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 MARCH 31, 1998
[ ] 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 May
12, 1998: Common Stock $.005 par value (22,415,325 shares).
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PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Statements of Income for the three
month periods ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows for the
three month periods ended March 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8K 9
SIGNATURES 10
EXHIBIT INDEX 11
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PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH DECEMBER
31, 1998 31, 1997
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,749,679 $ 585,142
Short-term investments 9,665,654 9,446,418
Accounts receivable 3,085,363 3,784,488
Inventories 490,836 500,325
Prepaid expenses and other current assets 1,098,461 895,874
----------- -----------
Total current assets 16,089,993 15,212,247
----------- -----------
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements, at cost 6,865,880 6,241,516
----------- -----------
Less-Accumulated depreciation and amortization (3,230,771) (3,021,842)
----------- -----------
3,635,109 3,219,674
----------- -----------
OTHER ASSETS - NET 447,927 423,318
=========== ===========
$20,173,029 $18,855,239
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 647,491 $ 196,259
Accrued expenses 832,860 438,063
Deferred revenue 1,699,820 1,488,010
----------- -----------
Total current liabilities 3,180,171 2,122,332
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $.005 par value; authorized 1,000,000
shares; none outstanding
Common stock; $.005 par value; authorized 50,000,000
shares; issued 22,404,015 and 22,382,720
shares in 1998 and 1997, respectively 112,020 111,913
Paid-in capital 23,650,534 23,581,549
Accumulated deficit (5,338,832) (5,537,505)
Less - Treasury stock, at cost; 183,683 shares in 1998
and 1997 (1,005,439) (1,005,439)
Less - Receivable from officer (425,425) (417,611)
----------- -----------
Total shareholders' equity 16,992,858 16,732,907
----------- -----------
$20,173,029 $18,855,239
=========== ===========
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 MARCH 31,
----------------------------
1998 1997
----------- -----------
REVENUE $ 4,121,903 $ 3,253,743
DIRECT COSTS 1,694,888 1,321,872
----------- -----------
Gross profit 2,427,015 1,931,871
----------- -----------
EXPENSES:
General and administrative 607,966 532,653
Marketing and selling 768,022 657,443
Research and development 106,993 108,908
----------- -----------
1,482,981 1,299,004
----------- -----------
OPERATING INCOME 944,034 632,867
OTHER INCOME 136,384 125,592
----------- -----------
NET INCOME BEFORE INCOME TAXES 1,080,418 758,459
PROVISION FOR INCOME TAXES 439,140 121,352
----------- -----------
NET INCOME $ 641,278 $ 637,107
=========== ===========
BASIC NET INCOME PER SHARE $ 0.03 $ 0.03
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.03 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 22,210,334 21,832,664
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 22,693,908 22,755,427
=========== ===========
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)
THREE MONTHS ENDED
ENDED MARCH 31,
----------------------------
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 641,278 $ 637,107
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 223,929 136,287
Changes in assets and liabilities:
Receivables 691,311 (266,606)
Inventories 9,489 (139,336)
Prepaid expenses and other current assets (202,587) (209,951)
Accounts payable 451,232 103,212
Accrued expenses 394,797 40,590
Deferred revenue 211,810
---------- -----------
Net cash provided by operating activities 2,421,259 301,303
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments - net (219,236) (997,352)
(Purchases) sales of property and equipment (624,364) (240,849)
(Increase) decrease in other assets - net (39,609) 12,478
---------- -----------
Net cash used in investing activities (883,209) (1,225,723)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 69,092 485,581
Cash dividends paid (442,605) (436,468)
---------- -----------
Net cash provided by (used in) financing activities (373,513) 49,113
---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,164,537 (875,307)
---------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 585,142 1,462,678
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $1,749,679 $ 587,371
========== ===========
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 FINANCIAL STATEMENTS
March 31, 1998
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, 1997. 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, 1997 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 ended March 31, 1998
may not be indicative of the results that may be expected for the year ending
December 31, 1998, or any other period.
2. Basic and Diluted Net Income Per Share
Basic net income per share was 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. Dilutive common equivalent shares outstanding during the period have
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:
March March
31, 1998 31, 1997
---------- ----------
Weighted average common shares 22,210,334 21,832,664
Effect of dilutive common stock options 483,574 922,763
---------- ----------
Weighted average common shares
outstanding, assuming dilution 22,693,908 22,755,427
========== ==========
3. Revenue Recognition
Revenues for all product offerings are recognized upon reporting drug test
results to the customer. During the second quarter of 1997, the Company began
offering its personal drug testing service, "PDT-90" through retail drug stores.
At March 31, 1998 and December 31, 1997, the Company had approximately
$1,700,000 and $1,488,000, respectively, of deferred revenue related to the
PDT-90 service, principally due to receiving payments prior to the performance
of the related test.
