<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 DECEMBER 31, 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)
4517 N.W. 31ST AVENUE, FT. LAUDERDALE, FLORIDA 33309
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(954) 739-9600
- --------------------------------------------------------------------------------
Registrant's Telephone Number, Including Area Code
10410 TRADEMARK STREET, RANCHO CUCAMONGA, CALIFORNIA 91730
- --------------------------------------------------------------------------------
(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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
As of February 10, 1997 - Common Stock, $.001 Par Value 5,221,900
<PAGE> 2
PART I
FINANCIAL INFORMATION
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
1996 MARCH 31
(UNAUDITED) 1996
--------------- -------------
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents ................................................ $ - $249,047
Prepaid Expenses and Other Current Assets ................................ 155,597 120,802
Note Receivable - Parent ................................................. -- 282,295
----------- -----------
Total Current Assets ..................................................... 155,597 652,144
Property and Equipment (Net of Accumulated Depreciation
of $442,586 at December 31, 1996 and $380,874 at
March 31, 1996) ........................................................ 505,506 483,039
Patents and Other Assets, Net of Cumulative Amortization ................. 40,476 40,207
----------- -----------
Total Assets ............................................................. $ 701,579 $ 1,175,390
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note Payable - Parent .................................................. $ 1,200,823 $ --
Accounts Payable ....................................................... 255,769 71,285
Accrued Expenses ....................................................... 16,015 22,920
Current Portion of Long-Term Debt ...................................... 3,265 21,059
----------- -----------
Total Current Liabilities ................................................ 1,475,872 115,264
Long-Term Debt - Net of Current Portion .................................. 848 3,239
----------- -----------
Total Liabilities ........................................................ 1,476,720 118,503
Commitments and Contingencies ............................................ -- --
Stockholders' Equity:
Common Stock, $.001 Par Value, 50,000,000 Shares
Authorized, Issued and Outstanding 5,221,900 Shares
at December 31 and March 31, 1996 .................................... 5,222 5,222
Additional Paid-In Capital ............................................... 7,542,401 7,542,401
Deficit Accumulated in the Development Stage ............................. (8,322,764) (6,490,736)
----------- -----------
Total Stockholders' Equity (Deficit) ..................................... (775,141) 1,056,887
----------- -----------
Total Liabilities and Stockholders' Equity ............................... $ 701,579 $ 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
FOR THE FOR THE OCTOBER 8, 1992
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION)
DECEMBER 31 DECEMBER 31 TO
----------------------------- -------------------------- DECEMBER 31,
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues: ........................... $ -- $ -- $ -- $ -- $ --
Costs and Expenses:
General and Administrative Expenses 19,792 105,704 148,386 266,623 2,166,268
Research and Development .......... 494,372 274,356 1,196,784 682,551 3,753,204
Depreciation and Amortization ..... 49,234 37,379 121,266 110,276 537,290
Interest Expense - Parent ......... 17,823 -- 19,670 -- 57,835
Management Fees - Parent .......... 105,000 105,000 315,000 315,000 1,575,000
Interest Expense .................. 1,041 2,450 2,544 70,786 115,066
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses ............ 687,262 524,889 1,803,650 1,445,236 8,204,663
----------- ----------- ----------- ----------- -----------
Loss from Operations ................ (687,262) (524,889) (1,803,650) (1,445,236) (8,204,663)
Other Income (Expense) .............. (33,905) 22,104 (28,378) 250,847 (118,103)
----------- ----------- ----------- ----------- -----------
Net Loss ............................ $ (721,167) $ (502,785) $(1,832,028) $(1,194,389) $(8,322,766)
=========== =========== =========== =========== ===========
Weighted Average Common Shares
Outstanding ....................... 5,221,900 5,221,900 5,221,900 5,221,900
=========== =========== =========== ===========
Net Loss Per Common Share ........... $ (0.14) $ (0.10) $ (0.35) $ (0.23)
=========== =========== =========== ===========
</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 NINE MONTHS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1996
----------- ----------- -----------
Cash Flow From Operating Activities:
<S> <C> <C> <C>
Net Loss ..................................... $(1,832,028) $(1,194,389) $(8,322,764)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Depreciation and Amortization .............. 121,266 110,276 537,290
Disposal of Property and Equipment ......... 41,873 -- 67,348
