U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 3 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1995; or
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
EXCHANGE ACT
for the transition period from________________ to____________________
Commission file number 0-17293
DRUG SCREENING SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 22-2795073
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
604 VPR Commerce Center, 1001 Lower Landing Road, Blackwood, N.J. 08012
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(609)228-8500
- -------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 5(d) of the Exchange Act during the past 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
--- ---
On September 30, 1995, there were 2,446,017 shares of the issuer's Common Stock,
$0.01 par value, outstanding.
<PAGE>
DRUG SCREENING SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 10
Part II - Other Information
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The accompanying unaudited condensed financial statements of Drug Screening
Systems, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-QSB and Item 310 of Regulation S-B of the Securities and
Exchange Commission. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1995 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 1996 ("Fiscal 1996"). The accompanying condensed financial
statements and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-KSB (the "Annual Report") for the year ended June 30,
1995 ("Fiscal 1995").
Page
----
Index to Financial Statements
- -----------------------------
Balance Sheetsat September 30, 1995 (unaudited) and June 30, 1995 4
Statements of Operations and Accumulated Deficit (unaudited) for the
three months ended September 30, 1995 and 1994 5
Statement of Cash Flows (unaudited) for the three months ended
September 30, 1995 and 1994 6
Notes to Financial Statements 7
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Balance Sheets, September 30, 1995 (unaudited), and June 30, 1995
September 30, June 30,
1995 1995
---- ----
Assets
Current Assets:
Cash $ 109,130 $ 305,108
Accounts receivable, net of allowance of $100,000 146,012 124,975
Inventory 442,173 379,336
Prepaid expenses and other 67,918 63,312
Equipment held for sale -- --
---------- ----------
Total Current Assets 765,233 872,731
Equipment and improvements, net 542,193 562,200
Other Assets:
Deposits 8,872 9,397
Patents 26,918 27,292
---------- ----------
Total Assets $1,343,216 $1,471,620
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt and
capital leases $ 160,162 $ 163,927
Accounts payable and accrued expenses 479,913 545,825
Customer advances and prepayments 55,000 63,523
---------- ----------
Total Current Liabilities 695,075 773,275
Long term debt -- 26,750
Commitments and contingencies
Stockholders' Equity
Class "A" preferred stock, $0.01 par value; 2,000
shares authorized; none issued
Common stock, $0.01 par value; 20,000,000
shares authorized; 2,446,017 shares at
September 30,1995 and June 30, 1995 24,460 24,460
Additional paid-in-capital 14,638,555 14,638,555
Accumulated deficit (14,014,874) (13,991,420)
----------- -----------
Total Stockholders' Equity 648,141 671,595
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,343,216 $ 1,471,620
=========== ===========
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Statements of Operations and Accumulated Deficit
(unaudited) For Three Months ended September 30, 1995 and 1994
1995 1994
---- ----
Revenues $ 531,158 $ 608,938
Cost of sales 171,934 352,316
------------ ------------
Gross profit 359,224 256,622
Operating expenses:
Research and development 85,852 81,961
Selling, general and administrative 297,983 339,257
------------ ------------
383,835 421,218
------------ ------------
Loss from operations (24,611) (164,596)
Interest income 1,157 1,179
------------ ------------
Net loss $ (23,454) $ (163,417)
Accumulated deficit - beginning of period $(13,991,420) $(13,696,064)
------------ ------------
$(14,014,874) $(13,859,481)
============ ============
Net loss per share $ (0.01) $ (0.10)
============ ============
Weighted average number of shares
outstanding 2,466,017 1,696,017
============ ============
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Statements of Cash Flows for the Three Months (Unaudited)
Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (23,454) $(163,417)
Adjustments to reconcile net loss to net cash used
Depreciation and amortization 22,870 30,375
Gain on sale of equipment held for sale -- (5,861)
Decrease (increase) in assets:
Accounts receivable (21,037) (19,070)
Inventory (62,837) (51,239)
Prepaid expenses and other (4,606) (8,998)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (65,912) 92,384
Other current liabilities -- (14,550)
Customer prepayments and advances (8,523) --
--------- ---------
Net cash used in operating activities (163,499) (140,376)
Cash flows from investing activities:
Proceeds from sale of equipment held for sale, net of expenses -- 17,166
Expenditures for equipment and improvements (2,489) (4,565)
Recovery of (expenditure for) deposits
525 (118)
--------- ---------
Net cash provided by (used in) investing activities (1,964) 12,483
Cash flows used financing activities:
Proceeds from non-bank financing 10,157 --
Principal payments on debt and capital leases (40,672) (20,298)
--------- ---------
Net cash provided by financing activities (30,515) (20,298)
--------- ---------
Net decrease in cash and cash equivalents (195,978) (148,191)
Cash and cash equivalents:
Beginning of period 305,108 280,775
--------- ---------
End of period $ 109,130 $ 132,584
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 508 $ 419
========= =========
</TABLE>
See notes to financial statements
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Notes to Financial Statements
For the Three Months Ended September 30, 1995 and 1994
A. Basis of Presentation
Since its inception, the Company has sustained, except for two quarters in
Fiscal 1995, recurring losses from operations. The Company has financed its
operations and research and development program primarily through proceeds
received from its initial public offering in May 1988 and subsequent securities
offerings. In November 1994, the Company raised $375,000 through a private
placement pursuant to Regulation D under the Securities Act of 1933, as amended.
