<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended SEPTEMBER 30, 1997
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., Ste. 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 10, 1997: Common Stock $.005 par value (22,107,401 shares).
Page 1 of 13
<PAGE> 2
PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Condensed Balance Sheets as of September 30, 1997
and December 31, 1996 3
Condensed Statements of Income for the three
and nine month periods ended September 30, 1997
and 1996 4-5
Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 6
Notes to Condensed Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8K 12
Page 2 of 13
<PAGE> 3
PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 405,162 $ 1,462,678
Short-term investments 9,343,038 8,370,727
Receivables 3,983,152 2,657,416
Inventory 479,975 230,777
Prepaid expenses and other current assets 592,423 129,828
------------ ------------
Total current assets 14,803,750 12,851,426
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 6,023,009 4,843,412
Less-accumulated depreciation and amortization 2,854,496 2,399,919
------------ ------------
3,168,513 2,443,493
------------ ------------
OTHER ASSETS - NET 420,824 449,601
------------ ------------
$ 18,393,087 $ 15,744,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 468,630 $ 395,434
Accrued dividend payable -- 437,217
Accrued expenses 239,478 283,719
Accrued income taxes 538,975 283,808
Deferred revenue 1,348,464 48,525
------------ ------------
Total current liabilities 2,595,547 1,448,703
------------ ------------
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 22,041,240 and 21,758,087
shares in 1997 and 1996, respectively 110,206 108,790
Paid-in capital 21,780,788 20,722,137
Accumulated deficit (5,839,391) (6,281,047)
Treasury stock, at cost; 66,381 shares in 1997
and 1996 (254,063) (254,063)
------------ ------------
Total shareholders' equity 15,797,540 14,295,817
------------ ------------
$ 18,393,087 $ 15,744,520
============ ============
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 3 of 14
<PAGE> 4
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUE $ 3,673,859 $ 3,146,808
DIRECT COSTS 1,596,967 1,279,929
----------- -----------
Gross profit 2,076,892 1,866,879
----------- -----------
EXPENSES:
General and administrative 552,490 545,324
Marketing and selling 980,833 481,825
Research and development 104,377 101,866
----------- -----------
1,637,700 1,129,015
----------- -----------
INCOME FROM OPERATIONS 439,192 737,864
OTHER INCOME (EXPENSE) - NET 129,003 94,695
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 568,195 832,559
PROVISION FOR INCOME TAXES 193,759 100,560
----------- -----------
NET INCOME $ 374,436 $ 731,999
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.02 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 22,826,007 22,720,866
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 4 of 14
<PAGE> 5
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
REVENUE $11,329,806 $ 8,962,785
DIRECT COSTS 4,525,454 3,686,773
----------- -----------
Gross profit 6,804,352 5,276,012
----------- -----------
EXPENSES:
General and administrative 1,648,192 1,637,725
Marketing and selling 2,762,278 1,486,929
Research and development 323,461 304,991
----------- -----------
4,733,931 3,429,645
----------- -----------
INCOME FROM OPERATIONS 2,070,421 1,846,367
OTHER INCOME (EXPENSE) - NET 385,809 244,975
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,456,230 2,091,342
PROVISION FOR INCOME TAXES 699,167 193,593
----------- -----------
NET INCOME $ 1,757,063 $ 1,897,749
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.08 $ 0.09
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 22,790,793 22,204,630
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 5 of 14
<PAGE> 6
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1997 1996
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,757,063 $ 1,893,749
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 454,577 472,521
Changes in assets and liabilities:
Receivables (1,325,736) (990,283)
Inventory (249,198) (1,765)
Prepaid expenses and other current assets (462,595) (139,969)
Accrued income taxes payable 255,167 --
Accounts payable 73,196 (150,754)
Accrued expenses (44,241) 92,487
Deferred revenue 1,299,939 --
----------- -----------
Net cash provided by operating activities 1,758,172 1,175,986
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments - net (972,311) (2,534,543)
(Purchases) of equipment and leasehold improvements (1,179,597) (543,295)
(Increase) decrease in other assets - net 28,777 (19,538)
----------- -----------
Net cash (used in) provided by investing activities (2,123,131) (3,097,376)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal payments on obligations under
capital leases -- (16,459)
Net proceeds from the issuance of
common stock including related tax benefits 1,060,067 2,420,596
Cash dividends paid (1,752,624) --
----------- -----------
Net cash (used in) provided by financing activities (692,557) 2,404,137
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,057,516) 482,747
CASH AND CASH EQUIVALENTS, beginning of period 1,462,678 193,787
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 405,162 $ 676,534
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 6 of 14
<PAGE> 7
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
1. The financial information furnished herein is unaudited; however, in the
opinion of management, it reflects all adjustments which are necessary to fairly
state the Company's financial position at September 30, 1997 and the results of
its operations and cash flows for the periods ended September 30, 1997 and 1996.
