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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
Commission File Number: 1-12362
U.S. DRUG TESTING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE #33-0539168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4517 N.W. 31st Avenue Ft. Lauderdale FL 33049
(Address of Principal Executive Offices) (Zip Code)
(954) 739-9600
Registrant's Telephone Number, Including Area Code
(Former name, former address and former fiscal year, if changed since last
report.)
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. [x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
As of August 14, 1997 - Common Stock, $.001 Par Value, - 7,297,260 shares
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
June 30, March 31,
ASSETS 1997 1997
------ --------------------------------
Current Assets:
Cash and Cash Equivalents $ - $ -
Prepaid Expenses and Other Current Assets 50,025 49,996
------------ -----------
Total Current Assets 50,025 49,996
Property and Equipment, net 531,531 505,799
Patents and other assets, net 41,356 40,152
============ ===========
Total Assets $ 622,912 $ 595,947
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank Overdraft $ 166,078 $ 119,514
Accounts Payable 375,869 216,687
Accrued Expenses 50,000 16,340
Current Portion of Capital Leases 25,060 25,494
Loan Payable - Parent - 1,668,179
------------ -----------
Total Current Liabilities 617,007 2,046,214
Long term Portion of Capital Lease Obligations 113,609 123,419
------------ -----------
Total Liabilities 730,616 2,169,633
Stockholders' Deficit:
Common Stock, $.001 Par Value; 50,000,000 Shares
Authorized, 7,297,260 shares and 5,221,900 shares issued and outstanding at
June 30, 1997 and March 31,1997, respectively 7,297 5,222
Additional Paid-In Capital 10,134,526 7,542,401
Deficit Accumulated in the Development Stage (10,249,527) (9,121,309)
------------ -----------
Total Stockholders' Deficit (107,704) (1,573,686)
============ ===========
Total Liabilities and Stockholders' Deficit $ 622,912 $ 595,947
============ ===========
The accompanying notes are an integral part of the financial statements.
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U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative
For the Three For the Three From Oct. 8, 1992
Months Ended Months Ended (Inception) to
June 30, 1997 June 30, 1996 June 30, 1997
----------- --------- ------------
Revenues: $ - $ - $ -
----------- --------- ------------
Costs and Expenses:
General and Administrative Expenses 137,278 71,978 2,048,828
Research and Development 529,842 162,778 5,196,710
Depreciation and Amortization 16,730 19,843 576,388
Interest Expense - Parent - - 61,260
Management Fees - Parent 409,838 105,000 2,089,838
Interest Expense - 388 118,344
----------- --------- ------------
Total Costs and Expenses 1,093,688 359,987 10,091,368
----------- --------- ------------
Loss from Operations (1,093,688) (359,987) (10,091,368)
Other Income/(Expense) (34,530) 4,016 (158,159)
----------- --------- ------------
Net Loss $(1,128,218) $(355,971) $(10,249,527)
=========== ========= ============
Weighted Average Common Shares Outstanding 5,221,900 5,221,900
Net Loss Per Common Share
$ (.22) $ (0.07)
The accompanying notes are an integral part of the financial statements
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U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
For the Three For the Three From Oct. 8, 1992
Months Ended Months Ended (Inception) to
June 30, June 30, June 30,
1997 1996 1997
----------- --------- ------------
Cash Flow from Operating Activities:
Net Loss $(1,128,218) $(355,971) $(10,249,527)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Depreciation and Amortization 16,730 19,843 576,388
Disposal of Property and Equipment - - 59,380
Unrealized (Gain) Loss on Marketable Securities - - 627,512
Amortization of Bond Discount - - (4,855)
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Prepaid Expenses (29) 3,354 (100,628)
(Increase) Decrease in Other Assets (1,204) 338 (5,023)
Increase in Accounts Payable 159,214 53,861 430,260
Increase (Decrease) in Accrued Expenses 33,660 (15,476) 50,000
----------- --------- -----------
Net Cash Used by Operating Activities (919,847) (294,051) (8,616,493)
----------- --------- -----------
Cash Flow From Investing Activities:
Sale of Marketable Securities - - 3,285,625
Purchases of Marketable Securities - - (3,908,281)