Under this offering, 750,000 shares of the Common Stock were issued at $0.50 a
share.
Beginning in July, 1994, the Company underwent a substantial restructuring to
reduce operating losses. These measures enabled the Company to reduce its losses
in Fiscal 1995 without a reduction in the sales levels. The restructuring
included elimination of the positions of Chairman, Chief Operating Officer and
Chief Financial Officer. Duties of the Chief Executive Officer and Chief
Operating Officer are being handled by an acting president who is a long-term
consultant. The current Chief Financial Officer is an employee of the Company.
The Company is now emphasizing its sales efforts through distributors and
outbound telemarketing.
The Board of Directors is exploring various financing options, including a
possible sale or merger. If operations are maintained at the levels experienced
in the quarter ended September 30, 1995, the Company will require additional
financing to augment the cash generated by operations to meet the Company's cash
requirements for the balance of the year ended June 30, 1996 ("Fiscal 1996").
There is, however, no assurance that this will be achieved.
Further, there is no assurance that management's actions will result in the
Company achieving profitability in Fiscal 1996 or thereafter. See Item 2 to this
Report for more detailed discussion.
Unless the Company can (1) obtain such capital contributions or financing as may
be required to fulfill its development and marketing activities, (2) achieve a
level of sales adequate to support the Company's cost structure and (3)
ultimately operate profitably for more than two quarters, the Company may be
unable to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
<PAGE>
B. Revenue Recognition
The Company recognizes revenues at the time Product is shipped. The Company has
arrangements with two customers whereby title and risk of loss transfers to the
customers upon transfer of Product from the Company's finished goods inventory
into a segregated refrigeration unit on the Company's premises and, accordingly,
the Company recognizes revenues at the time such Product is transferred. Sales
under these arrangements totaled $295,724 during the first three months of
Fiscal 1996 and $333,421 during the first three months of Fiscal 1995. Inventory
of $712,636 and $690,396 were in the refrigerated storage unit at September 30,
1995 and June 30, 1995, respectively. Under an agreement entered into with
another distributor, title and risk of loss transfers upon receipt of payment in
full by the Company and, accordingly, the Company recognizes revenues at the
time such payment is received. There were no sales under this arrangement in the
first three months of Fiscal 1996 or Fiscal 1995.
C. Inventory
Inventory at September 30, 1995 and June 30, 1995 consists of the following:
September 30 June 30
------------ -------
Raw Materials $200,062 $207,031
Work-in-process 202,120 132,739
Finished Goods 39,991 39,566
-------- --------
Total $442,173 $379,336
======== ========
D. Equipment and Improvements
Equipment and Improvements at September 30, 1995 and June 30, 1995, which are
recorded at cost, consist of the following:
September 30 June 30
------------ -------
Furniture and fixtures $ 59,746 $ 59,746
Leasehold improvements 176,299 176,299
Machinery and equipment 469,251 466,763
Construction in process 418,958 418,958
---------- -----------
1,124,254 1,121,766
Less accumulated depreciation and amortization 582,061 559,566
---------- -----------
$ 542,193 $ 562,200
========== ===========
<PAGE>
E. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at September 30, 1995 and June 30, 1995
consist of the following:
September 30 June 30
------------ -------
Accounts payable - trade $ 265,718 $ 268,759
Accrued payroll and related expenses 33,220 51,212
Other 180,975 225,854
---------- ---------
$ 479,913 $ 545,825
========== =========
F. Income Taxes
The tax effects of significant items comprising the Company's net deferred taxes
as of September 30, 1995 were as follows:
Deferred Tax Assets:
Property $ 44,000
Allowance for doubtful accounts 40,000
Vacation accrual 8,000
Operating loss carryforwards 5,800,000
Valuation allowance (5,892,000)
-----------
$ --
============
There was no change in the valuation allowance in the three months ended
September 30, 1995.
There was no provision for current income taxes for either the first three
months of Fiscal 1996 or 1995.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis for three months ended September 30, 1995
and 1994 should be read in conjunction with the Financial Statements included in
Item 1 of this Report.
Results of Operations - Three Months Ended September 30, 1995 Versus 1994
- -------------------------------------------------------------------------
Revenues - The Company's revenues from sales were $531,158 and $608,938 in the
first three months of Fiscal 1996 and 1995, respectively. This decrease of
$77,780 (12.8%) resulted from decreased sales to Borg-Warner Information
Services, Inc. ("BWIS") of approximately $38,000. Actual usage by BWIS increased
by approximately $26,000, but since the Company has manufactured the maximum
amount under its arrangement, it can no longer build for stock owned by BWIS.
