<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, 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
November 3, 1998: Common Stock $.005 par value (22,146,398 shares).
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PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Condensed Balance Sheets as of September 30, 1998
and December 31, 1997 3
Condensed Statements of Income for the three
month periods ended September 30, 1998 and 1997 4
Condensed Statements of Income for the nine
month periods ended September 30, 1998 and 1997 5
Condensed Statements of Cash Flows for the
nine month periods ended September 30, 1998 and 1997 6
Notes to Condensed Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Page 2
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PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 312,726 $ 585,142
Short-term investments 9,746,633 9,446,418
Accounts receivable, net 3,579,065 3,784,488
Inventories 426,935 500,325
Prepaid expenses and other current assets 1,072,376 895,874
----------- -----------
Total current assets 15,137,735 15,212,247
----------- -----------
PROPERTY AND EQUIPMENT
Equipment and leasehold improvements, at cost 7,679,308 6,241,516
Less-Accumulated depreciation and amortization (3,692,304) (3,021,842)
----------- -----------
3,987,004 3,219,674
----------- -----------
OTHER ASSETS - NET 451,114 423,318
----------- -----------
$19,575,853 $18,855,239
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 317,697 $ 196,259
Accrued expenses 1,060,791 438,063
Deferred revenue 1,689,193 1,488,010
----------- -----------
Total current liabilities 3,067,681 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 22,528,345 and 22,382,720
shares in 1998 and 1997, respectively 112,642 111,913
Paid-in capital 23,920,847 23,581,549
Accumulated deficit (5,319,478) (5,537,505)
Less - Treasury stock, at cost; 337,447 and
183,683 shares in 1998 and 1997, respectively (1,772,381) (1,005,439)
Less - Receivable from officer (433,458) (417,611)
----------- -----------
Total shareholders' equity 16,508,172 16,732,907
----------- -----------
$19,575,853 $18,855,239
=========== ===========
</TABLE>
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 SEPTEMBER 30,
------------------------------
1998 1997
----------- -----------
REVENUE $ 4,571,820 $ 3,673,859
DIRECT COSTS 1,948,025 1,596,967
----------- -----------
Gross profit 2,623,795 2,076,892
----------- -----------
EXPENSES:
General and administrative 730,924 552,490
Marketing and selling 948,391 980,833
Research and development 118,402 104,377
----------- -----------
1,797,717 1,637,700
----------- -----------
OPERATING INCOME 826,078 439,192
OTHER INCOME 142,623 129,003
----------- -----------
NET INCOME BEFORE INCOME TAXES 968,701 568,195
PROVISION FOR INCOME TAXES 393,292 193,759
----------- -----------
NET INCOME $ 575,409 $ 374,436
=========== ===========
BASIC NET INCOME PER SHARE $ 0.03 $ 0.02
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.03 $ 0.02
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 22,241,291 21,935,913
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 22,588,407 22,826,007
=========== ===========
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)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1998 1997
----------- -----------
REVENUE $13,528,443 $11,329,806
DIRECT COSTS 5,553,239 4,525,454
----------- -----------
Gross profit 7,975,204 6,804,352
----------- -----------
EXPENSES:
General and administrative 2,107,782 1,648,192
Marketing and selling 2,582,150 2,762,278
Research and development 339,249 323,461
----------- -----------
5,029,181 4,733,931
----------- -----------
OPERATING INCOME 2,946,023 2,070,421
OTHER INCOME 420,879 385,809
----------- -----------
NET INCOME BEFORE INCOME TAXES 3,366,902 2,456,230
PROVISION FOR INCOME TAXES 1,368,029 699,167
----------- -----------
NET INCOME $ 1,998,873 $ 1,757,063
=========== ===========
BASIC NET INCOME PER SHARE $ 0.09 $ 0.08
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.09 $ 0.08
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 22,227,708 21,890,024
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 22,654,591 22,790,793
=========== ===========
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
ENDED SEPTEMBER 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,998,873 $ 1,757,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 717,991 454,577
Accretion of interest on receivable from officer (15,846) -
Changes in assets and liabilities:
Receivables 205,423 (1,325,736)
Inventories 73,390 (249,198)
Prepaid expenses and other current assets (176,502) (462,595)
Accounts payable 121,438 73,196
Accrued expenses 622,728 210,926
Deferred revenue 201,183 1,299,939
----------- -----------
Net cash provided by operating activities 3,748,678 1,758,172
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of short-term investments (300,215) (972,311)
Purchases of property and equipment (1,437,792) (1,179,597)
(Increase) decrease in other assets - net (75,327) 28,777
----------- -----------
Net cash used in investing activities (1,813,334) (2,123,131)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 340,026 1,060,067
Cash dividends paid (1,780,844) (1,752,624)
Acquisition of treasury stock (766,942) -
----------- -----------
Net cash used in financing activities (2,207,760) (692,557)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (272,416) (1,057,516)
CASH AND CASH EQUIVALENTS, beginning of period 585,142 1,462,678
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 312,726 $ 405,162
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 892,330 $ 144,000
</TABLE>
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
September 30, 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 and the nine months
ended September 30, 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
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings Per Share. This statement established standards for computing and
presenting earnings per share. Net income per share for each period presented
has been retroactively restated to conform to SFAS No. 128.
