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