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 ............................ (34,795) (93,648) (155,597)
(Increase) Decrease in Other Assets .......... -- -- (4,993)
Increase (Decrease) in Accounts Payable ...... 184,484 33,895 255,769
Increase (Decrease) in Accrued Expenses ...... (6,905) (6,966) 16,015
----------- ----------- -----------
Net Cash Used by Operating Activities .......... (1,526,105) (1,228,052) (6,984,275)
----------- ----------- -----------
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 .......... (184,629) (39,601) (669,486)
Patent Costs ................................. (1,246) -- (39,082)
----------- ----------- -----------
Net Cash Provided (Used) by Investing Activities (185,875) 3,246,024 (1,331,224)
----------- ----------- -----------
Cash Flow from Financing Activities:
Sales of Common Stock ........................ -- -- 8,621,226
Expenses of Stock Offering ................... -- -- (1,510,663)
Advances on Note Receivable - Parent ......... -- (1,428,538) (1,917,057)
Collection on Note Receivable - Parent ....... 282,295 -- 1,917,057
Proceeds from Loan Payable - Parent .......... 1,200,823 1,000,000 2,500,605
Payment of Loan Payable - Parent ............. -- -- (1,299,782)
Proceeds from Capital Leases ................. -- -- 101,572
Payments of Capital Leases ................... (20,185) (23,398) (97,459)
Proceeds from 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 1,462,933 (2,021,528) 8,315,499
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Cumulative
From
October 8, 1992
For the Nine Months Ended (Inception) to
December 31 December 31,
1996 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents . (249,047) (3,556) -
Cash and Cash Equivalents - Beginning of Period .. 249,047 49,368 -
--------- ---------- ---------
Cash and Cash Equivalents - End of Period ........ $ - $ 45,812 $ -
========= ========== =========
Supplemental Disclosure of Cash Information:
Cash Paid for Interest ......................... $ 2,544 $ 70,786 $ 152,190
========= ========== =========
Income Taxes Paid ................................ $ - $ - $ -
========= ========== =========
Non-cash Financing Activities:
Value of Common Stock Issued for the Transfer of
Assets at Carrying Value from Parent ....... $ - $ - $ 437,060
========= ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 6
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
Cash in Banks ......................................... $ - $248,457
Money Market Funds .................................... - 590
------- --------
$ - $249,047
======= ========
</TABLE>
NOTE 3 - Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
----------- -----------
<S> <C> <C>
Furniture, Fixtures and Equipment .... $207,462 $268,182
Test Equipment ....................... 531,808 386,909
Leasehold Improvements ............... 208,822 208,822
-------- --------
948,092 863,913
Less: Accumulated Depreciation ...... 442,586 380,874
-------- --------
$505,506 $483,039
======== ========
</TABLE>
NOTE 4 - Note Receivable/Payable - Parent
Note Receivable - Parent represented a demand loan made to
Substance Abuse Technologies, Inc., formerly U.S. Alcohol
Testing of America, Inc. (the "Parent" or "SAT"), a publicly
traded company, which was due on or before December 31, 1996.
The note bore monthly interest at the rate of 8% per annum.
The note was secured by the Parent's shares in the Company.
The Parent repaid the loan in full during the quarter ended
September 30, 1996.
Note Payable - Parent represents a loan made to the Company by
its Parent. The Parent has agreed to advance to the Company
$1,500,000 to fund continuing research and development. The
$1,500,000 loan will bear interest at 8% and will be due after
the results of the consent solicitation for the proposed
acquisition of U.S. Drug shares owned by the minority interest
are known. See Note 7. At December 31, 1996, $1,200,823 of the
$1,500,000 commitment had been advanced to the Company.
<PAGE> 7
U.S. DRUG TESTING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
NOTE 5 - Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt is summarized as follows: DECEMBER 31 MARCH 31
1996 1996
------- ---------
<S> <C> <C>
Capitalized lease obligations secured by
certain equipment, payable in installments
of $434 monthly, and due November 1997 ... $ 4,113 $24,298
Less: Current Portion ...................... 3,265 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> 8
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 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 December 31, 1996, the Company had outstanding
loans in the amount of $1,200,822 payable to the Parent to fund continuing
research and development. These advances are evidenced by notes due after the
results of the consent solicitation for the proposed acquisition of the U.S.
Drug shares owned by its minority interest are known. These advances bear
interest at the rate of 8% per annum at December 31, 1996. SAT has committed to
advance a total of $1,500,000 to the Company to fund continuing research and
development. The Company is dependent on continuing advances from its Parent to
continue the research, development and ultimate marketing of its products and to
fund its working capital requirements for the next twelve months.
