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, 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 August
6, 2001: Common Stock $.005 par value (21,166,251 shares).
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PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION PAGE NO.
--------
Item 1 Financial Statements
Condensed Balance Sheets as of June 30, 2001
and December 31, 2000 3
Condensed Statements of Income for the three
month periods ended June 30, 2001 and 2000 4
Condensed Statements of Income for the six
month periods ended June 30, 2001 and 2000 5
Condensed Statements of Cash Flows for the
six month periods ended June 30, 2001 and 2000 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 12
SIGNATURES 13
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PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,809,559 $ 3,434,593
Accounts receivable, net 3,179,929 2,988,185
Inventories 413,735 396,497
Prepaid expenses and other current assets 482,133 454,632
Deferred tax asset 471,339 471,339
------------ ------------
Total current assets 7,356,695 7,745,246
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment and leasehold improvements, at cost 9,088,488 8,535,658
Less-Accumulated depreciation and amortization (6,164,686) (5,552,558)
------------ ------------
2,923,802 2,983,100
------------ ------------
OTHER ASSETS - NET 307,789 329,551
------------ ------------
$ 10,588,286 $ 11,057,897
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 605,641 $ 431,846
Accrued expenses 679,185 678,541
Accrued income taxes 633,613 475,604
Deferred revenue 732,912 636,304
------------ ------------
Total current liabilities 2,651,351 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 (9,373,619) (8,441,892)
Less - Treasury stock, at cost; 1,459,064 common
shares (6,998,767) (6,998,767)
Less - Receivable from officer (389,884) (391,619)
------------ ------------
Total shareholders' equity 7,827,503 8,726,170
------------ ------------
$ 10,588,286 $ 11,057,897
============ ============
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS
ENDED JUNE 30,
---------------------------------
2001 2000
----------- -----------
REVENUE $ 4,518,430 $ 5,472,701
DIRECT COSTS 2,004,081 2,353,094
----------- -----------
Gross profit 2,514,349 3,119,607
----------- -----------
EXPENSES:
General and administrative 811,040 890,803
Marketing and selling 955,313 1,022,611
Research and development 215,801 111,430
----------- -----------
1,982,154 2,024,844
----------- -----------
OPERATING INCOME 532,195 1,094,763
OTHER INCOME 34,840 60,852
----------- -----------
NET INCOME BEFORE INCOME TAXES 567,035 1,155,615
PROVISION FOR INCOME TAXES 238,800 477,700
----------- -----------
NET INCOME $ 328,235 $ 677,915
=========== ===========
BASIC NET INCOME PER SHARE $ 0.02 $ 0.03
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.02 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,155,640 21,207,720
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,369,452 21,483,974
=========== ===========
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------------------------
2001 2000
----------- -----------
REVENUE $ 8,582,753 $10,154,728
DIRECT COSTS 4,057,144 4,503,280
----------- -----------
Gross profit 4,525,609 5,651,448
----------- -----------
EXPENSES:
General and administrative 1,635,019 1,674,563
Marketing and selling 1,989,634 2,003,377
Research and development 386,563 218,346
----------- -----------
4,011,216 3,896,286
----------- -----------
OPERATING INCOME 514,393 1,755,162
OTHER INCOME 84,233 341,197
----------- -----------
NET INCOME BEFORE INCOME TAXES 598,626 2,096,359
PROVISION FOR INCOME TAXES 261,150 863,700
----------- -----------
NET INCOME $ 337,476 $ 1,232,659
=========== ===========
BASIC NET INCOME PER SHARE $ 0.02 $ 0.06
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.02 $ 0.06
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,154,514 21,280,645
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,398,278 21,552,827
=========== ===========
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
ENDED JUNE 30,
---------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 337,476 $ 1,232,659
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 645,087 680,646
Compensation expense related to issuance of
stock options 2,510 15,133
Changes in assets and liabilities:
Receivables (191,744) (969,835)
Inventories (17,238) (11,553)
Prepaid expenses and other current assets (27,501) (72,184)
Accounts payable 173,795 (23,224)
Accrued expenses 158,653 717,246
Deferred revenue 96,608 (92,255)
----------- -----------
Net cash provided by operating activities 1,177,646 1,476,633
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short-term investments - net -- 2,226,331
Purchases of property and equipment (552,830) (564,887)
Increase in other assets - net (11,197) (19,503)
----------- -----------
Net cash (used in) provided by investing activities (564,027) 1,641,941
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 28,815 --
Proceeds from the receivable from officer 1,735 2,165
Cash dividends paid (1,269,203) (1,701,062)
Acquisition of treasury stock -- (1,274,942)
----------- -----------
Net cash used in financing activities (1,238,653) (2,973,839)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (625,034) 144,735
CASH AND CASH EQUIVALENTS, beginning of period 3,434,593 899,387
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,809,559 $ 1,044,122
=========== ===========
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
June 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 six months
ended June 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 Standards ("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,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average common shares 21,155,640 21,207,720 21,154,514 21,280,645
Dilutive common stock options 213,812 276,254 243,764 272,182
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, assuming dilution 21,369,452 21,483,974 21,398,278 21,552,827
For the three months ended June 30, 2001 and 2000, options to purchase 1,352,370
and 834,370 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 six months ended June 30, 2001 and 2000, options to
purchase 1,087,870 and 1,096,070 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
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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 June 30, 2001 and December
31, 2000, the Company had deferred revenue balances of approximately $733,000
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 six month
periods ended June 30, 2001 and 2000 was the same as reported net income.
