10-Q 1 e10-q.txt PSYCHEMEDICS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE --------- SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 2000 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF --------- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-13738 PSYCHEMEDICS CORPORATION (exact name of Issuer as specified in its charter) Delaware 58-1701987 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 1280 Massachusetts Ave., Suite 200, Cambridge, MA 02138 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (617-868-7455) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (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 ------ ------ Number of shares outstanding of only class of Issuer's Common Stock as of August 2, 2000: Common Stock $.005 par value (21,176,376 shares). Page 1 2 PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION Page No. -------- Item 1 Financial Statements Condensed Balance Sheets as of June 30, 2000 and December 31, 1999 3 Condensed Statements of Income for the three month periods ended June 30, 2000 and 1999 4 Condensed Statements of Income for the six month periods ended June 30, 2000 and 1999 5 Condensed Statements of Cash Flows for the six month periods ended June 30, 2000 and 1999 6 Notes to Condensed Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Item 3 Quantitative and Qualitative Disclosures about Market Risk 11 Part II OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders 12 Item 6 Exhibits and Reports on Form 8-K 13 SIGNATURES 14
Page 2 3 PSYCHEMEDICS CORPORATION CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,044,122 $ 899,387 Short-term investments 2,712,132 4,938,463 Accounts receivable, net 4,189,345 3,219,510 Inventories 460,656 449,103 Prepaid expenses and other current assets 629,460 557,276 Deferred tax asset 337,752 337,752 ----------- ----------- Total current assets 9,373,467 10,401,491 ----------- ----------- PROPERTY AND EQUIPMENT: Equipment and leasehold improvements, at cost 9,137,373 8,572,486 Less-Accumulated depreciation and amortization (5,802,703) (5,154,037) ----------- ----------- 3,334,670 3,418,449 ----------- ----------- OTHER ASSETS - NET 358,488 370,965 ----------- ----------- $13,066,625 $14,190,905 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 489,356 $ 512,580 Accrued expenses 1,560,036 842,790 Deferred revenue 769,833 862,088 ----------- ----------- Total current liabilities 2,819,225 2,217,458 ----------- ----------- DEFERRED TAX LIABILITY 167,520 167,520 SHAREHOLDERS' EQUITY: Preferred stock, $.005 par value; 1,000,000 shares authorized; none outstanding - - Common stock; $.005 par value; 50,000,000 shares authorized; issued 22,612,440 shares in 2000 and 1999 113,062 113,062 Paid-in capital 24,430,118 24,414,985 Accumulated deficit (7,214,560) (6,746,157) Less - Treasury stock, at cost; 1,430,064 and 1,172,464 shares in 2000 and 1999, respectively (6,855,235) (5,580,293) Less - Receivable from officer (393,505) (395,670) ----------- ----------- Total shareholders' equity 10,079,880 11,805,927 ----------- ----------- $13,066,625 $14,190,905 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 3 4 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ------------------------------ 2000 1999 ----------- ----------- REVENUE $ 5,472,701 $ 5,854,999 DIRECT COSTS 2,353,094 2,287,059 ----------- ----------- Gross profit 3,119,607 3,567,940 ----------- ----------- EXPENSES: General and administrative 890,803 822,506 Marketing and selling 1,022,611 1,080,360 Research and development 111,430 129,338 ----------- ----------- 2,024,844 2,032,204 ----------- ----------- OPERATING INCOME 1,094,763 1,535,736 OTHER INCOME 60,852 92,798 ----------- ----------- NET INCOME BEFORE INCOME TAXES 1,155,615 1,628,534 PROVISION FOR INCOME TAXES 477,700 667,690 ----------- ----------- NET INCOME $ 677,915 $ 960,844 =========== =========== BASIC NET INCOME PER SHARE $ 0.03 $ 0.04 =========== =========== DILUTED NET INCOME PER SHARE $ 0.03 $ 0.04 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,207,720 21,925,614 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,483,974 22,155,948 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 4 5 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------ 2000 1999 ----------- ----------- REVENUE $10,154,728 $10,535,256 DIRECT COSTS 4,503,280 4,230,158 ----------- ----------- Gross profit 5,651,448 6,305,098 ----------- ----------- EXPENSES: General and administrative 1,674,563 1,582,265 Marketing and selling 2,003,377 2,071,934 Research and development 218,346 270,399 ----------- ----------- 3,896,286 3,924,598 ----------- ----------- OPERATING INCOME 1,755,162 2,380,500 OTHER INCOME 341,197 209,453 ----------- ----------- NET INCOME BEFORE INCOME TAXES 2,096,359 2,589,953 PROVISION FOR INCOME TAXES 863,700 1,061,870 ----------- ----------- NET INCOME $ 1,232,659 $ 1,528,083 =========== =========== BASIC NET INCOME PER SHARE $ 0.06 $ 0.07 =========== =========== DILUTED NET INCOME PER SHARE $ 0.06 $ 0.07 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,280,645 21,986,321 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,552,827 