Sales to other customers in the first three months of Fiscal 1996 decreased by
approximately $33,000 from the first three months of Fiscal 1995 due partially
to turnover in the Company's inside sales force. Subsequent to September 30,
1995, the Company added its first telemarketer and believes it will restore
sales to the prior year's level.
The Company's gross profit of $359,224 for the first three months of Fiscal 1996
amounted to 94% ($256,622 and 61%, respectively, in the first three months of
Fiscal 1995) of its operating expenses. At the gross profit percentage for the
first three months of Fiscal 1996, the Company would have had to generate
approximately $568,000 in sales to cover such operating expenses ($998,000 in
the first three months of Fiscal 1995).
Cost of sales and gross profit - The Company's cost of sales for the first three
months of Fiscal 1996 was $171,934 and its gross profit percentage was 67.6%
($352,316 and 42.1%, respectively for the comparable period in Fiscal 1995).
This gross profit percentage of 67.6% is higher than the level achieved for
Fiscal 1995. The increase in the gross profit as a percent of sales from the
first three months of Fiscal 1995 resulted primarily from better unit sales
prices and continued improvements in our manufacturing process.
Operating expenses - Operating expenses of $383,835 for the three months ended
September 30, 1995 decreased $37,383 from $421,218 for the comparable period in
Fiscal 1995. This decrease resulted principally from decreased headcount.
Net loss - The Company had a net loss of $23,454 for the first three months of
Fiscal 1996. This was a decrease of $139,963 from the loss of $163,417 for the
first three months of Fiscal 1995. The decrease in the net loss was primarily
attributable to the improved gross margin and reduced operating expenses, offset
by decreased sales as more fully explained above.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company had working capital at September 30, 1995 of $70,158 as compared to
$99,456 at June 30, 1995. At September 30, 1995, the Company had the
availability of $109,130 of cash as compared to $305,108 at June 30, 1995. The
changes in working capital and cash between June 30 and September 30, 1995 were
primarily attributable to the net loss and changes in the non-cash operating
accounts for the three months ended September 30, 1995. See the Statement of
Cash Flows in Item 1 of this Report.
Accounts receivable increased to $146,012 from $124,975 at September 30, 1995
and June 30, 1995, respectively. This increase is due to normal business
fluctuations.
Inventory increased by $62,837 to $442,173 at September 30, 1995 from $379,336
at June 30, 1995. This increase was principally due to a build up of inventory
during a slow sales period.
Current liabilities decreased $78,200 to $695,075 at September 30, 1995 from
$773,275 at June 30, 1995. This decrease resulted primarily from payments on
accounts payable and debt.
As of September 30, 1995, the Company had shareholders' equity of $648,141. This
decrease of $23,454 from $671,595 at June 30, 1995 resulted from the net loss
for the three months ended September 30, 1995.
Net cash used in operating activities was $163,499. This was primarily due to
the net loss and changes in the non-cash operating accounts for the three months
ended September 30, 1995. Net cash used in investing activities was $1,964,
which was for the upgrade of certain manufacturing equipment. Cash used in
financing activities was $30,515 which were for principal payments on debt and
capital lease obligations.
Unless the Company can (1) obtain capital contributions or financing as may be
required to fulfill its development and marketing activities, (2) achieve a
level of sales adequate to support the Company's cost structure and (3)
ultimately operated profitably, the Company will be unable to continue as a
going concern.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceeding
There has been no change in status of the legal proceeding described in Item 3,
Legal Proceedings of the Annual Report.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
During the three months ended September 30, 1995, there has been no defaults
upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DRUG SCREENING SYSTEMS, INC.
/s/ Patrick J. Brennan
----------------------
Patrick J. Brennan, Vice President and
Chief Financial Officer
Date: November 9, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000828747
<NAME> DRUG SCREENING SYSTEMS, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1995
<PERIOD-START> JUL-01-1995 JUL-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<EXCHANGE-RATE> 1 1
<CASH> 109,130 305,108
<SECURITIES> 0 0
<RECEIVABLES> 246,012 224,975
<ALLOWANCES> 100,000 100,000
<INVENTORY> 442,173 379,336
<CURRENT-ASSETS> 765,223 872,731
<PP&E> 1,124,254 1,121,766
<DEPRECIATION> 582,061 559,566
<TOTAL-ASSETS> 1,343,216 1,471,620
<CURRENT-LIABILITIES> 695,075 773,275
<BONDS> 0 0
<COMMON> 24,460 24,460
0 0
0 0
<OTHER-SE> 623,681 696,055
<TOTAL-LIABILITY-AND-EQUITY> 1,342,316 1,471,260
<SALES> 531,158 0
<TOTAL-REVENUES> 532,315 0
<CGS> 171,934 0
<TOTAL-COSTS> 383,835 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (23,454) 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,454) 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,454) 0
<EPS-PRIMARY> (0.10) 0
<EPS-DILUTED> (0.10) 0
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