<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, 2000
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 9, 2000: Common Stock $.005 par value (21,167,876 shares).
<PAGE> 2
PSYCHEMEDICS CORPORATION
Part I FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Condensed Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Statements of Income for the three
month periods ended September 30, 2000 and 1999 4
Condensed Statements of Income for the nine
month periods ended September 30, 2000 and 1999 5
Condensed Statements of Cash Flows for the
nine month periods ended September 30, 2000 and 1999 6
Notes to Condensed Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Item 3 Quantitative and Qualitative Disclosures about Market
Risk 11
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE> 3
PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,348,802 $ 899,387
Short-term investments -- 4,938,463
Accounts receivable, net 3,957,823 3,219,510
Inventories 421,173 449,103
Prepaid expenses and other current assets 621,822 557,276
Deferred tax asset 337,752 337,752
------------ ------------
Total current assets 8,687,372 10,401,491
------------ ------------
PROPERTY AND EQUIPMENT:
Equipment and leasehold improvements, at cost 9,224,591 8,572,486
Less-Accumulated depreciation and amortization (6,080,459) (5,154,037)
------------ ------------
3,144,132 3,418,449
------------ ------------
OTHER ASSETS - NET 342,009 370,965
------------ ------------
$ 12,173,513 $ 14,190,905
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 427,201 $ 512,580
Accrued expenses 1,234,875 842,790
Deferred revenue 728,111 862,088
------------ ------------
Total current liabilities 2,390,187 2,217,458
------------ ------------
DEFERRED TAX LIABILITY 167,520 167,520
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
shares in 2000 and 1999 113,062 113,062
Paid-in capital 24,437,746 24,414,985
Accumulated deficit (7,610,218) (6,746,157)
Less - Treasury stock, at cost; 1,444,564 and 1,172,464
shares in 2000 and 1999, respectively (6,925,352) (5,580,293)
Less - Receivable from officer (399,432) (395,670)
------------ ------------
Total shareholders' equity 9,615,806 11,805,927
------------ ------------
$ 12,173,513 $ 14,190,905
============ ============
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
<PAGE> 4
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE $ 5,021,437 $ 4,904,275
DIRECT COSTS 2,263,915 2,195,965
----------- -----------
Gross profit 2,757,522 2,708,310
----------- -----------
EXPENSES:
General and administrative 808,488 724,745
Marketing and selling 1,111,142 947,038
Research and development 129,092 120,077
----------- -----------
2,048,722 1,791,860
----------- -----------
OPERATING INCOME 708,800 916,450
OTHER INCOME 58,878 94,515
----------- -----------
NET INCOME BEFORE INCOME TAXES 767,678 1,010,965
PROVISION FOR INCOME TAXES 317,200 414,370
----------- -----------
NET INCOME $ 450,478 $ 596,595
=========== ===========
BASIC NET INCOME PER SHARE $ 0.02 $ 0.03
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.02 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,174,034 21,760,796
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,436,108 22,008,063
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
<PAGE> 5
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE $15,176,165 $15,439,531
DIRECT COSTS 6,767,195 6,426,123
----------- -----------
Gross profit 8,408,970 9,013,408
----------- -----------
EXPENSES:
General and administrative 2,483,051 2,307,010
Marketing and selling 3,114,519 3,018,972
Research and development 347,438 390,476
----------- -----------
5,945,008 5,716,458
----------- -----------
OPERATING INCOME 2,463,962 3,296,950
OTHER INCOME 400,075 303,968
----------- -----------
NET INCOME BEFORE INCOME TAXES 2,864,037 3,600,918
PROVISION FOR INCOME TAXES 1,180,900 1,476,240
----------- -----------
NET INCOME $ 1,683,137 $ 2,124,678
=========== ===========
BASIC NET INCOME PER SHARE $ 0.08 $ 0.10
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.08 $ 0.10
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,244,848 21,913,198
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,513,684 22,149,599
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
<PAGE> 6
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
ENDED SEPTEMBER 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,683,137 $ 2,124,678
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 974,879 1,001,279
Compensation expense related to issuance of
stock options 22,761 --
Changes in assets and liabilities:
Receivables (738,313) (1,176,733)
Inventories 27,930 45,680
Prepaid expenses and other current assets (64,546) (51,191)
Accounts payable (85,379) (345,105)
Accrued expenses 392,085 108,765
Deferred revenue (133,977) (381,222)
----------- -----------
Net cash provided by operating activities 2,078,577 1,326,151
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments - net 4,938,463 3,381,355
Purchases of property and equipment (652,103) (504,032)
Increase in other assets - net (19,503) --
----------- -----------
Net cash provided by investing activities 4,266,857 2,877,323
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock -- 14,523
Increase in the receivable from officer (3,762) (650)
Cash dividends paid (2,547,198) (2,631,593)
Acquisition of treasury stock (1,345,059) (1,792,427)
----------- -----------
Net cash used in financing activities (3,896,019) (4,410,147)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,449,415 (206,673)
CASH AND CASH EQUIVALENTS, beginning of period 899,387 724,738
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,348,802 $ 518,065
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
<PAGE> 7
PSYCHEMEDICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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, 1999. 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, 1999 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, 2000 may not be indicative of the results that may be
expected for the year ending December 31, 2000, or any other period.
