<PAGE>
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, 1996; 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.
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(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
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(Address of principal executive offices)
(609) 228-8500
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(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, 1996, there were 4,246,017 shares of the issuer's Common Stock,
$0.01 par value, outstanding.
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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
2
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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, 1996 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 1997 ("Fiscal 1997"). 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,
1996 ("Fiscal 1996").
Page
----
Index to Financial Statements
Balance Sheets at September 30, 1996 (unaudited) and June 30, 1996 4
Statements of Operations and Accumulated Deficit (unaudited) for the
three months ended September 30, 1996 and 1995 5
Statement of Cash Flows (unaudited) for the three months ended
September 30, 1996 and 1995 6
Notes to Financial Statements 7
3
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DRUG SCREENING SYSTEMS, INC.
Balance Sheets, September 30 1996 (unaudited), and June 30, 1996
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 75,192 $ 91,807
Accounts receivable, net of allowance of $50,000 141,296 222,262
Inventory 374,886 445,229
Prepaid expenses and other 114,747 63,120
------------ ------------
Total Current Assets 706,121 822,418
Equipment and improvements, net 281,823 283,726
Other Assets:
Deposits 12,104 12,104
Patents 25,417 25,792
------------ ------------
Total Assets $ 1,025,465 $ 1,144,040
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-tert debt $ 129,475 $ 109,117
Accounts payable and accrued expenses 371,152 348,116
Customer advances and prepayments 17,000 17,000
------------ ------------
Total Current Liabilities 517,627 474,233
Commitments and contingencies -- --
Stockholders' Equity
Class "A" preferred stock, $o.01 par value; 2,000,000
shares authorized; none issued -- --
Common stock, $0.01 par value; 20,000,000
shares authorized; 4,246,017 shares at September 30,1996
and June 30, 1996 issued and outstanding 42,460 42,460
Additional paid-in-capital 15,070,555 15,070,555
Accumulated deficit (14,605,177) (14,443,208)
------------ ------------
Total Stockholders' Equity 507,838 669,807
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,025,465 $ 1,144,040
============ ============
</TABLE>
See notes to financial statements
4
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DRUG SCREENING SYSTEMS, INC
Statements of Operations and Accumulated Deficit (unaudited) For Three Months
ended September 30, 1996 and 1995
Three Months ended September 30,
1996 1995
---- ----
Revenues $ 595,616 $ 531,158
Cost of sales 347,688 171,934
------------ ------------
Gross profit 247,928 359,224
Operating expenses:
Research and development 98,368 85,852
Selling, general and administrative 311,533 297,983
------------ ------------
409,901 383,835
------------ ------------
Loss from operations (161,973) (24,611)
Interest income 4 1,157
------------ ------------
Net loss (161,969) (23,454)
Accumulated deficit - beginning of period $(14,443,208) $(13,991,420)
------------ ------------
Accumulated deficit - end of period $(14,605,177) $(14,014,874)
============ ============
Net loss per share $ (0.04) $ (0.01)
============ ============
Weighted average number of shares
outstanding
4,266,017 2,466,017
============ ============
See notes to financial statements
5
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DRUG SCREENING SYSTEMS, INC.
Statements of Cash Flows for the Three Months (Unaudited)
Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months ended September 30,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss (161,969) $ (23,454)
Adjustments to reconcile net loss to net cash used
Depreciation and amortization 16,909 22,870
Gain on sale of equipment held for sale --
Decrease (increase) in assets:
Accounts receivable 80,966 (21,037)
Inventory 70,343 (62,837)
Prepaid expenses and other (51,627) (4,606)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 23,036 (65,912)
Other current liabilities (8,523)
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Net cash used in operating activities (22,342) (163,499)
Cash flows from investing activities:
Expenditures for equipment and improvements (14,631) (2,489)
Recovery of (expenditure for) deposits 525
--------- ---------
Net cash used in investing activities (14,631) (1,964)
Cash flows from financing activities:
Proceeds from non-bank financing 95,258 10,157
Principal payments on debt and capital leases (74,900) (40,672)
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Net cash provided by financing activities 20,358 (30,515)
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Net increase (decrease) in cash and cash equivalents (16,615) (195,978)
Cash and cash equivalents:
Beginning of period 91,807 305,108
--------- ---------
End of period $ 75,192 $ 109,130
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 782 $ 508
========= =========
</TABLE>
See notes to financial statements
6
<PAGE>
DRUG SCREENING SYSTEMS, INC.
Notes to Financial Statements
For the Three Months Ended September 30, 1996 and 1995
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. During the quarter ended March 31, 1996, the Company raised $450,000
through a private placement pursuant to Regulation D under the Securities Act of
1933, as amended. Under this offering, 1,800,000 shares of the Common Stock were
issued at $0.25 a share.
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, 1996, 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, 1997 ("Fiscal 1997").
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 1997 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.
7
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B. Revenue Recognition
The Company recognizes revenues at the time Product is shipped. The Company has
an arrangement with a customers whereby title and risk of loss transfers to the
customer 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 $248,928 during the first three months of
Fiscal 1997 and $295,724 during the first three months of Fiscal 1996. Inventory
of $660,000 was in the refrigerated storage unit at September 30, 1996 and June
30, 1996, respectively.
