<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, 1999
[ ] 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 5, 1999: Common Stock $.005 par value (21,584,576 shares).
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PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Condensed Balance Sheets as of September 30, 1999
and December 31, 1998 3
Condensed Statements of Income for the three
month periods ended September 30, 1999 and 1998 4
Condensed Statements of Income for the nine month
periods ended September 30, 1999 and 1998 5
Condensed Statements of Cash Flows for the nine
month periods ended September 30, 1999 and 1998 6
Notes to Condensed Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 12
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Page 2
<PAGE> 3
PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 518,065 $ 724,738
Short-term investments 5,707,081 9,088,436
Accounts receivable 4,252,352 3,075,619
Inventories 464,336 510,016
Prepaid expenses and other current assets 774,579 723,388
----------- -----------
Total current assets 11,716,413 14,122,197
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment and leasehold improvements, at cost 8,635,397 8,131,365
Less-Accumulated depreciation and amortization (4,902,436) (3,949,128)
----------- -----------
3,732,961 4,182,237
----------- -----------
OTHER ASSETS - NET 386,955 434,925
----------- -----------
$15,836,329 $18,739,359
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 329,967 $ 675,072
Accrued expenses 853,876 745,111
Deferred revenue 1,055,445 1,436,667
----------- -----------
Total current liabilities 2,239,288 2,856,850
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $.005 par value; 1,000,000
Shares authorized; none outstanding
Common stock; $.005 par value; 50,000,000
shares authorized; issued 22,612,440 and 113,062 113,036
Paid-in capital 24,418,446 24,403,949
Accumulated deficit (6,092,367) (5,585,453)
Less - Treasury stock, at cost; 917,264 and
533,664 shares in 1999 and 1998, respectively (4,437,659) (2,645,232)
Less - Receivable from officer (404,441) (403,791)
----------- -----------
Total shareholders' equity 13,597,041 15,882,509
----------- -----------
$15,836,329 $18,739,359
=========== ===========
</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,
------------------------------
1999 1998
----------- -----------
REVENUE $ 4,904,275 $ 4,571,820
DIRECT COSTS 2,195,965 1,948,025
----------- -----------
Gross profit 2,708,310 2,623,795
----------- -----------
EXPENSES:
General and administrative 724,745 730,924
Marketing and selling 947,038 948,391
Research and development 120,077 118,402
----------- -----------
1,791,860 1,797,717
----------- -----------
OPERATING INCOME 916,450 826,078
OTHER INCOME 94,515 142,623
----------- -----------
NET INCOME BEFORE INCOME TAXES 1,010,965 968,701
PROVISION FOR INCOME TAXES 414,370 393,292
----------- -----------
NET INCOME $ 596,595 $ 575,409
=========== ===========
BASIC NET INCOME PER SHARE $ 0.03 $ 0.03
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.03 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,760,796 22,241,291
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 22,008,063 22,588,407
=========== ===========
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,
------------------------------
1999 1998
----------- -----------
REVENUE $15,439,531 $13,528,443
DIRECT COSTS 6,426,123 5,553,239
----------- -----------
Gross profit 9,013,408 7,975,204
----------- -----------
EXPENSES:
General and administrative 2,307,010 2,107,782
Marketing and selling 3,018,972 2,582,150
Research and development 390,476 339,249
----------- -----------
5,716,458 5,029,181
----------- -----------
OPERATING INCOME 3,296,950 2,946,023
OTHER INCOME 303,968 420,879
----------- -----------
NET INCOME BEFORE INCOME TAXES 3,600,918 3,366,902
PROVISION FOR INCOME TAXES 1,476,240 1,368,029
----------- -----------
NET INCOME $ 2,124,678 $ 1,998,873
=========== ===========
BASIC NET INCOME PER SHARE $ 0.10 $ 0.09
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.10 $ 0.09
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,913,198 22,227,708
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 22,149,599 22,654,591
=========== ===========
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,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,124,678 $ 1,998,873
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,001,279 717,991
Changes in assets and liabilities:
Receivables (1,177,383) 189,577
Inventories 45,680 73,390
Prepaid expenses and other current assets (51,191) (176,502)
Accounts payable (345,105) 121,438
Accrued expenses 108,765 622,728
Deferred revenue (381,222) 201,183
----------- -----------
Net cash provided by operating activities 1,325,501 3,748,678
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short-term investments - net 3,381,355 (300,215)
Purchases of property and equipment (504,032) (1,437,792)
Increase in other assets - net -- (75,327)
----------- -----------
Net cash provided by (used in) investing activities 2,877,323 (1,813,334)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 14,523 340,026
Cash dividends paid (2,631,593) (1,780,844)
Acquisition of treasury stock (1,792,427) (766,942)
----------- -----------
Net cash used in financing activities (4,409,497) (2,207,760)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (206,673) (272,416)
CASH AND CASH EQUIVALENTS, beginning of period 724,738 585,142
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 518,065 $ 312,726
=========== ===========
</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, 1999
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, 1998. 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, 1998 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, 1999 may not be indicative of the results that may be
expected for the year ending December 31, 1999, or any other period.