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
9-30-98 9-30-97 9-30-98 9-30-97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares 22,241,291 21,935,913 22,227,708 21,890,024
Effect of dilutive common stock
options 347,116 890,094 426,883 900,769
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, assuming dilution 22,588,407 22,826,007 22,654,591 22,790,793
</TABLE>
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PSYCHEMEDICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the three months ended September 30, 1998 and 1997, options to purchase
864,356 and 50,000 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 nine months ended September 30, 1998 and
1997, options to purchase 546,312 and 50,000 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
Revenues for all product offerings are recognized upon reporting drug test
results to the customer. During the third quarter of 1997, the Company began
offering its personal drug testing service, "PDT-90" through retail drug stores.
At September 30, 1998 and December 31, 1997, the Company had approximately
$1,689,000 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.
4. New Accounting Pronouncements
Effective January 1, 1998, the Company adopted the provisions of SFAS No.130,
Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. The Company's total comprehensive income for the three and nine month
periods ended September 30, 1998 was the same as reported net income.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria have been met. The Company adopted SOP
98-1 beginning January 1, 1998. Adoption of this Statement is not expected to
have a material impact on the Company's financial position or results of
operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires all costs associated with pre-opening,
pre-operating and organization activities to be charged to operations as
incurred. The Company will adopt SOP 98-5 beginning January 1, 1999. Adoption of
this Statement is not expected to have a material impact on the Company's
financial position or results of operations.
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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 $4,571,820 in the third quarter of 1998 as compared to $3,673,859 in
the third quarter of 1997, representing an increase of 24%. Revenue for the nine
month period ended September 30, 1998 was $13,528,443, an increase of 19% over
the $11,329,806 of revenue reported for the comparable period of 1997. The
revenue increase was due to increases in volume from both new and existing
clients offset by average price decreases of 1% primarily as a result of volume
discounts granted to large customers.
Gross margin was 57% of sales in the third quarter of 1998, consistent with the
year earlier period. Gross margin was 59% for the nine months ended September
30, 1998 as compared to 60% in the year earlier period. The decrease for the
nine month period ended September 30, 1998 when compared to the year earlier
period can be attributed to the average price decrease of 1%.
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General and administrative ("G&A") expenses were $730,924 for the three months
ended September 30, 1998 as compared to $552,490 for the three months ended
September 30, 1997, representing an increase of 32%. G&A expenses were
$2,107,782 for the nine months ended September 30, 1998 as compared to
$1,648,192 for the year earlier period, representing an increase of 28%. As a
percentage of revenue, G&A expenses increased to 16% in the third quarter of
1998 from 15% in the third quarter of 1997 and increased to 16% for the nine
months ended September 30, 1998 from 15% for the comparable year earlier period.
Approximately half of the increases were personnel related and consisted
primarily of three additions to staff, costs pertaining to the introduction of a
401(k) retirement plan, and costs associated with employee turnover in the
finance department. The Company's activities relating to investor relations and
greater professional fees also contributed to the increases.
Marketing and selling expenses for the three month period ended September 30,
1998 decreased $32,442 to $948,391, a decrease of 3%. Marketing and selling
expenses were $2,582,150 for the nine months ended September 30, 1998 as
compared to $2,762,278 for the year earlier period, representing a decrease of
7%. Total marketing and selling expenses decreased as a percentage of revenue
from 27% in the third quarter of 1997 to 21% in the third quarter of 1998, and
decreased as a percentage of revenue from 24% for the nine months ended
September 30, 1997 to 19% for the nine months ended September 30, 1998. Although
the Company continued to expand marketing activities related to the corporate
market in 1998, total marketing and selling expenses decreased from 1997 levels
because a significant amount of expenditures made in the second quarter of 1997
to initially penetrate the retail home testing market were non-recurring.