2. Basic and Diluted Net Income Per Share
In accordance with Statement of Financial Accounting Standard ("SFAS") No. 128,
Earnings Per Share, basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share was computed by dividing net income by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. The number of dilutive common equivalent shares
outstanding during the period has been determined in accordance with the
treasury-stock method. Common equivalent shares consist of common stock issuable
upon the exercise of outstanding options.
Basic and diluted weighted average common shares outstanding are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average 21,174,034 21,760,796 21,244,848 21,913,198
common shares
Dilutive common
stock options 262,074 247,267 268,836 236,401
---------- ---------- ---------- ----------
Weighted average common
shares outstanding,
assuming dilution 21,436,108 22,008,063 21,513,684 22,149,599
</TABLE>
For the three months ended September 30, 2000 and 1999, options to purchase
1,086,070 and 814,370 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, 2000 and
1999, options to purchase 1,086,070 and 814,370 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
<PAGE> 8
Except as provided below, revenues from the Company's services are recognized
upon reporting of drug test results to the customer. Revenues related to sample
collection kits not returned for processing by customers are recognized when the
likelihood of the Company performing any service obligation is deemed remote.
During the third quarter of 2000 the Company did not record any revenue related
to sample collection kits that were sold for which the Company's obligation to
provide service was deemed remote. During the third quarter of 1999 and for the
nine months ended September 30, 2000 and 1999, the Company recorded $150,000,
$109,000 and $480,000, respectively, of revenue related to sample collection
kits that were sold for which the Company's obligation to provide service was
deemed remote. At September 30, 2000 and December 31, 1999, the Company had
deferred revenue balances of approximately $728,000 and $862,000, 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, 2000 and 1999 was the same as reported net
income.
5. Computer Software Costs
As of September 30, 2000 and December 31, 1999, $1,205,540 of software
development costs have been capitalized. For both of the three month periods
ended September 30, 2000 and 1999, $60,294 of related amortization was charged
to operations. During the nine month periods ended September 30, 2000 and 1999,
$180,882 and $180,554, respectively, of related amortization was charged to
operations.
6. New Accounting Pronouncements
In September 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Financial Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133, which defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after September 15, 2000. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. The Company
does not anticipate the adoption of these statements to have a material impact
on its financial position or results of operations. As of September 30, 2000,
the Company did not have any derivatives or other financial instruments as
defined by SFAS No. 119, Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments.
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,
<PAGE> 9
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 $5,021,437 in the third quarter of 2000 as compared to $4,904,275 in
the third quarter of 1999, representing an increase of 2%. Revenue for the nine
month period ended September 30, 2000 was $15,176,165, a decrease of 2% from the
$15,439,531 of revenue reported for the comparable period of 1999. The revenue
increase for the third quarter of 2000 and the revenue decrease for the nine
months ended September 30, 2000 were due primarily to variations in volume from
both new and existing clients.
Gross margin was 55% of sales in both the third quarter of 2000 and the third
quarter of 1999. Gross margin for the nine months ended September 30, 2000 was
55% of sales, as compared to 59% for the nine months ended September 30, 1999.
The decrease in gross margin was due to higher direct costs in the first three
quarters of 2000 in anticipation of higher volume.