2. Basic and Diluted Net Income Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share, basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share was computed by dividing net income by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. The number of dilutive common equivalent shares
outstanding during the period has been determined in accordance with the
treasury-stock method. Common equivalent shares consist of common stock issuable
upon the exercise of outstanding options.
Basic and diluted weighted average common shares outstanding are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average
common shares 21,760,796 22,241,291 21,913,198 22,227,708
Dilutive common
stock options 247,267 347,116 236,401 426,883
---------- ---------- ---------- ----------
Weighted average common
shares outstanding,
assuming dilution 22,008,063 22,588,407 22,149,599 22,654,591
</TABLE>
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For the three months ended September 30, 1999 and 1998, options to purchase
983,460 and 864,356 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, 1999 and
1998, options to purchase 983,460 and 546,312 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. At
September 30, 1999 and December 31, 1998, the Company had deferred revenue
balances of approximately $1,055,000 and $1,437,000, 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, 1999 and 1998 was the same as reported net
income.
5. New Accounting Pronouncements
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 charged to operations
as incurred until certain capitalization criteria have been met. The Company
adopted SOP 98-1 beginning January 1, 1998. SOP 98-1 had no effect upon
adoption. As of September 30, 1999 and December 31, 1998, approximately
$1,206,000 of software development costs had been capitalized. During the three
month periods ended September 30, 1999 and 1998, approximately $60,000 and
$10,000, respectively, of related amortization was charged to operations. During
the nine month periods ended September 30, 1999 and 1998, approximately $180,000
and $24,000, respectively, of related amortization was charged to operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
is effective for all periods beginning after June 15, 2000 and establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Adoption of SFAS No. 133 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 $4,904,275 in the third quarter of 1999 as compared to $4,571,820 in
the third quarter of 1998, representing an increase of 7%. Revenue for the nine
month period ended September 30, 1999 was $15,439,531, an increase of 14% over
the $13,528,443 of revenue reported for the comparable period of 1998. The
revenue increase was due primarily to increases in volume from both new and
existing clients. Gross margin was 55% of sales in the third quarter of 1999, as
compared to 57% for the comparable period of 1998. Gross margin for the nine
months ended September 30, 1999 and the nine months ended September 30, 1998 was
58% and 59%, respectively. This slight decrease in gross margin is due primarily
to sample volume being less than was expected for the third quarter of 1999.
General and administrative ("G&A") expenses were $724,745 for the three months
ended September 30, 1999 as compared to $730,924 for the three months ended
September 30, 1998, representing a decrease of 1%. G&A expenses were $2,307,010
for the nine months ended September 30, 1999 as compared to $2,107,782 for the
year earlier period, representing an increase of 9%. As a percentage of revenue,
G&A expenses decreased to 15% in the third quarter of 1999 from 16% in the third
quarter of 1998 and decreased to 15% for the nine months ended September 30,
1999 from 16%
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for the comparable year earlier period. The increases in G&A expenses for the
nine months ended September 30,1999 were due primarily to greater personnel
costs from additions to staff, costs related to the implementation of a new
billing system and increased facilities expenses (rent, taxes).