C. Inventory
Inventory at September 30, 1996 and June 30, 1996 consists of the following:
September 30 June 30
------------ -------
Raw Materials $ 224,435 $ 262,858
Work-in-process 115,428 134,911
Finished Goods 35,023 47,460
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Total $ 374,886 $ 445,229
========= =========
D. Equipment and Improvements
Equipment and Improvements at September 30, 1996 and June 30, 1996, 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 680,335 666,259
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916,380 902,304
Less accumulated depreciation and amortization 634,557 618,578
======== =========
$281,823 $ 283,726
======== =========
8
<PAGE>
E. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at September 30, 1996 and June 30, 1996
consist of the following:
September 30 June 30
------------ -------
Accounts payable - trade $ 279,816 $ 275,878
Accrued payroll and related expenses 26,400 46,728
Other 64,936 43,510
-------------- --------------
$ 371,152 $ 366,116
============== ==============
F. Income Taxes
The tax effects of significant items comprising the Company's net deferred taxes
as of September 30, 1996 were as follows:
Deferred Tax Assets:
Property $ 44,000
Allowance for doubtful accounts 20,000
Vacation accrual 4,000
Operating loss carryforwards 6,150,000
Valuation allowance (6,218,000)
-----------------
$ -
=================
There was a $50,0000 increase in the valuation allowance in the three months
ended September 30, 1996.
There was no provision for current income taxes for either the first three
months of Fiscal 1997 or 1996.
9
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis for three months ended September 30, 1996
and 1995 should be read in conjunction with the Financial Statements included in
Item 1 of this Report.
Results of Operations - Three Months Ended September 30, 1996 Versus 1995
Revenues - The Company's revenues from sales were $595,616 and $531,158 in the
first three months of Fiscal 1997 and 1996, respectively. This increase of
$64,458 (12.1%) resulted from increased sales to Allegiance (formerly Baxter)
Healthcare and the Commonwealth of Pennsylvania of approximately $43,000 and
$37,000 respectively, offset by decreased sales to Borg-Warner Information
Services, Inc. ("BWIS") of approximately $47,000. Sales to other customers in
the first three months of Fiscal 1997 increased by approximately $31,000 from
the first three months of Fiscal 1996.
The Company's gross profit of $247,928 for the first three months of Fiscal 1997
amounted to 60% ($359,224 and 94%, respectively, in the first three months of
Fiscal 1996) of its operating expenses. At the gross profit percentage for the
first three months of Fiscal 1997, the Company would have had to generate
approximately $985,000 in sales to cover such operating expenses ($568,000 in
the first three months of Fiscal 1996).
Cost of sales and gross profit - The Company's cost of sales for the first three
months of Fiscal 1997 was $347,688 and its gross profit percentage was 41.6%
($171,934 and 67.6%, respectively for the comparable period in Fiscal 1996).
This gross profit percentage of 41.6% is lower than the level achieved for
Fiscal 1996. The decrease in the gross profit as a percent of sales from the
first three months of Fiscal 1995 resulted primarily from increased quality
control standards being applied resulting in much lower yields.
Operating expenses - Operating expenses of $409,901 for the three months ended
September 30, 1996 increased $26,066 from $383,835 for the comparable period in
Fiscal 1996. This increase resulted principally from increased headcount due to
anticipated sales to Allegiance Healthcare which have not materialized at the
anticipated level.
Net loss - The Company had a net loss of $161,969 for the first three months of
Fiscal 1997. This was a increase of $138,515 from the loss of $23,454 for the
first three months of Fiscal 1996. The increase in the net loss was primarily
attributable to the lower gross margin and increased operating expenses, offset
by increased sales as more fully explained above.
10
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Liquidity and Capital Resources
The Company had working capital at September 30, 1996 of $188,494 as compared to
$348,185 at June 30, 1996. At September 30, 1996, the Company had the
availability of $75,192 of cash as compared to $91,807 at June 30, 1996. The
changes in working capital and cash between June 30 and September 30, 1996 were
primarily attributable to the net loss and changes in the non-cash operating
accounts for the three months ended September 30, 1996. See the Statement of
Cash Flows in Item 1 of this Report.
Accounts receivable decreased to $141,296 from $222,262 at September 30, 1996
and June 30, 1996, respectively. This decrease is due to the collection of a
large receivable which resulted from a state government contract.
Inventory decreased by $70,343 to $374,886 at September 30, 1996 from $445,229
at June 30, 1995. This decrease was principally due to a reduction of inventory
which was built up in anticipation of greater Allegiance Healthcare sales.
Current liabilities increased $43,394 to $517,627 at September 30, 1996 from
$474,233 at June 30, 1996. This increase resulted primarily from the liability
created by a large purchase from a contract customer at month end.
As of September 30, 1996, the Company had shareholders' equity of $507,838. This
decrease of $161,969 from $669,807 at June 30, 1996 resulted from the net loss
for the three months ended September 30, 1996.
Net cash used in operating activities was $22,342. This was primarily due to the
net loss and changes in the non-cash operating accounts for the three months
ended September 30, 1996. Net cash used in investing activities was $14,631,
which was for the purchase of a new mold. Cash provided by financing activities
was $20,358 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.
11
<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, 1996, 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
12
<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, there unto duly
authorized.
DRUG SCREENING SYSTEMS, INC.
/s/ Patrick J. Brennan
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Patrick J. Brennan, Vice President and
Chief Financial Officer
Date: November 14, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000828747
<NAME> DRUG SCREENING SYSTEMS, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 75,192
<SECURITIES> 0
<RECEIVABLES> 191,296
<ALLOWANCES> (50,000)
<INVENTORY> 374,886
<CURRENT-ASSETS> 706,121
<PP&E> 916,380
<DEPRECIATION> (634,557)
<TOTAL-ASSETS> 1,025,465
<CURRENT-LIABILITIES> 517,627
<BONDS> 0
42,460
0
<COMMON> 0
<OTHER-SE> 465,378
<TOTAL-LIABILITY-AND-EQUITY> 1,025,465
<SALES> 595,616
<TOTAL-REVENUES> 595,620
<CGS> 347,688
<TOTAL-COSTS> 409,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (161,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (161,969)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