General and administrative ("G&A") expenses were $808,488 for the three months
ended September 30, 2000 as compared to $724,745 for the three months ended
September 30, 1999, representing an increase of 12%. G&A expenses were
$2,483,051 for the nine months ended September 30, 2000 as compared to
$2,307,010 for the year earlier period, representing an increase of 8%. As a
percentage of revenue, G&A expenses increased to 16% in the third quarter of
2000 from 15% in the third quarter of 1999 and increased to 16% for the nine
months ended September 30, 2000 from 15% for the comparable year earlier period.
Professional fees related to legal services, investor relations and consulting
services related to computer services and strategic corporate development
accounted for most of the increase, while all other G&A expenses remained
relatively constant.
Marketing and selling expenses for the three month period ended September 30,
2000 increased $164,104 from the comparable period of the prior year to
$1,111,142, an increase of 17%. This increase is due primarily to the expansion
of the Company's sales force during the third quarter of 2000. Marketing and
selling expenses were $3,114,519 for the nine months ended September 30, 2000 as
compared to $3,018,972 for the year earlier period, representing an increase of
3%. Expenses pertaining to additions to the sales force and expanded marketing
activities related to the corporate market were partially offset by decreased
customer service costs in the first three
<PAGE> 10
quarters of 2000, as compared to the first three quarters of 1999. Customer
service costs during the first three quarters of 1999 were elevated due to the
Company's assistance in the testing of all employees at one of the Company's
larger customers. Total marketing and selling expenses were 22% of revenue in
the third quarter of 2000 and 19% of revenue in the third quarter of 1999. Total
marketing and selling expenses were 21% and 20% of revenue for the nine months
ended September 30, 2000 and September 30, 1999, respectively. The Company
expects to continue to aggressively promote its drug testing services during the
remainder of 2000 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,
2000 represented primarily interest earned on cash equivalents and short-term
investments. Other income for the nine month period ended September 30, 2000
included a $200,000 legal settlement from a breach of contract dispute with a
third party administrator. The remainder of other income represented interest
earned on cash equivalents and short-term investments. Although the yields on
investment balances increased in the first three quarters of 2000 as compared to
the first three quarters of 1999, interest income decreased due to lower average
investment balances.
During the three months ended September 30, 2000 and September 30, 1999, the
Company recorded tax provisions of $317,200 and $414,370, respectively. During
the nine months ended September 30, 2000 and September 30, 1999, the Company
recorded tax provisions of $1,180,900 and $1,476,240, respectively. These tax
provisions reflect an effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $3.3 million of cash, cash equivalents
and short-term investments. The Company's operating activities generated net
cash of $2,078,577 in the nine months ended September 30, 2000. Investing
activities generated $4,266,857 in the nine month period while financing
activities used a net amount of $3,896,019 during the period.
Operating cash flows increased $752,426 in the first nine months of 2000,
compared to the year earlier period. A lesser increase in accounts receivable
and a lesser decrease in accounts payable and deferred revenue along with an
increase in accrued expenses during the first nine months of 2000 as compared to
the first nine months of 1999 were the main reason for this increase. This was
partially offset by the reduction in net income for the first three quarters of
2000 as compared to the year earlier period. The non-cash effect of depreciation
and amortization in the 2000 and 1999 periods was $974,879 and $1,001,279,
respectively.
Capital expenditures in the first three quarters of 2000 were $652,103. The
expenditures primarily consisted of new equipment, including laboratory and
computer equipment. The Company believes that within the next two years it may
be required to expand its existing laboratory or develop a second laboratory,
the cost of which is currently believed to range from $2 million to $4 million.
During the nine month period ended September 30, 2000, the Company distributed
$2,547,198 in cash dividends to its shareholders and repurchased a total of
272,100 shares for treasury at an aggregate cost of $1,345,059.
At September 30, 2000, the Company's principal sources of liquidity included an
aggregate of $3.3 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
<PAGE> 11
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, 2000, the Company had no long-term debt.
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 six 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, 2000, 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.
<PAGE> 12
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.
<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 9, 2000 By: /s/ Raymond C. Kubacki, Jr.
-----------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: November 9, 2000 By: /s/ Peter C. Monson
------------------------------------
Peter C. Monson
Vice President, Treasurer &
Chief Financial Officer