Marketing and selling expenses for the three month period ended September 30,
1999 were relatively unchanged from the year earlier period, decreasing by only
$1,353 from the comparable period of the prior year to $947,038. Marketing and
selling expenses were $3,018,972 for the nine months ended September 30, 1999 as
compared to $2,582,150 for the comparable period in 1998, representing an
increase of 17%. This increase was primarily due to greater customer service
costs resulting from the Company's growth. Total marketing and selling expenses
decreased as a percentage of revenue to 19% in the third quarter of 1999 from
21% in the third quarter of 1998, and increased as a percentage of revenue to
20% for the nine months ended September 30, 1999 from 19% for the nine months
ended September 30, 1998. The Company expects to continue to aggressively
promote its drug testing services during the remainder of 1999 and in future
years in order to expand its client base.
Other income for the three month and the nine month periods ended September 30,
1999 primarily represents interest earned on cash equivalents and short-term
investments. The decrease in 1999 was primarily due to lower average investment
balances coupled with decreased yields on these investments.
During the three months ended September 30, 1999 and September 30, 1998, the
Company recorded tax provisions of $414,370 and $393,292, respectively. During
the nine months ended September 30, 1999 and September 30, 1998, the Company
recorded tax provisions of $1,476,240 and $1,368,029, respectively. These tax
provisions reflect an effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At September 30, 1999, the Company had $6.2 million of cash, cash equivalents
and short-term investments. The Company's operating activities generated net
cash of $1,325,501 in the nine months ended September 30, 1999. Investing
activities generated $2,877,323 in the nine month period while financing
activities used a net amount of $4,409,497 during the period.
Operating cash flows decreased $2,423,177 in the first nine months of 1999,
compared to the first nine months of 1998. This was primarily due to a
significant increase in accounts receivable resulting from increased sales in
1999 along with a decrease in accounts payable and deferred revenue. The
non-cash effect of depreciation and amortization in the 1999 and 1998 periods
was $1,001,279 and $717,991, respectively.
Capital expenditures in the first three quarters of 1999 were $504,032. 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.
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During the nine month period ended September 30, 1999, the Company distributed
$2,631,593 in cash dividends to its shareholders and repurchased a total of
383,600 shares for treasury at an aggregate cost of $1,792,427.
At September 30, 1999, the Company's principal sources of liquidity included an
aggregate of $6.2 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, 1999, 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. Some 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.
In the normal course of business over the past three 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 an evaluation of all of the existing software and hardware
used in its internal systems and operations and is now Year 2000 compliant. The
Company has also evaluated various hardware and equipment components used in its
laboratory operations and is now Year 2000 compliant in this area. The
incremental cost to the Company of Year 2000 compliance was less than $100,000.
The expensed costs do not include internal costs, as the Company does not
separately track the internal costs of Year 2000 compliance. Such costs are
principally the related payroll costs for the Company's information technology
group.
The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its major suppliers, customers or service
providers to remedy their own Year 2000 issues, and has initiated formal
communications with these parties. Suppliers of hardware, software or products
were asked to provide information regarding the Year 2000 compliance status of
their products. The Company also contacted critical materials and services
suppliers during the second and third quarter of 1999. We have received
responses from most of these suppliers. 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 or 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
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<PAGE> 12
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains a short-term investment
portfolio consisting principally of securities issued by the U.S. Government
with an average maturity of less than nine months. These held-to-maturity
securities are subject to interest rate risk and will fall in value if market
rates increase. If market interest rates were to increase immediately and
uniformly by 10 percent from levels at September 30, 1999, the fair value of the
portfolio would decline by an immaterial amount. The Company has the ability to
hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
its securities portfolio.
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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 8, 1999 By: /s/ Raymond C. Kubacki, Jr.
---------------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: November 8, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 518,065
<SECURITIES> 5,707,081
<RECEIVABLES> 4,252,352
<ALLOWANCES> 0
<INVENTORY> 464,336
<CURRENT-ASSETS> 11,716,413
<PP&E> 8,635,397
<DEPRECIATION> 4,902,436
<TOTAL-ASSETS> 15,836,329
<CURRENT-LIABILITIES> 2,239,288
<BONDS> 0
0
0
<COMMON> 113,062
<OTHER-SE> 13,483,979
<TOTAL-LIABILITY-AND-EQUITY> 15,836,329
<SALES> 15,439,531
<TOTAL-REVENUES> 15,439,531
<CGS> 6,426,123
<TOTAL-COSTS> 6,426,123
<OTHER-EXPENSES> 5,716,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,600,918
<INCOME-TAX> 1,476,240
<INCOME-CONTINUING> 2,124,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124,678
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