22,217,651 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 5 6 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ENDED JUNE 30, ---------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,232,659 $ 1,528,083 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 680,646 677,759 Compensation expense related to issuance of stock options 15,133 - Changes in assets and liabilities: Receivables (969,835) (1,456,527) Inventories (11,553) 39,835 Prepaid expenses and other current assets (72,184) (153,282) Accounts payable (23,224) (158,381) Accrued expenses 717,246 724,943 Deferred revenue (92,255) (277,167) ----------- ----------- Net cash provided by operating activities 1,476,633 925,263 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities (purchases) of short-term investments - net 2,226,331 2,562,575 Purchases of property and equipment (564,887) (389,231) Increase in other assets - net (19,503) - ----------- ----------- Net cash provided by investing activities 1,641,941 2,173,344 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock - - Proceeds from the receivable from officer 2,165 (2,718) Cash dividends paid (1,701,062) (1,756,546) Acquisition of treasury stock (1,274,942) (1,140,921) ----------- ----------- Net cash used in financing activities (2,973,839) (2,900,185) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 144,735 198,422 CASH AND CASH EQUIVALENTS, beginning of period 899,387 724,738 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 1,044,122 $ 923,160 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 6 7 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS June 30, 2000 1. Interim Financial Statements The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the financial statements and related notes of Psychemedics Corporation (the "Company") as reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The balance sheet presented as of December 31, 1999 has been derived from the financial statements that have been audited by the Company's independent public accountants. The results of operations for the three months and the six months ended June 30, 2000 may not be indicative of the results that may be expected for the year ending December 31, 2000, or any other period. 2. Basic and Diluted Net Income Per Share In accordance with Statement of Financial Accounting Standard ("SFAS") No. 128, EARNINGS PER SHARE, basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share was computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The number of dilutive common equivalent shares outstanding during the period has been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options. Basic and diluted weighted average common shares outstanding are as follows:
Three Months Ended Six Months Ended ---------------------------- -------------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Weighted average common shares 21,207,720 21,925,614 21,280,645 21,986,321 Dilutive common stock options 276,254 230,334 272,182 231,330 ----------- ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 21,483,974 22,155,948 21,552,827 22,217,651
For the three months ended June 30, 2000 and 1999, options to purchase 834,370 and 832,406 common shares, respectively, were outstanding but not included in the diluted Page 7 8 weighted average common share calculation as the effect would have been antidilutive. For the six months ended June 30, 2000 and 1999, options to purchase 1,096,070 and 832,406 common shares, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would have been antidilutive. 3. Revenue Recognition Except as provided below, revenues from the Company's services are recognized upon reporting of drug test results to the customer. Revenues related to sample collection kits not returned for processing by customers are recognized when the likelihood of the Company performing any service obligation is deemed remote. During the second quarter of 2000 the Company did not record any revenue related to sample collection kits that were sold for which the Company's obligation to provide service was deemed remote. During the second quarter of 1999 and for the six months ended June 30, 2000 and 1999, the Company recorded $100,000, $109,000 and $330,000, respectively, of revenue related to sample collection kits that were sold for which the Company's obligation to provide service was deemed remote. At June 30, 2000 and December 31, 1999, the Company had deferred revenue balances of approximately $770,000 and $862,000, respectively, reflecting payments for its personal drug testing service received prior to the performance of the related test. 4. Comprehensive Income The Company's comprehensive income for the three month periods and the six month periods ended June 30, 2000 and 1999 was the same as reported net income. 5. Computer Software Costs As of June 30, 2000 and December 31, 1999, $1,205,540 of software development costs have been capitalized. For both of the three month periods ended June 30, 2000 and 1999, $60,294 of related amortization was charged to operations. During the six month periods ended June 30, 2000 and 1999, $120,588 and $120,260, respectively, of related amortization was charged to operations. 