The Company completed a feasibility study in November 1996 as to the saliva
based drug testing products and made a decision to proceed with development. The
Company estimates that it will be approximately two years before the drug
testing products will be available for marketing. 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.
U.S. Drug will require approximately $10,000,000, in addition to the
approximately $8,300,000 already expended, to complete development of a saliva
based testing products. Although U.S. Drug management believes that its parent,
SAT, can raise the necessary funds to complete this project, failure to raise
the funds will result in cessation of operations of U.S. Drug because it has no
other product to market or service to furnish.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 as Compared with Three Months Ended
December 31, 1995
General and administrative expenses for the quarter ended December 31, 1996
were $20,000 as compared with $106,000 in the same period of the prior year; a
decrease of $86,000 or 81%. Major components of the decrease in general and
administrative expenses are a decrease in professional fees of $26,000, printing
expenses of $9,000 and outside services of $10,000.
During the quarter ended December 31, 1996, the Company spent $494,000 on
research and development as compared with $274,000 in the prior year; an
increase of $220,000 or 80%. The increase reflects accelerated research on the
saliva drug testing project.
Depreciation expense for the quarter ended December 31, 1996 was $49,000 as
compared with $37,000 in the same period of the prior year, reflecting increased
investment in fixed assets. Management fees paid to SAT were $105,000 in the
quarter ended December 31, 1996 of both the current and prior years.
Interest expense in the quarter ended December 31, 1996 was $1,000 as
compared with $2,400 in the same period of the prior year.
<PAGE> 9
Other income and expenses was a net other expense of $34,000 in the quarter
ended December 31, 1996 as compared with a net other income of $22,000 in the
same period of the prior year. Current year other expenses was due to a loss on
disposal of equipment. Prior year other income was primarily interest income on
a loan to the Parent of $12,000.
Nine Months Ended December 31, 1996 as Compared with Nine Months Ended December
31, 1995
General and administrative expenses for the nine months ended December 31,
1996 was $148,000 as compared with $266,000 in the same period of the prior
year, a decrease of $118,000 or 44%, reflecting reduced expenditures, primarily
reductions in professional fees, outside services and printing. During fiscal
year 1997, costs previously charged to general and administrative in fiscal year
1996 which were directly related to product development have been classified
accordingly, primarily royalty expenses, facility expenses and research-related
travel.
During the nine months ended December 31, 1996, the Company spent
$1,197,000 on research and development as compared with $683,000 in the prior
year, an increase of $514,000 or 75%. The increase reflected a significant
acceleration of spending on research and development of the saliva drug testing
project.
Depreciation expense for the nine months ended December 31, 1996 was
$121,000 as compared with $110,000 in the same period of the prior year,
reflecting an increased investment in fixed assets. Management fees paid to SAT
were $315,000 in the nine months ended December 31 of both the current and prior
years.
Interest expense in the nine months ended December 31, 1996 was $2,500 as
compared with $71,000 in the same period of the prior year. The prior year
expense was the result of interest on broker margin loans secured by REMIC bonds
owned by the Company. The REMIC bonds were sold in the quarter ended September
30, 1995.
Other income and expenses was a net expense of $28,000 in the current year
as compared with net other income of $251,000 in the same period of the prior
year. Current year net other expense is primarily due to a loss on disposal of
an asset. Prior year other income includes interest income generated by the
REMIC bonds of $104,000, unrealized gain on marketable securities of $704,000
less realized losses of $627,000, and interest income from loans to SAT of
$70,000.
Since inception the Company has spent $3,753,000 on research and
development and an additional $2,166,000 on general and administrative expenses.
<PAGE> 10
PART II
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
None
<PAGE> 11
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
Date: February 14, 1997 BY: /s/ Linda H. Masterson
---------------------------- -----------------------------------
Linda H. Masterson
President
Date: February 14, 1997 BY: /s/ Dennis A. Wittman
--------------------------- -----------------------------------
Dennis A. Wittman
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FORM 10Q FOR NINE MONTHS ENDED 12/31/96
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 155,597
<PP&E> 948,092
<DEPRECIATION> 442,586
<TOTAL-ASSETS> 701,579
<CURRENT-LIABILITIES> 1,475,872
<BONDS> 848
0
0
<COMMON> 5,222
<OTHER-SE> (780,363)
<TOTAL-LIABILITY-AND-EQUITY> 701,579
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,803,650
<OTHER-EXPENSES> 28,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,670
<INCOME-PRETAX> (1,832,028)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,832,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,832,028)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> 0
</TABLE>
