )   (253 )
NET INCOME     $ 421   $ 414  
BASIC EARNINGS PER COMMON SHARE (1)     $ 0.06   $ 0.06  
DILUTED EARNINGS PER COMMON SHARE (1)     $ 0.05   $ 0.05  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:    
          Basic (1)       7,540,484     7,465,844  
          Diluted (1)       8,203,204     7,723,538  

(1)     Share and per share amounts for the three months ended March 31, 2004 have been restated for the three-for-two stock split paid on August 20, 2004.

See Notes to Consolidated Financial Statements (Unaudited).

3

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

March 31,
2005
 December 31,
2004
ASSETS            
CURRENT ASSETS:  
   Cash and cash equivalents   $ 606   $ 263  
   Accounts receivable:  
         Trade, less allowance for doubtful accounts ($476 in 2005 and $734 in 2004)    9,581    8,084  
         Other    183    203  
             Total accounts receivable    9,764    8,287  
   Inventories    3,317    3,624  
   Prepaid expenses and other    1,253    1,293  
   Deferred income taxes    1,531    1,531  
             Total current assets    16,471    14,998  
BUILDING, EQUIPMENT AND IMPROVEMENTS, net    16,399    16,348  
GOODWILL    15,967    15,967  
OTHER INTANGIBLE ASSETS, net    1,510    1,608  
DEFERRED INCOME TAXES, net    6,475    6,733  
OTHER ASSETS    222    306  
TOTAL ASSETS   $ 57,044   $ 55,960  
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:  
   Line of credit   $ 5,369   $ 4,690  
   Accounts payable    2,114    1,661  
   Accrued expenses    3,716    4,188  
   Current portion of long-term debt    2,053    1,469  
   Current portion of capital leases    59    73  
             Total current liabilities    13,311    12,081  
LONG-TERM DEBT, net of current portion    5,384    6,050  
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion    34    40  
   
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, 7,542,407 in 2005 and 7,534,842 in 2004    1,131    1,130  
   Additional paid-in capital    81,702    81,693  
   Deferred stock-based compensation    (413 )  (508 )
   Accumulated deficit    (43,929 )  (44,350 )
   Treasury stock    (176 )  (176 )
             Total stockholders' equity    38,315    37,789  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 57,044   $ 55,960  

See Notes to Consolidated Financial Statements (Unaudited).

4

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

Three Months Ended
March 31,
2005
 March 31,
2004
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:            
   Net income   $ 421   $ 414  
   Adjustments to reconcile net income to net cash provided by  
           operating activities:  
      Depreciation and amortization    804    720  
      Provision for losses on accounts receivable    60    63  
      Loss on sale of equipment    --    10  
      Deferred compensation    63    131  
      Deferred income taxes    258    253  
      Changes in operating assets and liabilities:  
         Accounts receivable    (1,537 )  (1,395 )
         Inventories    307    50  
         Prepaid expenses and other current assets    40    298  
         Other assets    84    84  
         Accounts payable and accrued expenses    (19 )  592  
                Net cash provided by operating activities    481    1,220  
    
CASH FLOWS USED IN INVESTING ACTIVITIES:   
    Capital expenditures    (751 )  (1,492 )
    Purchase of customer list    (5 )  (84 )
    Proceeds from sale of equipment    --    35  
              Net cash used in investing activities    (756 )  (1,541 )
    
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:   
    Net proceeds from sale of common stock    160    12  
    Net proceeds on revolving credit facility    679    406  
    Proceeds from long-term debt    300    --  
    Principal payments on long-term debt    (382 )  (604 )
    Principal payments on capital leases    (20 )  (18 )
    Payment of taxes from traded shares    (119 )  --  
              Net cash provided by (used in) financing activities    618    (204 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    343    (525 )
    
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    263    711  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 606   $ 186  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
   Cash paid for:  
          Interest   $ 206   $ 237  
          Taxes    62    --  

See Notes to Consolidated Financial Statements (Unaudited).

5

MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2005

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 March 31, 2005 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, 2004.

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 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 and earnings per share would have been changed to the pro forma amounts indicated below:


(In thousands, except per share data) Three Months Ended
March 31,
2005
 March 31,
2004
Net income     As reported     $ 421   $ 414  
    Less: Total stock-based compensation  
    expense, net of related tax effect        (35 )  (86 )
    Pro forma   $ 386   $ 328  
   
Basic earnings per share   As reported   $ 0.06   $ 0.06  
    Pro forma    0.05    0.04  
   
Diluted earnings per share   As reported   $ 0.05   $ 0.05  
    Pro forma    0.05    0.04  

6

New Accounting Standards: In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment” that will require compensation costs related to share-based payment transactions to be recognized in the Company’s statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) will be effective for the Company on January 1, 2006. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 123(R).

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. SFAS No. 151 will be effective for the Company on July 1, 2005. The Company does not expect the adoption of this statement will have a material impact on its results of operations or financial position.