Purchases of Property and Equipment (42,490) (34,557) (579,887)
Additional Patent Costs (37,836)
----------- --------- -----------
Cash Used By Investing Activities (42,490) (34,557) (1,240,379)
----------- --------- -----------
Cash Flow From Financing Activities:
Sales of Common Stock 8,621,226
Increase Bank Overdraft 46,564 - 166,078
Expenses of Stock Offering - - (1,510,663)
Payment of Loan to Parent - - (1,917,057)
Repayment of Loan by Parent - 120,952 1,634,762
Proceeds of Loan Payable - Parent 926,017 - 4,176,273
Payment of Loan Payable - Parent - - (1,299,782)
Proceeds of Capital Leases - - 101,572
Payments of Capital Leases (10,244) (8,688) (115,537)
Proceeds of Brokerage Loan Payable - - 2,674,683
Payments of Brokerage Loan Payable - - (2,674,683)
----------- --------- -----------
Net Cash Provided (Used) By Financing Activities 962,337 112,264 9,856,872
----------- --------- -----------
Decrease in Cash and Cash Equivalents $ - $(216,344)
Cash and Cash Equivalents - Beginning of Period $ - $ 249,047
Cash and Cash Equivalents - End of Period $ - $ 32,703
Supplemental Disclosure of Cash Information:
Cash Paid For Interest $ - $ - $ 156,560
=========== ========= ===========
Non-Cash Financing Activities:
Value of Common Stock Issued
to Parent for Forgiveness of Debt $ 2,594,200 $ - $ 2,594,200
Value of Common Stock Issued for the Transfer
of Assets at Carrying Value From Parent $ - $ - $ 437,060
=========== ========= ===========
The accompanying notes are an integral part of the financial statements.
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U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1 - Basis of Presentation
In the opinion of U.S. Drug Testing, Inc. ("the Company"), the accompanying
unaudited financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for the periods presented.
Results of operations for interim periods are not necessarily indicative of the
results of operations for a full year due to external factors which are beyond
the control of the Company. This report should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
NOTE 2 - Continuing Operations
The Company has incurred recurring operating losses and at June 30, 1997
has a deficiency in working capital of approximately $567,000. To increase
working capital, in June 1997, the Company converted outstanding indebtedness to
its parent Substance Abuse Technologies, Inc. ("SAT") into shares of the
Company's Common Stock, $.001 par value (the "U.S. Drug Common Stock"). However,
the Company will require additional capital to continue the research,
development and ultimate manufacture and marketing of its product and to fund
its working capital requirements for the next 12 months.
Additionally, on a consolidated basis, SAT reported a net loss of
$15,443,814 for the year ended March 31, 1997 and a net loss of $2,387,680 and
has a working capital deficiency and a deficiency in stockholders' equity. These
conditions raise substantial doubt about SAT's ability to continue as a going
concern. Because of the aforementioned conditions relating to SAT and the
uncertainties surrounding its plans to address its liquidity problems, the
parent company's actions could have a substantial effect on the Company's
assets.
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The aforementioned conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects, if any, on the on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
SAT has funded U.S. Drug and continues to provide working capital as
needed. In May 1997, the Board of Directors of SAT also authorized the purchase
of 2,000,000 shares of the U.S. Drug Common Stock for $2,500,000; however such
potential investment has been delayed pending additional financing by SAT. SAT
has also initiated a program to have U.S. Drug seek its own financing, with an
equity investment, debt financing or some combination. In connection with this
program, SAT intends to acquire the U.S. Common Stock owned by the minority
shareholders by exchanging shares of SAT's common stock for these shares of the
U.S. Drug Common Stock. In addition to seeking a strategic partner, SAT also
plans to seek independent directors for U.S. Drug and establish an independent
management team. There can be no assurance that any of these additional sources
of financing will be available and, in such event, U.S. Drug will not be able to
complete its research and development on a timely basis.
