<PAGE> 1
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 SEPTEMBER 30, 1996
COMMISSION FILE NUMBER: 1-123620
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)
10410 TRADEMARK STREET, RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices) (Zip Code)
(909) 466-8378
Registrant's Telephone Number, Including Area Code
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
As of November 8, 1996 - Common Stock, $.001 Par Value 5,221,900
<PAGE> 2
PART l
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE
BALANCE SHEETS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 MARCH 31
1996 1996
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 475 $ 249,047
Prepaid Expenses and Other Current Assets 90,116 120,802
Notes Receivable - Parent -- 282,295
----------- -----------
Total Current Assets 90,591 652,144
Property and Equipment (Net of Accumulated Depreciation
of $452,254 at September 30, 1996 and $380,874 at
March 31, 1996) 532,314 483,039
Patents and Other Assets, Net of Cumulative Amortization 40,172 40,207
----------- -----------
Total Assets $ 663,077 $ 1,175,390
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note Payable - Parent $ 278,892 $ --
Accounts Payable 423,988 71,285
Accrued Expenses 8,756 22,920
Current Portion of Long-Term Debt 4,567 21,059
----------- -----------
Total Current Liabilities 716,203 115,264
Long-Term Debt - Net of Current Portion 848 3,239
----------- -----------
Total Liabilities 717,051 118,503
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, Issued and Outstanding 5,221,900 Shares
at September 30 and March 31, 1996 5,222 5,222
Additional Paid-In Capital 7,542,401 7,542,401
Deficit Accumulated in the Development Stage (7,601,597) (6,490,736)
----------- -----------
Total Stockholders' Equity (53,974) 1,056,887
----------- -----------
Total Liabilities and Stockholders' Equity $ 663,077 $ 1,175,390
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 3
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
OCTOBER 8, 1992
FOR THE FOR THE (INCEPTION)
THREE MONTHS ENDED SIX MONTHS ENDED TO
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30,
--------------------------- ---------------------------
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues: $ - $ - $ - $ - $ -
Costs and Expenses:
General and Administrative Expenses 55,816 85,553 128,592 160,919 2,146,474
Research and Development 539,635 220,726 702,413 408,195 3,258,832
Depreciation and Amortization 52,189 42,151 72,032 72,897 488,056
Interest Expense - Parent 1,847 - 1,847 - 40,012
Management Fees - Parent 105,000 105,000 210,000 210,000 1,470,000
Interest Expense 1,114 24,921 1,503 68,336 114,025
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses 755,601 478,351 1,116,387 920,347 7,517,399
----------- ----------- ----------- ----------- -----------
Loss from Operations (755,601) (478,351) (1,116,387) (920,347) (7,517,399)
Other Income (Expense) 710 (107,324) 5,526 228,743 (84,198)
----------- ----------- ----------- ----------- -----------
Net Loss $ (754,891) $ (585,675) $(1,110,861) $ (691,604) $(7,601,597)
=========== =========== =========== =========== ===========
Weighted Average Common Shares
Outstanding 5,221,900 5,221,900 5,221,900 5,221,900
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.14) $ (0.11) $ (0.21) $ (0.13)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
OCTOBER 8, 1992
FOR THE SIX MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss $(1,110,861) $ (691,604) $(7,601,597)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Depreciation and Amortization 72,032 72,897 488,056
Disposal of Property and Equipment - - 25,475
Realized Gain on Marketable Securities - 627,512 627,512
Unrealized Loss on Marketable Securities - (703,953 -
Amortization of Bond Discount - (779) (4,855)
Changes in Operating Assets and Liabilities:
(Increase) Decrease Prepaid Expenses and Other
Current Assets 30,686 23,243 (90,116)
(Increase) Decrease in Other Assets - - (4,993)
Increase (Decrease) in Accounts Payable 352,703 (16,924) 370,139
Increase (Decrease) in Accrued Expenses (14,164) (1,544) 8,756
----------- ----------- -----------
Net Cash Used by Operating Activities (669,604) (691,152) (6,181,623)
----------- ----------- -----------
Cash Flow From Investing Activities:
Sale of Marketable Securities - 3,285,625 3,285,625
Purchases of Marketable Securities - - (3,908,281)
Purchases of Property and Equipment (120,655) (34,059) (605,512)
Patent Costs (617) - (38,453)
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities (121,272) 3,251,566 (1,266,621)
----------- ----------- -----------
Cash Flow from Financing Activities:
Sales of Common Stock - - 8,621,226
Expenses of Stock Offering - - (1,510,663)
Payment of Loan to Parent - (961,839 (1,917,057)
Repayment of Loan by Parent 282,295 - 1,917,057
Proceeds of Loan Payable - Parent 278,892 1,000,000 1,578,674
Payment of Loan Payable - Parent - - (1,299,782)
Proceeds of Capital Leases - - 101,572
Payments of Capital Leases (18,883) (17,008) (96,157)
Proceeds of Brokerage Loan Payable - 1,000,000 2,674,683
Payments of Brokerage Loan Payable - (2,569,592) (2,674,683)
----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 542,304 (1,548,439) 7,394,870
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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,
1996.