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances, and included in
the financial statements are certain amounts based on management's estimates and
judgments.
The financial information herein is not necessarily representative of a full
year's operations because levels of sales, capital additions and other factors
fluctuate throughout the year. These same considerations apply to all year to
year comparisons. See the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 for additional information not required by this report
(Form 10-Q).
2. Net income per common and common equivalent share is based upon the weighted
average number of common and common equivalent shares outstanding as computed
using the treasury stock method.
3. On July 3, 1996, the Company distributed a 3% stock dividend to shareholders
of record on June 21, 1996. Average shares outstanding and all per share amounts
included in the accompanying financial statements and Notes are based on the
increased number of shares giving retroactive effect to the stock dividend.
4. On October 28, 1997, the Company declared a cash dividend of $0.02 per share
payable on December 5, 1997, to holders of record at the close of business on
November 14, 1997.
5. During the second quarter of 1997, the Company began offering its personal
drug testing service, "PDT-90" through retail drug stores. Revenues for this
product are being recognized on an "as tested" basis rather than on the basis of
delivery to retailers. At September 30, 1997, the Company had $1,348,000 of
deferred revenue related to this retail product.
Page 7 of 13
<PAGE> 8
6. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to all publicly held companies. This
statement is effective for fiscal years ending after December 15, 1997 and early
adoption is not permitted. When adopted, the statement will require restatement
of prior years' earnings per share. The Company will adopt this statement for
its fiscal year ended December 31, 1997.
Pro forma calculations of basic and diluted earnings per share as required by
SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9-30-97 9-30-96 9-30-97 9-30-96
------------------------- --------------------------
Basic EPS
<S> <C> <C> <C> <C>
Net income available
to common shareholders $ 374,436 $ 731,999 $ 1,757,063 $ 1,897,749
Weighted average common
shares outstanding net
of treasury shares 21,935,913 21,615,468 21,890,024 21,144,176
----------- ----------- ----------- -----------
Basic EPS $ 0.02 $ 0.03 $ 0.08 $ 0.09
=========== =========== =========== ===========
Diluted EPS
Net income available to
common shareholders $ 374,436 $ 731,999 $ 1,757,063 $ 1,897,749
Weighted average common
and common equivalent
shares outstanding 22,826,007 22,720,866 22,790,793 22,204,630
----------- ----------- ----------- -----------
Diluted EPS $ 0.02 $ 0.03 $ 0.08 $ 0.09
=========== =========== =========== ===========
</TABLE>
Page 8 of 13
<PAGE> 9
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenue was $3.7 million in the third quarter of 1997 as compared to $3.1
million in the third quarter of 1996 representing an increase of 17%. Revenue
for the nine month period ended September 30, 1997 was $11.3 million, an
increase of 26% over the $9.0 million reported for the comparable period of
1996. The revenue increases were 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 57% of sales in the third quarter of 1997 compared to 59% in
the year earlier period. The decrease in 1997 was primarily the result of higher
labor costs as a percentage of revenues compared to 1996. Gross margin was 60%
for the nine months ended September 30, 1997 compared to 59% in the year earlier
period. The increase in year-to-date 1997 was primarily the result of increased
efficiencies resulting from increased volume during the first six months of
1997, which more than offset the impact of volume discounts.
General and administrative (G&A) expenses remained virtually unchanged at
$552,000 and $1,648,000 in the three and nine month periods ended September 30,
1997 from the year earlier amounts. As a percentage of revenue, G&A expenses
declined to 15% from 17% in the third quarter of 1996 because of the higher
revenues in 1997. Similarly, G&A expenses as a percentage of revenues declined
to 15% from 18% for the nine month period ended September 30, 1997 because of
higher revenues in 1997.
Marketing and selling expenses for the three month period ended September 30,
1997 increased $499,000, to $981,000, an increase of 103%. As a percentage of
revenues, marketing and selling expenses increased from 15% in the 1996 period
to 27% in the third quarter of 1997. Marketing and selling expenses for the nine
month period ended September 30, 1997 increased $1,275,349, to $2,762,278, an
increase of 86%. As a percentage of revenues, marketing and selling expenses
increased from 17% in the 1996 period to 24% in 1997. These increases were
primarily due to additions to the Company's sales staff and expanded marketing
activities related to the corporate market and significant additional
expenditures made to penetrate the retail home testing market. The Company
expects to continue to aggressively promote its drug testing services during the
remainder of 1997 and in future years in order to expand its client base.