NOTE 3 - Property and Equipment
Property and equipment is summarized as follows:
June 30, March 31,
1997 1997
------- --------
Furniture, Fixtures & Equipment $373,513 $ 363,229
Test Equipment 427,229 400,798
Leasehold Improvements 214,569 208,822
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1,015,311 972,849
Less: Accumulated Depreciation 483,780 467,050
---------- ----------
$ 531,531 $ 505,799
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U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 4 - Loan Conversion
The Board of Directors of SAT, the Company's parent, at a May 1997 meeting,
agreed to capitalize the indebtedness due to the parent. The parent will receive
one share of Common Stock for every $1.25 of indebtedness. As of June 30,1997,
the Company converted $2,594,200 in debt for 2,075,360 shares of the U.S. Drug
Common Stock raising the parent's ownership to 76.4%. Additionally the parent
agreed to sell the Company fixed assets at fair market value and provide limited
additional funding.
NOTE 5 - Commitments and Contingencies
In June 1995, the License Agreement with the Department of the Navy was
renegotiated and amended to provide for minimum annual royalties of $100,000 per
year commencing October 1, 1995 and terminating September 30, 2005. Additional
royalties will be paid pursuant to a schedule based upon sales of products. The
Company sub-licenses this agreement from SAT and, accordingly, has obligations
to SAT for the royalty payments required by the License Agreement.
NOTE 6 - Registration Statement
During May 1996, SAT filed a Registration Statement on Form S-4 under the
Securities Act of 1993, as amended, in an attempt, through a consent
solicitation, to acquire the U.S. Drug Common Stock owned by the minority
stockholders and thereby own 100% of the U.S. Drug Common Stock. There can be no
assurance that such solicitation will be successfully completed.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a development stage enterprise with no earnings history
and initially derived its capital resources from unsecured advances provided by
SAT. During October and November 1993, the Company sold 1,721,900 shares of the
U.S. Drug Common Stock to the public at $5.00 per share and netted approximately
$7,099,000. From the net proceeds of the offering, the Company repaid the
advances made by SAT. As of June 30,1997, the Company owed its parent
$2,594,200. The Board of Directors of the parent agreed to convert this debt to
equity at $1.25 per share of the U.S. Drug Common Stock. The additional shares
issued will raise the parent's ownership to 76.4%. The parent further agreed to
sell fixed assets at fair market value, pay outstanding debt and supply an
additional $160,000. The management of the Company is seeking outside investors
to fund the research and development effort to bring the saliva testing product
to market. Should the funding be unsuccessful, it will be necessary to suspend
any further product development until such investor is found.
Management of the Company estimated that it will cost approximately
$16,000,000 to complete the project and that the product will be ready for
submission to the Food and Drug Administration and non medical marketing in
February 1999 at the earliest. An independent consulting firm estimated that the
costs may be approximately $18,400,000 and the market ready date to be August
1999 at the earliest. RESULTS OF OPERATIONS
During the quarter June 30, 1997, the Company spent $530,000 on
research and development and an additional $137,000 on general and
administrative expenses. Since inception the Company has spent $5,197,000 on
research and development and an additional $2,049,000 on general and
administrative expenses. The management fee for fiscal quarter ending June 1997
represents a percentage of expenses for services provided by the parent company
which includes expenses allocated for a shared facility with the parent company.
The comparative fiscal quarter management fee was a fixed amount per month.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no known legal proceedings against the Company.
ITEM 2. CHANGES IN SECURITIES.
There have been no changes in securities of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS.
There was no matter submitted to a stockholders' vote
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
There are no exhibits being filed with this Report and no Reports on
Form 8-K were filed for the quarter ended June 30, 1997.
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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 thereto duly authorized.
U.S. DRUG TESTING, INC.
Registrant
August 19, 1997 BY: /s/ Linda H. Masterson
----------------------
Linda H. Masterson
President and Chief Executive Officer
August 19, 1997 BY: /s/ Robert Muccini
----------------------
Robert Muccini
Treasurer, Chief Financial Officer
and Chief Accounting Officer
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