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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 $4,121,903 in the first quarter of 1998 as compared to $3,253,743 in
the first quarter of 1997, representing an increase of 27%. The revenue increase
was due primarily to increases in volume from both new and existing clients
offset by average price decreases of 3% primarily as a result of volume
discounts granted to large customers.
Gross margin was 59% of sales in the first quarter of 1998, consistent with the
year earlier period. Increased efficiencies resulting from the greater volume of
the first quarter of 1998 when compared to the first quarter of 1997 offset the
aforementioned average price decrease of 3%, causing the gross margin percentage
to remain flat.
General and administrative ("G&A") expenses were $607,966 for the three months
ended March 31, 1998 as compared to $532,653 for the three months ended March
31, 1997, representing an increase of 14%. As a percentage of revenue, G&A
expenses declined to 15% in the first quarter of 1998 from 16% in the first
quarter of 1997, primarily because of the higher revenues in 1998.
Marketing and selling expenses for the three month period ended March 31, 1998
increased $110,579, to $768,022, an increase of 17%. This increase was primarily
due to additions to the Company's sales staff and expanded marketing activities
related to
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the corporate market. Although total marketing and selling expenses increased by
17%, they decreased as a percentage of revenue from 20% in the first quarter of
1997 to 19% in the first quarter of 1998. The Company expects to continue to
aggressively promote its drug testing services during the remainder of 1998 and
in future years in order to expand its client base.
Other income for the three month period ended March 31, 1998 represented
primarily interest earned on cash equivalents and short-term investments. The
increase in 1998 was primarily due to higher investment balances coupled with
increased yields on these investments.
Net income before income taxes increased by $321,959 to $1,080,418 when compared
to the year earlier period. However, net income remained relatively flat at
$641,278 for the first three months of 1998 as compared to $637,107 for the
first quarter of 1997, due to an increased effective tax rate in 1998. The
effective tax rate for the first quarter of 1998 was 41% in 1998 versus 16% in
1997, reflecting the reduction in net operating loss carryforwards available to
offset the provision for income taxes for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $11.4 million of cash, cash equivalents and
short-term investments. The Company's operating activities generated net cash of
$2,421,259 in the three months ended March 31, 1998. Investing activities used
$883,209 in the three month period while financing activities used a net amount
of $373,513 during the period.
The Company's source of funds in the first three months of 1998 was derived
almost entirely from cash generated from operations. Operating cash flows
increased $2,119,956 in the first three months of 1998, compared to the year
earlier period. This was primarily due to improved cash collections of
outstanding accounts receivable, as well as an increase in accounts payable and
other accrued expenses resulting from fully utilizing vendors' credit terms that
were available to the Company. Also, deferred revenue, which represents
deliveries to retail outlets of the Company's retail product PDT-90, increased
by $211,810. The non-cash effect of depreciation and amortization in the 1998
and 1997 periods was $223,929 and $136,287, respectively.
Capital expenditures in the first three months of 1998 were $624,364. 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 three month period ended March 31, 1998, the Company distributed
$442,605 in cash dividends to its shareholders. In addition, on May 4, 1998, the
Company declared a cash dividend of $0.03 per share payable on May 29, 1998 to
holders of record on May 15, 1998. On May 4, 1998 the Company also announced
that it was increasing by 500,000 shares the number of shares authorized for
repurchase in the open market under the Company's Stock Repurchase Program.
At March 31, 1998, the Company's principal sources of liquidity included an
aggregate of $11.4 million of cash, cash equivalents and short-term investments.
Management currently believes that such funds, together with cash generated from
operations, should be adequate to fund anticipated working capital requirements
and capital expenditures in the near term. Depending upon the Company's results
of operations, its future capital needs and available marketing opportunities,
the Company may use various financing sources to raise additional funds. Such
sources could potentially include joint ventures, issuances of common stock or
debt financing. At March 31, 1998, the Company had no long-term debt.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See Exhibit Index included at Page 11 of this Report
(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: May 12, 1998 By: /s/ Raymond C. Kubacki, Jr.
---------------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: May 12, 1998 By: /s/ Peter C. Monson
---------------------------------------
Peter C. Monson
Vice President, Treasurer & Controller
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PSYCHEMEDICS CORPORATION
FORM 10-Q
MARCH 31, 1998
EXHIBIT INDEX
PAGE NO.
10.1 Promissory Note from Raymond C. Kubacki, Jr.
dated January 6, 1997 12-13
10.2 Pledge Agreement between Raymond C. Kubacki, Jr.
and Psychemedics Corporation dated January 6, 1997 14-18
10.3 Pledge Agreement between Raymond C. Kubacki, Jr.
and Psychemedics Corporation dated November 12, 1997 19-23
10.4 Promissory Note from Raymond C. Kubacki, Jr. dated
November 12, 1997 24-26
10.5 January 6, 1998 First Amendment To Promissory Note
dated January 6, 1997 27-28
27. Financial Data Schedule
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