5. Computer Software Costs
As of June 30, 2001 and December 31, 2000, $1,205,540 of software development
costs have been capitalized. For both of the three month periods ended June 30,
2001 and 2000, $60,294 of related amortization was charged to operations. During
both of the six month periods ended June 30, 2001 and 2000, $120,588 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, as amended by SFAS No. 138, 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 adoption of these statements did not have a
material impact on the Company's financial position or results of operations. As
of June 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.
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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 $4,518,430 for the three month period ended June 30, 2001 as
compared to $5,472,701 for the comparable period of 2000, representing a
decrease of 17%. Revenue for the six month period ended June 30, 2001 was
$8,582,753, a decrease of 15% from the $10,154,728 of revenue reported for the
comparable period of 2000. Although the Company added new customers in the first
two 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 current economic downturn as many clients
experienced deep reductions in their new hires and the number of their drug
tests.
Gross margin was 56% of sales in the second quarter of 2001, as compared to 57%
in the second quarter of 2000. Gross margin for the six months ended June 30,
2001 was 53% of sales, as compared to 56% for the six months ended June 30,
2000. The decrease in margins from the year earlier periods were caused by fixed
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 achieve a gross margin reduction of only
1% for the second quarter, as compared to the year earlier period, despite the
17% decrease in revenue.
General and administrative ("G&A") expenses were $811,040 for the three month
period ended June 30, 2001 as compared to $890,803 for the comparable period of
2000, representing a decrease of 9%. G&A expenses were $1,635,019 for the six
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months ended June 30, 2001 as compared to $1,674,563 for the comparable period
of 2000, representing a decrease of 2%. As a percentage of revenue, G&A expenses
increased to 18% in the second quarter of 2001 from 16% in the second quarter of
2000 and increased to 19% for the six months ended June 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 June 30, 2001
decreased $67,298 from the comparable period of 2000 to $955,313, a decrease of
7%. Marketing and selling expenses were $1,989,634 for the six months ended June
30, 2001 as compared to $2,003,377 for the year earlier period, representing a
decrease of 1%. Expenses pertaining to additions to the sales force related to
the corporate market were offset by reduced public relations and advertising
expenses in the first and second quarters of 2001, as compared to the first and
second quarters of 2000. As a percentage of revenue, marketing and selling
expenses increased to 21% for the three months ended June 30, 2001 from 19% in
the second quarter of 2000 and increased to 23% for the six months ended June
30, 2001 from 20% 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 June
30, 2001 increased by $104,371 from the comparable period of the prior year to
$215,801, an increase of 94%. R&D expenses were $386,563 for the six months
ended June 30, 2001 as compared to $218,346 for the year earlier period,
representing an increase of 77%. 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 increased to 5% in the second quarter of
2001 from 2% in the second quarter of 2000 and increased to 5% for the six
months ended June 30, 2001 from 2% for the comparable period of 2000.
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. While the yields on investment balances
increased in the first quarter of 2001 and decreased slightly in the second
quarter of 2001 as compared to the first and second quarter of 2000, interest
income decreased due to lower average investment balances.
During the three months ended June 30, 2001 and June 30, 2000, the Company
recorded tax provisions of $238,800 reflecting an effective tax rate of 42.1% as
compared to a tax provision of $477,700 and an effective tax rate of 41.3% for
the three months ended June 30, 2000. During the six months ended June 30, 2001
and June 30, 2000, the Company recorded tax provisions of $261,500 and $863,700
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.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company had $2,809,559 of cash and cash equivalents. The
Company's operating activities generated net cash of $1,177,646 in the six
months ended June 30, 2001. Investing activities used $564,027 in the six month
period while financing activities used a net amount of $1,238,653 during the
period.
Operating cash flows decreased $298,987 in the first six months of 2001,
compared to the year earlier period. The reduction in net income for the first
two quarters of 2001 as compared to the year earlier period was the main reason
for this decrease. This was partially offset by the net effect of a smaller
increase in accounts receivable, an increase in accounts payable and a smaller
increase in accrued expenses during the first six months of 2001 as compared to
the first six months of 2000. The non-cash effect of depreciation and
amortization in the 2001 and 2000 periods was $645,087 and $680,646,
respectively.
Capital expenditures in the first two quarters of 2001 were $552,830. 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, 2001, the Company distributed
$1,269,203 in cash dividends to its shareholders.
At June 30, 2001, the Company's principal sources of liquidity included an
aggregate of $2,809,559 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 June 30, 2001, 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 money market securities that are not
sensitive to sudden interest rate changes.
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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
10, 2001 for the purpose of electing a board of directors 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 10, 2001:
All of management's nominees for directors, as listed in the proxy statement,
were elected with the following votes:
Election of Directors.
Number of Shares
----------------
For Abstain
--- -------
Werner A Baumgartner, Ph.D. 15,222,193 2,793,560
Donald F. Flynn 15,207,178 2,808,575
Raymond C. Kubacki, Jr. 15,222,193 2,793,560
Walter S. Tomenson, Jr. 15,219,893 2,795,860
A. Clinton Allen 15,220,693 2,795,060
Fred J. Weinert 15,220,178 2,795,575
Selection of Arthur Andersen LLP as auditors of the Company.
Number of Shares
----------------
For 17,713,726
Against 296,479
Abstain 5,548
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.
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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 7, 2001 By: /s/ Raymond C. Kubacki, Jr.
-------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive
Officer
Date: August 7, 2001 By: /s/ Peter C. Monson
-------------------------------
Peter C. Monson
Vice President, Treasurer &
Chief Financial Officer
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