-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U/FO5VIYI7Tev7QF1pNK6/qZtsbtLkHVUVyI/c/e14Z7IdkR9QjPfIwdIcvcmJiM BhlwYSuDJXW36MNxNmE8cQ== 0000950135-01-503520.txt : 20020410 0000950135-01-503520.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950135-01-503520 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSYCHEMEDICS CORP CENTRAL INDEX KEY: 0000806517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 581701987 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13738 FILM NUMBER: 1786055 BUSINESS ADDRESS: STREET 1: 1280 MASSACHUSETTS AVENUE STREET 2: SUITE 200 CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6178687455 MAIL ADDRESS: STREET 1: 1280 MASSACHUSETTS AVE STREET 2: SUITE 200 CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-Q 1 b40931pme10-q.txt PSYCHEMEDICS CORPORATION 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, 2001 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 12, 2001: Common Stock $.005 par value (21,136,251 shares). Page 1 PSYCHEMEDICS CORPORATION Part I FINANCIAL INFORMATION Page No. -------- Item 1 Financial Statements Condensed Balance Sheets as of September 30, 2001 and December 31, 2000 3 Condensed Statements of Income for the three month periods ended September 30, 2001 and 2000 4 Condensed Statements of Income for the nine month periods ended September 30, 2001 and 2000 5 Condensed Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2000 6 Notes to Condensed Financial Statements 7-9 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 12 Part II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 12 SIGNATURES 13 Page 2 PSYCHEMEDICS CORPORATION CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,703,423 $ 3,434,593 Accounts receivable, net 2,845,878 2,988,185 Inventories 461,982 396,497 Prepaid expenses and other current assets 492,254 454,632 Deferred tax asset 471,339 471,339 ------------ ------------ Total current assets 6,974,876 7,745,246 ------------ ------------ PROPERTY AND EQUIPMENT: Equipment and leasehold improvements, at cost 9,106,679 8,535,658 Less-Accumulated depreciation and amortization (6,463,214) (5,552,558) ------------ ------------ 2,643,465 2,983,100 ------------ ------------ OTHER ASSETS - NET 291,310 329,551 ------------ ------------ $ 9,909,651 $ 11,057,897 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 485,624 $ 431,846 Accrued expenses 518,454 678,541 Accrued income taxes 606,838 475,604 Deferred revenue 748,437 636,304 ------------ ------------ Total current liabilities 2,359,353 2,222,295 ------------ ------------ DEFERRED TAX LIABILITY 109,432 109,432 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred stock, $0.005 par value; 1,000,000 shares authorized; none outstanding -- -- Common stock; $0.005 par value; 50,000,000 shares authorized; issued 22,625,315 shares and 22,612,440 shares in 2001 and 2000, respectively 113,127 113,062 Paid-in capital 24,476,646 24,445,386 Accumulated deficit (9,680,674) (8,441,892) Less - Treasury stock, at cost; 1,481,064 common shares in 2001 and 1,459,064 common shares in 2000 (7,079,130) (6,998,767) Less - Receivable from officer (389,103) (391,619) ------------ ------------ Total shareholders' equity 7,440,866 8,726,170 ------------ ------------ $ 9,909,651 $ 11,057,897 ============ ============
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 3 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ----------- ----------- REVENUE $ 3,955,117 $ 5,021,437 DIRECT COSTS 1,974,092 2,263,915 ----------- ----------- Gross profit 1,981,025 2,757,522 ----------- ----------- EXPENSES: General and administrative 750,747 808,488 Marketing and selling 930,651 1,111,142 Research and development 115,216 129,092 ----------- ----------- 1,796,614 2,048,722 ----------- ----------- OPERATING INCOME 184,411 708,800 OTHER INCOME 22,010 58,878 ----------- ----------- NET INCOME BEFORE INCOME TAXES 206,421 767,678 PROVISION FOR INCOME TAXES 90,150 317,200 ----------- ----------- NET INCOME $ 116,271 $ 450,478 =========== =========== BASIC NET INCOME PER SHARE $ 0.01 $ 0.02 =========== =========== DILUTED NET INCOME PER SHARE $ 0.01 $ 0.02 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,163,963 21,174,034 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,353,504 21,436,108 =========== =========== See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 4 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ----------- ----------- REVENUE $12,537,870 $15,176,165 DIRECT COSTS 6,031,236 6,767,195 ----------- ----------- Gross profit 6,506,634 8,408,970 ----------- ----------- EXPENSES: General and administrative 2,385,766 2,483,051 Marketing and selling 2,920,285 3,114,519 Research and development 501,779 347,438 ----------- ----------- 5,807,830 5,945,008 ----------- ----------- OPERATING INCOME 698,804 2,463,962 OTHER INCOME 106,243 400,075 ----------- ----------- NET INCOME BEFORE INCOME TAXES 805,047 2,864,037 PROVISION FOR INCOME TAXES 351,300 1,180,900 ----------- ----------- NET INCOME $ 453,747 $ 1,683,137 =========== =========== BASIC NET INCOME PER SHARE $ 0.02 $ 0.08 =========== =========== DILUTED NET INCOME PER SHARE $ 0.02 $ 0.08 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,157,698 21,244,848 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 21,379,251 21,513,684 =========== =========== See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 5 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED ENDED SEPTEMBER 30, ----------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 453,747 $ 1,683,137 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 960,093 974,879 Compensation expense related to issuance of stock options 2,510 22,761 Changes in assets and liabilities: Receivables 142,307 (738,313) Inventories (65,485) 27,930 Prepaid expenses and other current assets (37,622) (64,546) Accounts payable 53,778 (85,379) Accrued expenses (28,853) 392,085 Deferred revenue 112,133 (133,977) ----------- ----------- Net cash provided by operating activities 1,592,608 2,078,577 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of short-term investments - net -- 4,938,463 Purchases of property and equipment (571,021) (652,103) Increase in other assets - net (11,196) (19,503) ----------- ----------- Net cash (used in) provided by investing activities (582,217) 4,266,857 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock 28,815 -- Decrease (increase) in receivable from officer 2,516 (3,762) Cash dividends paid (1,692,529) (2,547,198) Acquisition of treasury stock (80,363) (1,345,059) ----------- ----------- Net cash used in financing activities (1,741,561) (3,896,019) ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (731,170) 2,449,415 CASH AND CASH EQUIVALENTS, beginning of period 3,434,593 899,387 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 2,703,423 $ 3,348,802 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 6 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS September 30, 2001 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, 2000. 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, 2000 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, 2001 may not be indicative of the results that may be expected for the year ending December 31, 2001, 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, 2001 2000 2001 2000 ------------ ------------- ------------- ------------- Weighted average common shares 21,163,963 21,174,034 21,157,698 21,244,848 Dilutive common stock options 189,541 262,074 221,553 268,836 ---------- ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 21,353,504 21,436,108 21,379,251 21,513,684
For the three months ended September 30, 2001 and 2000, options to purchase 1,440,120 and 1,086,070 common shares, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would Page 7 have been antidilutive. For the nine months ended September 30, 2001 and 2000, options to purchase 1,078,370 and 1,086,070 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 first quarter of 2000, the Company recorded $109,000 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, 2001 and December 31, 2000, the Company had deferred revenue balances of approximately $748,000 and $636,000, 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, 2001 and 2000 was the same as reported net income. 5. Computer Software Costs As of September 30, 2001 and December 31, 2000, $1,205,540 of software development costs have been capitalized. For both of the three month periods ended September 30, 2001 and 2000, $60,294 of related amortization was charged to operations. For both of the nine month periods ended September 30, 2001 and 2000, $180,882 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 September 30, 2001, 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. On June 30, 2001, the FASB issued SFAS No. 141, Accounting for Business Combinations, and SFAS No. 142, Accounting for Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. Upon adoption of SFAS No. 142, Page 8 goodwill will no longer be subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment of impairment by applying a fair-value based test. The Company does not anticipate the adoption of these statements to have a material impact on the financial position or results of operations. 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 expansion of the Company's sales and marketing network, market acceptance of the Company's products, 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. RESULTS OF OPERATIONS --------------------- Revenue was $3,955,117 for the three month period ended September 30, 2001 as compared to $5,021,437 for the comparable period of 2000, representing a decrease of 21%. Revenue for the nine month period ended September 30, 2001 was $12,537,870, a decrease of 17% from the $15,176,165 of revenue reported for the comparable period of 2000. Although the Company added new customers in the first three quarters of 2001, this new business was outweighed by lower volume from existing customers. The Company believes that this lower volume from existing customers is due largely to the continued current economic downturn as many clients experienced deep reductions in their new hires and the number of their drug tests. Gross margin was 50% of sales in the third quarter of 2001, as compared to 55% in the third quarter of 2000. Gross margin for the nine months ended September 30, 2001 was 52% of sales, as compared to 55% for the nine months ended September 30, 2000. The decreases in margins from the year earlier periods were caused by fixed Page 9 and semi-variable direct costs being spread over a lower number of tests performed, combined with a decrease of 1% in the Company's prices. During the second quarter of 2001, the Company implemented cost reduction measures at its laboratory which enabled the Company to experience a gross margin reduction of only 2% for the nine month period ended September 30, 2001, as compared to the year earlier period, despite the 17% decrease in revenue. General and administrative ("G&A") expenses were $750,747 for the three month period ended September 30, 2001 as compared to $808,488 for the comparable period of 2000, representing a decrease of 7%. G&A expenses were $2,385,766 for the nine months ended September 30, 2001 as compared to $2,483,051 for the comparable period of 2000, representing a decrease of 4%. As a percentage of revenue, G&A expenses increased to 19% in the third quarter of 2001 from 16% in the third quarter of 2000 and increased to 19% for