Page 9 of 13
<PAGE> 10
Other income for the three and nine month periods ended September 30, 1997
represented primarily interest earned on cash equivalents and short-term
investments. The increase in 1997 was primarily due to higher investment
balances coupled with increased yields on these investments.
Net income was $374,436 in the third quarter of 1997, a decrease of $357,563 or
49% from the year earlier amount. The decrease in 1997 was primarily due to
expanded marketing efforts and an increased effective tax rate which more than
offset the increase in revenues. The effective tax rate for the third quarter of
1997 increased significantly over the 1996 rate, reflecting the reduction in net
operating loss carryforwards available to offset the provision for income taxes
for financial reporting purposes. The Company had total net operating loss
carryforwards at December 31, 1996 of approximately $3.6 million available to
offset the 1997 and future years' cash payments for income taxes. However,
approximately $2.6 million of these loss carryforwards were comprised of
deductions from the exercise of certain options and warrants which will increase
paid-in capital when tax benefits related to these options and warrants are
recognized.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $9.7 million of cash, cash equivalents
and short-term investments. The Company's operating activities generated net
cash of $1,758,000 in the nine months ended September 30, 1997. Investing
activities used $2,123,000 in the nine month period while financing activities
used a net amount of $693,000 during the period.
The Company's source of funds in the first nine months of 1997 was derived,
approximately 62%, from net cash generated from operations, and approximately
38% from financing activities, the major item being the receipt of proceeds from
the exercise of stock options. Operating cash flows increased $582,000 in the
first nine months of 1997, compared to the year earlier period primarily due to
deferred revenue of $1,300,000 in the 1997 period offset, in part by lower net
income, and larger increases in accounts receivable, inventory and prepaid
expenses from the year earlier increases. The deferred revenue represents
deliveries to retail outlets of the Company's retail product PDT-90 which will
be recorded as revenue after completion of the underlying tests. The non-cash
effect of depreciation and amortization in the 1997 and 1996 periods was
$455,000 and $473,000, respectively.
Capital expenditures in the first nine months of 1997 were $1,180,000. The
expenditures primarily consisted of new equipment, including laboratory and
computer equipment. The Company currently plans to make additional capital
expenditures of approximately $100,000 during the remainder of 1997, primarily
in connection with the purchase of additional 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.
Page 10 of 13
<PAGE> 11
On July 3, 1996, the Company distributed a 3% stock dividend to shareholders of
record on June 21, 1996. The shares issued in the stock dividend represented
shares which the Company acquired in a stock repurchase program authorized in
1994. This transaction resulted in an increase of $4.67 million in the
accumulated deficit (633,000 shares distributed at a fair market value of $7.37
per share). Treasury stock was reduced by $2.42 million as a result of this
distribution. Average shares outstanding and all per share amounts included in
the accompanying financial statements and Notes are based on the increased
number of shares giving retroactive effect to the stock dividend.
During the nine month period ended September 30, 1997, the Company distributed
approximately $1,750,000 in cash dividends to its shareholders, including
approximately $440,000 in the quarter ended September 30, 1997. In addition, on
October 28, 1997, the Company declared a cash dividend of $0.02 per share
payable on December 5, 1997 to holders of record on November 14, 1997.
At September 30, 1997, the Company's principal sources of liquidity included
$9.7 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 include joint ventures, issuances of common stock or debt
financing. At September 30, 1997, the Company had no long-term debt.
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 principal customers, business strategy, anticipated operating results
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, competition and general
economic conditions.
Page 11 of 13
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
Page 12 of 13
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Psychemedics Corporation
Date: November 12, 1997 By: /s/ Raymond C. Kubacki,Jr.
--------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: November 12, 1997 By: /s/ Bruce M. Stillwell
---------------------------
Bruce M. Stillwell
Vice President, Treasurer & Controller
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 405,162
<SECURITIES> 9,343,038
<RECEIVABLES> 3,983,152
<ALLOWANCES> 0
<INVENTORY> 479,975
<CURRENT-ASSETS> 14,803,750
<PP&E> 6,023,009
<DEPRECIATION> 2,854,496
<TOTAL-ASSETS> 18,393,087
<CURRENT-LIABILITIES> 2,595,547
<BONDS> 0
0
0
<COMMON> 110,206
<OTHER-SE> 15,686,857
<TOTAL-LIABILITY-AND-EQUITY> 18,393,087
<SALES> 3,673,859
<TOTAL-REVENUES> 3,673,859
<CGS> 1,596,967
<TOTAL-COSTS> 1,596,967
<OTHER-EXPENSES> 1,637,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 568,195
<INCOME-TAX> 193,759
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,436
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
