10-Q 1 b37255pce10-q.txt PSCHEMEDICS CORPORATION 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 SEPTEMBER 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 November 9, 2000: Common Stock $.005 par value (21,167,876 shares). 2 PSYCHEMEDICS CORPORATION Part I FINANCIAL INFORMATION Page No. -------- Item 1 Financial Statements Condensed Balance Sheets as of September 30, 2000 and December 31, 1999 3 Condensed Statements of Income for the three month periods ended September 30, 2000 and 1999 4 Condensed Statements of Income for the nine month periods ended September 30, 2000 and 1999 5 Condensed Statements of Cash Flows for the nine month periods ended September 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 6 Exhibits and Reports on Form 8-K 12 SIGNATURES 13 3 PSYCHEMEDICS CORPORATION CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,348,802 $ 899,387 Short-term investments -- 4,938,463 Accounts receivable, net 3,957,823 3,219,510 Inventories 421,173 449,103 Prepaid expenses and other current assets 621,822 557,276 Deferred tax asset 337,752 337,752 ------------ ------------ Total current assets 8,687,372 10,401,491 ------------ ------------ PROPERTY AND EQUIPMENT: Equipment and leasehold improvements, at cost 9,224,591 8,572,486 Less-Accumulated depreciation and amortization (6,080,459) (5,154,037) ------------ ------------ 3,144,132 3,418,449 ------------ ------------ OTHER ASSETS - NET 342,009 370,965 ------------ ------------ $ 12,173,513 $ 14,190,905 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 427,201 $ 512,580 Accrued expenses 1,234,875 842,790 Deferred revenue 728,111 862,088 ------------ ------------ Total current liabilities 2,390,187 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 24,437,746 24,414,985 Accumulated deficit (7,610,218) (6,746,157) Less - Treasury stock, at cost; 1,444,564 and 1,172,464 shares in 2000 and 1999, respectively (6,925,352) (5,580,293) Less - Receivable from officer (399,432) (395,670) ------------ ------------ Total shareholders' equity 9,615,806 11,805,927 ------------ ------------ $ 12,173,513 $ 14,190,905 ============ ============
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. 4 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2000 1999 ----------- ----------- REVENUE $ 5,021,437 $ 4,904,275 DIRECT COSTS 2,263,915 2,195,965 ----------- ----------- Gross profit 2,757,522 2,708,310 ----------- ----------- EXPENSES: General and administrative 808,488 724,745 Marketing and selling 1,111,142 947,038 Research and development 129,092 120,077 ----------- ----------- 2,048,722 1,791,860 ----------- ----------- OPERATING INCOME 708,800 916,450 OTHER INCOME 58,878 94,515 ----------- ----------- NET INCOME BEFORE INCOME TAXES 767,678 1,010,965 PROVISION FOR INCOME TAXES 317,200 414,370 ----------- ----------- NET INCOME $ 450,478 $ 596,595 =========== =========== BASIC NET INCOME PER SHARE $ 0.02 $ 0.03 =========== =========== DILUTED NET INCOME PER SHARE $ 0.02 $ 0.03 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,174,034 21,760,796 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,436,108 22,008,063 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. 5 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2000 1999 ----------- ----------- REVENUE $15,176,165 $15,439,531 DIRECT COSTS 6,767,195 6,426,123 ----------- ----------- Gross profit 8,408,970 9,013,408 ----------- ----------- EXPENSES: General and administrative 2,483,051 2,307,010 Marketing and selling 3,114,519 3,018,972 Research and development 347,438 390,476 ----------- ----------- 5,945,008 5,716,458 ----------- ----------- OPERATING INCOME 2,463,962 3,296,950 OTHER INCOME 400,075 303,968 ----------- ----------- NET INCOME BEFORE INCOME TAXES 2,864,037 3,600,918 PROVISION FOR INCOME TAXES 1,180,900 1,476,240 ----------- ----------- NET INCOME $ 1,683,137 $ 2,124,678 =========== =========== BASIC NET INCOME PER SHARE $ 0.08 $ 0.10 =========== =========== DILUTED NET INCOME PER SHARE $ 0.08 $ 0.10 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,244,848 21,913,198 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,513,684 22,149,599 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. 6 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,683,137 $ 2,124,678 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 974,879 1,001,279 Compensation expense related to issuance of stock options 22,761 -- Changes in assets and liabilities: Receivables (738,313) (1,176,733) Inventories 27,930 45,680 Prepaid expenses and other current assets (64,546) (51,191) Accounts payable (85,379) (345,105) Accrued expenses 392,085 108,765 Deferred revenue (133,977) (381,222) ----------- ----------- Net cash provided by operating activities 2,078,577 1,326,151 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of short-term investments - net 4,938,463 3,381,355 Purchases of property and equipment (652,103) (504,032) Increase in other assets - net (19,503) -- ----------- ----------- Net cash provided by investing activities 4,266,857 2,877,323 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock -- 14,523 Increase in the receivable from officer (3,762) (650) Cash dividends paid (2,547,198) (2,631,593) Acquisition of treasury stock (1,345,059) (1,792,427) ----------- ----------- Net cash used in financing activities (3,896,019) (4,410,147) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,449,415 (206,673) CASH AND CASH EQUIVALENTS, beginning of period 899,387 724,738 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 3,348,802 $ 518,065 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. 7 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS September 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 nine months ended September 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 Nine Months Ended ---------------------------------- ---------------------------------- September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Weighted average 21,174,034 21,760,796 21,244,848 21,913,198 common shares Dilutive common stock options 262,074 247,267 268,836 236,401 ---------- ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 21,436,108 22,008,063 21,513,684 22,149,599