Other income for the three month and the nine month periods ended September 30,
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 $400,506 to $968,701 and by $910,672
to $3,366,902 for the three months and nine months ended September 30, 1998,
respectively, when compared to the year earlier periods. Net income was $575,409
for the third quarter of 1998 as compared to $374,436 for the third quarter of
1997. Net income for the nine months ended September 30, 1998 was $1,998,873 as
compared to $1,757,063 for the year earlier period. The effective tax rate for
the three month and the nine month periods ended September 30, 1998 was 41% in
1998 versus 34% and 29% for the three month and the nine month periods ended
September 30, 1997, respectively. This increase in the effective tax rate
reflects the reduction in net operating loss carryforwards available to offset
the provision for income taxes for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $10.1 million of cash, cash equivalents
and short-term investments. The Company's operating activities generated net
cash of $3,748,678 in the nine months ended September 30, 1998. Investing
activities used $1,813,334 in the nine month period while financing activities
used a net amount of $2,207,760 during the period.
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The Company's source of funds in the first nine months of 1998 was derived
almost entirely from cash generated from operations. Operating cash flows
increased $1,990,506 in the first three quarters of 1998, compared to the year
earlier period. The increase in net income of $241,810 as compared to the first
nine months of 1997, along with a decrease in receivables and inventories and an
increase in accounts payable and accrued expenses for the nine months ended
September 30, 1998, contributed to cash flow. An increase in prepaid expenses
and other current assets offset this to a lesser degree. Also, deferred revenue,
which represents deliveries to retail outlets of the Company's retail product
PDT-90, increased by $201,183. The non-cash effect of depreciation and
amortization in the 1998 and 1997 periods was $717,991 and $454,577,
respectively.
Capital expenditures in the first three quarters of 1998 were $1,437,792. The
expenditures primarily consisted of new equipment, including laboratory and
computer equipment. The Company believes that within the next three 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, 1998, the Company distributed
$1,780,844 in cash dividends to its shareholders.
At September 30, 1998, the Company's principal sources of liquidity included an
aggregate of $10.1 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, issuance of common stock or
debt financing. At September 30, 1998, the Company had no long-term debt.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or hardware and equipment that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Over the past two years, the Company has made substantial modifications and
improvements to all of its operational and financial software. An integral part
of this process has been to ensure that all newly purchased and internally
developed software is Year 2000 compliant. The Company has completed a
preliminary evaluation all of the existing software used in its internal systems
and operations and expects that it will be Year 2000 compliant by the end of the
second quarter of 1999, and that the cost to bring such software into compliance
will not exceed $20,000. The Company is still evaluating various hardware and
equipment components used in its laboratory operations and also expects to be
Year 2000 compliant in this area by the end of the second quarter of 1999, at an
estimated additional cost of less than $100,000. The Company believes that
although these costs are not material to its business, if these efforts are not
completed on time, or if the cost of updating or replacing the Company's
information systems greatly exceeds the Company's
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<PAGE> 12
current estimates, the Year 2000 issue could have a material adverse impact on
the Company's business, financial condition or results of operations.
The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its major suppliers, customers and service
providers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third party suppliers, customers and service
providers to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material shipment delays from
its major product suppliers or any material payment delays from its major
customers due to Year 2000 issues. However, there can be no assurance that these
third parties will not experience Year 2000 problems or that any problems would
not have a material effect on the Company's business. Because the cost and
timing of Year 2000 compliance by third parties such as suppliers, customers and
service providers is not within the Company's control, no assurance can be given
with respect to the cost or timing of such efforts or any potential adverse
effects on the Company of any failure by these third parties to achieve Year
2000 compliance.
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PART II OTHER INFORMATION
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.
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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: November 3, 1998 By: /s/ Raymond C. Kubacki, Jr.
-----------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: November 3, 1998 By: /s/ Peter C. Monson
-----------------------------------
Peter C. Monson
Vice President, Treasurer & Controller
(principal financial officer)
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 312,726
<SECURITIES> 9,746,633
<RECEIVABLES> 3,579,065
<ALLOWANCES> 0
<INVENTORY> 426,935
<CURRENT-ASSETS> 15,137,735
<PP&E> 7,679,308
<DEPRECIATION> 3,692,304
<TOTAL-ASSETS> 19,575,853
<CURRENT-LIABILITIES> 3,067,681
<BONDS> 0
0
0
<COMMON> 112,642
<OTHER-SE> 16,395,530
<TOTAL-LIABILITY-AND-EQUITY> 19,575,853
<SALES> 13,528,443
<TOTAL-REVENUES> 13,528,443
<CGS> 5,553,239
<TOTAL-COSTS> 5,553,239
<OTHER-EXPENSES> 5,029,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,366,902
<INCOME-TAX> 1,368,029
<INCOME-CONTINUING> 1,998,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,998,873
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