the nine months ended September 30, 2001 from 16% for the comparable period of 2000. Reduced professional fees related to legal services and investor relations accounted for most of the decrease, while other G&A expenses remained relatively constant. Marketing and selling expenses for the three month period ended September 30, 2001 decreased $180,491 from the comparable period of 2000 to $930,651, a decrease of 16%. Marketing and selling expenses were $2,920,285 for the nine months ended September 30, 2001 as compared to $3,114,519 for the year earlier period, representing a decrease of 6%. Reduced public relations and advertising expenses comprised most of the decrease, while other marketing and selling expenses remained relatively constant. As a percentage of revenue, marketing and selling expenses increased to 24% for the three months ended September 30, 2001 from 22% in the third quarter of 2000 and increased to 23% for the nine months ended September 30, 2001 from 21% for the comparable period of 2000. The Company expects to continue to aggressively promote its drug testing services during the remainder of 2001 and in future years in order to expand its client base. Research and development ("R&D") expenses for the three month period ended September 30, 2001 decreased by $13,876 from the comparable period of the prior year to $115,216, a decrease of 11%. R&D expenses were $501,779 for the nine months ended September 30, 2001 as compared to $347,438 for the year earlier period, representing an increase of 44%. This increase was primarily due to expenses related to applying for FDA 510k clearance for its assays for marijuana, methamphetamines, cocaine, and PCP. The Company previously received 510k clearance from the FDA to market its opiate assay on December 11, 2000. As a percentage of revenue, R&D expenses remained the same at 3% for both the third quarter of 2001 and 2000 and increased to 4% for the nine months ended September 30, 2001 from 2% for the comparable period of 2000. 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 in 2000 and other income in 2001 primarily represented interest earned on cash equivalents and short-term investments. While the yields on investment balances increased in the first quarter of 2001 and decreased slightly in the second and third quarters of 2001 as compared to the comparable periods of 2000, interest income decreased due to lower average investment balances. Page 10 During the three months ended September 30, 2001, the Company recorded a tax provision of $90,150 reflecting an effective tax rate of 43.7% as compared to a tax provision of $317,200 and an effective tax rate of 41.3% for the three months ended September 30, 2000. During the nine months ended September 30, 2001 and September 30, 2000, the Company recorded tax provisions of $351,300 and $1,180,900 representing effective tax rates of 43.6% and 41.2%, respectively. The increase in the effective tax rate was due primarily to non-deductible expenses for tax purposes. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At September 30, 2001, the Company had $2.7 million of cash and cash equivalents. The Company's operating activities generated net cash of $1,592,608 in the nine months ended September 30, 2001. Investing activities used $582,217 in the nine month period while financing activities used a net amount of $1,741,561 during the period. Operating cash flows decreased $485,969 in the first nine months of 2001, compared to the year earlier period. The reduction in net income for the first three quarters of 2001 as compared to the year earlier period was the main reason for this decrease. Also contributing to the decline in operating cash flows was a small decrease in accrued expenses for the first nine months of 2001 as compared to a sizeable increase in accrued expenses for the first nine months of 2001. These were partially offset by a decrease in accounts receivable and an increase in deferred revenue for the nine month period ended September 30, 2001 versus a significant increase in accounts receivable and a decrease in deferred revenue during the comparable year earlier period. The non-cash effect of depreciation and amortization in the 2001 and 2000 periods was $960,093 and $974,879, respectively. Capital expenditures in the first three quarters of 2001 were $571,021. 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, 2001, the Company distributed $1,692,529 in cash dividends to its shareholders and repurchased a total of 22,000 shares for treasury at an aggregate cost of $80,363. At September 30, 2001, the Company's principal sources of liquidity included an aggregate of $2.7 million of cash and cash equivalents. 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 September 30, 2001, the Company had no long-term debt. Page 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's exposure to market risk related to changes in interest rates is limited as the Company maintains a short-term investment portfolio consisting principally of money market securities that are not sensitive to sudden interest rate changes. 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 money market securities that are not sensitive to sudden interest rate changes. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Not applicable. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. Page 12 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 12, 2001 By: /s/ Raymond C. Kubacki, Jr. ------------------------------------- Raymond C. Kubacki, Jr. President and Chief Executive Officer Date: November 12, 2001 By: /s/ Peter C. Monson ------------------------------------- Peter C. Monson Vice President, Treasurer & Chief Financial Officer Page 13 -----END PRIVACY-ENHANCED MESSAGE-----