For the three months ended September 30, 2000 and 1999, options to purchase 1,086,070 and 814,370 common shares, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would have been antidilutive. For the nine months ended September 30, 2000 and 1999, options to purchase 1,086,070 and 814,370 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 8 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 third 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 third quarter of 1999 and for the nine months ended September 30, 2000 and 1999, the Company recorded $150,000, $109,000 and $480,000, respectively, of revenue related to sample collection kits that were sold for which the Company's obligation to provide service was deemed remote. At September 30, 2000 and December 31, 1999, the Company had deferred revenue balances of approximately $728,000 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 nine month periods ended September 30, 2000 and 1999 was the same as reported net income. 5. Computer Software Costs As of September 30, 2000 and December 31, 1999, $1,205,540 of software development costs have been capitalized. For both of the three month periods ended September 30, 2000 and 1999, $60,294 of related amortization was charged to operations. During the nine month periods ended September 30, 2000 and 1999, $180,882 and $180,554, respectively, of related amortization was charged to operations. 6. New Accounting Pronouncements In September 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 September 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 September 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. 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, 9 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 $5,021,437 in the third quarter of 2000 as compared to $4,904,275 in the third quarter of 1999, representing an increase of 2%. Revenue for the nine month period ended September 30, 2000 was $15,176,165, a decrease of 2% from the $15,439,531 of revenue reported for the comparable period of 1999. The revenue increase for the third quarter of 2000 and the revenue decrease for the nine months ended September 30, 2000 were due primarily to variations in volume from both new and existing clients. Gross margin was 55% of sales in both the third quarter of 2000 and the third quarter of 1999. Gross margin for the nine months ended September 30, 2000 was 55% of sales, as compared to 59% for the nine months ended September 30, 1999. The decrease in gross margin was due to higher direct costs in the first three quarters of 2000 in anticipation of higher volume. General and administrative ("G&A") expenses were $808,488 for the three months ended September 30, 2000 as compared to $724,745 for the three months ended September 30, 1999, representing an increase of 12%. G&A expenses were $2,483,051 for the nine months ended September 30, 2000 as compared to $2,307,010 for the year earlier period, representing an increase of 8%. As a percentage of revenue, G&A expenses increased to 16% in the third quarter of 2000 from 15% in the third quarter of 1999 and increased to 16% for the nine months ended September 30, 2000 from 15% for the comparable year earlier period. Professional fees related to legal services, investor relations and consulting services related to computer services and strategic corporate development 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 September 30, 2000 increased $164,104 from the comparable period of the prior year to $1,111,142, an increase of 17%. This increase is due primarily to the expansion of the Company's sales force during the third quarter of 2000. Marketing and selling expenses were $3,114,519 for the nine months ended September 30, 2000 as compared to $3,018,972 for the year earlier period, representing an increase of 3%. Expenses pertaining to additions to the sales force and expanded marketing activities related to the corporate market were partially offset by decreased customer service costs in the first three 10 quarters of 2000, as compared to the first three quarters of 1999. Customer service costs during the first three quarters 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 22% of revenue in the third quarter of 2000 and 19% of revenue in the third quarter of 1999. Total marketing and selling expenses were 21% and 20% of revenue for the nine months ended September 30, 2000 and September 30, 1999, respectively. 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 nine month periods ended September 30, 2000 represented primarily interest earned on cash equivalents and short-term investments. Other income for the nine month period ended September 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 three quarters of 2000 as compared to the first three quarters of 1999, interest income decreased due to lower average investment balances. During the three months ended September 30, 2000 and September 30, 1999, the Company recorded tax provisions of $317,200 and $414,370, respectively. During the nine months ended September 30, 2000 and September 30, 1999, the Company recorded tax provisions of $1,180,900 and $1,476,240, respectively. These tax provisions reflect an effective tax rate of 41%. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had $3.3 million of cash, cash equivalents and short-term investments. The Company's operating activities generated net cash of $2,078,577 in the nine months ended September 30, 2000. Investing activities generated $4,266,857 in the nine month period while financing activities used a net amount of $3,896,019 during the period. Operating cash flows increased $752,426 in the first nine 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 along with an increase in accrued expenses during the first nine months of 2000 as compared to the first nine months of 1999 were the main reason for this increase. This was partially offset by the reduction in net income for the first three quarters of 2000 as compared to the year earlier period. The non-cash effect of depreciation and amortization in the 2000 and 1999 periods was $974,879 and $1,001,279, respectively. Capital expenditures in the first three quarters of 2000 were $652,103. 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 nine month period ended September 30, 2000, the Company distributed $2,547,198 in cash dividends to its shareholders and repurchased a total of 272,100 shares for treasury at an aggregate cost of $1,345,059. At September 30, 2000, the Company's principal sources of liquidity included an aggregate of $3.3 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 11 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 September 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 September 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. 12 PART II OTHER INFORMATION 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. 13 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: November 9, 2000 By: /s/ Raymond C. Kubacki, Jr. ----------------------------------- Raymond C. Kubacki, Jr. President and Chief Executive Officer Date: November 9, 2000 By: /s/ Peter C. Monson ------------------------------------ Peter C. Monson Vice President, Treasurer & Chief Financial Officer