6. New Accounting Pronouncements In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. The Company does not anticipate the adoption of these statements to have a material impact on its financial position or results of operations. As of June 30, 2000, the Company did not have any derivatives or other financial instruments as defined by SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. Page 8 9 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACTORS THAT MAY AFFECT FUTURE RESULTS -------------------------------------- From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including but not limited to the Company's expectations regarding revenues, business strategy, anticipated operating results, cash dividends and anticipated cash requirements) may be "forward looking" statements. The Company's actual results may differ from those stated in any "forward looking" statements. Factors that may cause such differences include, but are not limited to, risks associated with the continued expansion of the Company's sales and marketing network, development of markets for new products and services offered by the Company, the economic health of principal customers of the Company, financial and operational risks associated with possible expansion of testing facilities used by the Company, government regulation (including, but not limited to, Food and Drug Administration regulations), competition and general economic conditions. OVERVIEW -------- Psychemedics Corporation was incorporated in 1986. The Company utilizes a patented hair analysis method involving radioimmunoassay technology to analyze human hair to detect abused substances. The founder of the Company has granted to the Company an exclusive license to all his rights in this hair analysis technology, including his rights to the drug extraction method. RESULTS OF OPERATIONS --------------------- Revenue was $5,472,701 in the second quarter of 2000 as compared to $5,854,999 in the second quarter of 1999, representing a decrease of 7%. Revenue for the six month period ended June 30, 2000 was $10,154,728, a decrease of 4% from the $10,535,256 of revenue reported for the comparable period of 1999. The revenue decrease was due primarily to decreases in volume from both new and existing clients. Gross margin was 57% of sales in the second quarter of 2000, as compared to 61% in the second quarter of 1999. Gross margin for the six months ended June 30, 2000 was 56% of sales, as compared to 60% for the six months ended June 30, 1999. The decrease in gross margin was due to higher direct costs in the first and second quarter of 2000 in anticipation of higher volume. General and administrative ("G&A") expenses were $890,803 for the three months ended June 30, 2000 as compared to $822,506 for the three months ended June 30, 1999, representing an increase of 8%. G&A expenses were $1,674,563 for the six months ended June 30, 2000 as compared to $1,582,265 for the year earlier period, representing an increase of 6%. As a percentage of revenue, G&A expenses increased to 16% in the second quarter of 2000 from 14% in the second quarter of 1999 and Page 9 10 increased to 16% for the six months ended June 30, 2000 from 15% for the comparable year earlier period. Professional fees related to legal services and investor relations accounted for most of the increase, while all other G&A expenses remained relatively constant. Marketing and selling expenses for the three month period ended June 30, 2000 decreased $57,749 from the comparable period of the prior year to $1,022,611, a decrease of 5%. Marketing and selling expenses were $2,003,377 for the six months ended June 30, 2000 as compared to $2,071,934 for the year earlier period, representing a decrease of 3%. Expenses pertaining to additions to the sales force and expanded marketing activities related to the corporate market were offset by decreased customer service costs in the first and second quarter of 2000, as compared to the first and second quarter of 1999. Customer service costs during the first and second quarter of 1999 were elevated due to the Company's assistance in the testing of all employees at one of the Company's larger customers. Total marketing and selling expenses were 19% of revenue in both the second quarter of 2000 and the second quarter of 1999, and 20% of revenue for the six months ended June 30, 2000 and June 30, 1999. The Company expects to continue to aggressively promote its drug testing services during the remainder of 2000 and in future years in order to expand its client base. Other income for the three month and the six month periods ended June 30, 2000 represented primarily interest earned on cash equivalents and short-term investments. Other income for the six month period ended June 30, 2000 included a $200,000 legal settlement from a breach of contract dispute with a third party administrator. The remainder of other income represented interest earned on cash equivalents and short-term investments. Although the yields on investment balances increased in the first and second quarter of 2000 as compared to the first and second quarter of 1999, interest income decreased due to lower average investment balances. During the three months ended June 30, 2000 and June 30, 1999, the Company recorded tax provisions of $477,700 and $667,690, respectively. During the six months ended June 30, 2000 and June 30, 1999, the Company recorded tax provisions of $863,700 and $1,061,870, respectively. These tax provisions reflect an effective tax rate of 41%. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At June 30, 2000, the Company had $3.8 million of cash, cash equivalents and short-term investments. The Company's operating activities generated net cash of $1,476,633 in the six months ended June 30, 2000. Investing activities generated $1,641,941 in the six month period while financing activities used a net amount of $2,973,839 during the period. Operating cash flows increased $551,370 in the first six months of 2000, compared to the year earlier period. A lesser increase in accounts receivable and a lesser decrease in accounts payable and deferred revenue during the first six months of 2000 as compared to the first six months of 1999 were the main reason for this increase. This was partially offset by the reduction in net income for the first two quarters of 2000 as Page 10 11 compared to the year earlier period. The non-cash effect of depreciation and amortization in the 2000 and 1999 periods was $680,645 and $677,759, respectively. Capital expenditures in the first two quarters of 2000 were $564,887. The expenditures primarily consisted of new equipment, including laboratory and computer equipment. The Company believes that within the next two years it may be required to expand its existing laboratory or develop a second laboratory, the cost of which is currently believed to range from $2 million to $4 million. During the six month period ended June 30, 2000, the Company distributed $1,701,062 in cash dividends to its shareholders and repurchased a total of 257,600 shares for treasury at an aggregate cost of $1,274,942. At June 30, 2000, the Company's principal sources of liquidity included an aggregate of $3.8 million of cash, cash equivalents and short-term investments. Management currently believes that such funds, together with cash generated from operations, should be adequate to fund anticipated working capital requirements and capital expenditures in the near term. Depending upon the Company's results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could potentially include joint ventures, issuance of common stock or debt financing. At June 30, 2000, the Company had no long-term debt. Item 3. Quantitative and Qualitative Disclosures about Market Risk The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The Company maintains a short-term investment portfolio consisting principally of securities issued by the U.S. Government with an average maturity of less than six months. These held-to-maturity securities are subject to interest rate risk and will fall in value if market rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at June 30, 2000, the fair value of the portfolio would decline by an immaterial amount. The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio. Page 11 12 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Psychemedics Corporation was held on May 11, 2000 for the purpose of electing a board of directors, ratification of the Company's 2000 Stock Option Plan and approving the appointment of the Company's auditors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. Description and tabulation by the Company's transfer agent of each matter voted upon at the Annual Meeting of Shareholders of Psychemedics Corporation held on May 11, 2000. All of management's nominees for directors, as listed in the proxy statement, were elected with the following vote: Election of Directors.
Number of Shares -------------------------------- For Abstain --- ------- Werner A Baumgartner, Ph.D. 12,310,939 3,292,006 Donald F. Flynn 12,202,621 3,400,324 Raymond C. Kubacki, Jr. 12,232,801 3,370,144 Walter S. Tomenson, Jr. 12,329,298 3,273,647 A. Clinton Allen 12,209,536 3,393,409 Fred J. Weinert 12,229,502 3,373,443
Ratification of the Company's 2000 Stock Option Plan.
Number of Shares ---------------- For 9,305,394 Against 3,607,294 Abstain 42,506 Delivered - not voted 2,917,751
Selection of Arthur Andersen LLP as auditors of the Company.
Number of Shares ---------------- For 15,114,805 Against 38,215 Abstain 449,925
Page 12 13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 27. Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. Page 13 14 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, thereunto duly authorized. Psychemedics Corporation Date: August 4, 2000 By: /s/ Raymond C. Kubacki, Jr. ------------------------------------- Raymond C. Kubacki, Jr. President and Chief Executive Officer Date: August 4, 2000 By: /s/ Peter C. Monson ------------------------------------- Peter C. Monson Vice President, Treasurer & Chief Financial Officer Page 14