NOTE 2 - Cash and Cash Equivalents
-------------------------
<TABLE>
<CAPTION>
Cash and cash equivalents are summarized as follows: SEPTEMBER 30, MARCH 31,
1996 1996
------------- ------------
<S> <C> <C>
Cash in Banks $ - $ 248,457
Money Market Funds 475 590
------------- ------------
$ 475 $ 249,047
============= ============
NOTE 3 - Property and Equipment
----------------------
Property and equipment is summarized as follows:
Furniture, Fixtures and Equipment $ 286,330 $ 268,182
Test Equipment 489,416 386,909
Leasehold Improvements 208,822 208,822
------------- ------------
984,568 863,913
Less: Accumulated Depreciation 452,254 380,874
------------- ------------
$ 532,314 $ 483,039
============= ============
</TABLE>
NOTE 4 - Notes Receivable/Payable - Parent
---------------------------------
Notes Receivable - Parent represented demand loans made to
Substance Abuse Technologies, Inc., formerly U.S. Alcohol
Testing of America, Inc. (the "Parent" or "SAT"), which were
due on or before December 31, 1996. The notes bore monthly
interest at the rate of 8% per annum. The notes were secured
by the Parent's shares in the Company. The Parent repaid these
loans in full during the quarter ended September 30, 1996.
Notes Payable - Parent represent loans made to the Company by
its Parent. The Parent has agreed to advance to the Company
$1,000,000 to fund continuing research and development. The
$1,000,000 loan will bear interest at 8% and have a due date
of December 31, 1996. At September 30, 1996, $278,892 of the
$1,000,000 commitment had been advanced to the Company.
<PAGE> 6
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
NOTE 5 - Long-Term Debt
--------------
<TABLE>
<CAPTION>
Long-term debt is summarized as follows: SEPTEMBER 30 MARCH 31
1996 1996
------------ -----------
<S> <C> <C>
Capitalized lease obligations secured by certain
equipment, payable in installments of $2,496 and $434
monthly, and due from
November 1996 to November 1997 $ 5,415 $ 24,298
Less: Current Portion 4,567 21,059
----------- -----------
$ 848 $ 3,239
=========== ===========
</TABLE>
NOTE 6 - 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 its
Parent and, accordingly, has obligations to its Parent for the
royalty payments required by the License Agreement.
NOTE 7 - 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 common
stock of the Company owned by the minority interest and
thereby own 100% of the Company's common stock. There can be
no assurance that such solicitation will be successfully
completed.
<PAGE> 7
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 its
parent company, SAT, a publicly traded company. During October and November
1993, the Company sold 1,721,900 shares of its 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. During the period
ended September 30, 1996, the Company had outstanding loans payable to SAT for
working capital purposes in the amount of $278,892. These advances are evidenced
by notes due December 31, 1996, bearing interest at the rate of 8% per annum at
September 30, 1996. SAT has committed to advance $1,000,000 to the Company to
fund continuing research and development. As of November 14, 1996, approximately
$845,000 has been advanced to the Company by SAT. The Company is dependent on
continuing advances from its Parent to continue research, development and
ultimate marketing of its products and to fund its working capital requirements
for the next twelve months. There are presently no unfunded commitments for
capital expenditures.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 as Compared with Three Months Ended
September 30, 1995
During the three months ended September 30, 1996, the Company spent
$540,000 on research and development as compared with $221,000 in the same three
months of fiscal 1995. The increase of $319,000 represented accelerated research
on the saliva drug testing project. General and administrative expenses
decreased $30,000, from $86,000 to $56,000, due to expense reductions.
Other income (expense) was net income of approximately $1,000 in fiscal
1996 as compared with net expense of $107,000 in the prior fiscal year. The
prior year net expense was primarily a net loss of $173,000 on the sale of the
Company's investment in REMIC bonds, partially offset by interest income of
$65,000.
Six Months Ended September 30, 1996 as Compared with Six Months Ended September
30, 1995
During the six months ended September 30, 1996, the Company spent $702,000
on research and development as compared with $408,000 in the first six months of
fiscal 1996. This increase of $294,000 reflected accelerated research on the
saliva drug testing project. General and administrative expenses totaled
$129,000 in the first six months of fiscal 1997 as compared with $161,000 for
the prior year.
Since inception, the Company has spent $3,300,000 on research and
development and an additional $2,100,000 on general and administrative expenses.
The Company is currently conducting a feasibility study as to the saliva
based drug testing products currently under development. Assuming the study
indicates that the Company should proceed, the Company estimates that it will be
at least fifteen months before the drug project will be submitted to the Food
and Drug Administration. There can be no assurance that the Company will
successfully complete its development program on a timely basis, that it will
thereafter obtain the necessary governmental approval or that marketing will
start when contemplated.
<PAGE> 8
PART ll
OTHER INFORMATION
ITEM 1 Legal Proceedings
There are no known legal proceedings pending against the
Company.
ITEM 2 Changes in Securities
There have been no changes in securities of the Company during
the period covered by this Report.
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 during the
period covered by this Report.
ITEM 5 Other Information.
Not applicable.
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K reporting Item 4 (Changes in
Registrant's Certifying Accountant) was filed on September
18, 1996.
<PAGE> 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Ace 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
BY: /s/ Linda H. Masterson
--------------------------------------
Linda H. Masterson
President
Date: November 19, 1996 BY: /s/ Dennis A. Wittman
--------------------------------------
Dennis A. Wittman
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
9-30-1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 475
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,591
<PP&E> 984,568
<DEPRECIATION> 452,254
<TOTAL-ASSETS> 663,077
<CURRENT-LIABILITIES> 716,203
<BONDS> 848
0
0
<COMMON> 5,222
<OTHER-SE> (59,196)
<TOTAL-LIABILITY-AND-EQUITY> 663,077
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 755,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (754,891)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (754,891)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754,891)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
