UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| [X] | Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2019
or
| [ ] | 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 Registrant as Specified in its Charter)
| Delaware | 58-1701987 | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) | ||
| 289 Great Road | ||
| Acton, MA | 01720 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant's telephone number including area code: (978) 206-8220
Securities registered pursuant to section 12(b) of the act:
| Title of Class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock. $0.005 par value | PMD | The Nasdaq Stock Market, LLC. |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | |
| Accelerated filer | ☒ | |
| Non–accelerated filer | ☐ | |
| Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No X
The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at October 20, 2019 was 5,516,931.
1
PSYCHEMEDICS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019
INDEX
| Page | ||
| PART I - FINANCIAL INFORMATION | ||
|
Item 1 - Financial Statements (Unaudited) |
||
| Condensed Consolidated Balance Sheets | 3 | |
| Condensed Consolidated Statements of Income and Comprehensive Income | 4 | |
| Condensed Consolidated Statements of Shareholders’ Equity | 5 | |
| Condensed Consolidated Statements of Cash Flows | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7 | |
| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
| Overview | 15 | |
| Results of Operations | 15 | |
| Liquidity and Capital Resources | 16 | |
| Item 4 - Controls and Procedures | 18 | |
|
PART II - OTHER INFORMATION |
||
| Item 1A - Risk Factors | 19 | |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |
| Item 6 - Exhibits | 20 | |
| Signatures | 20 | |
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 6,492 | $ | 4,069 | ||||
| Marketable securities | - | 3,905 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $43 in 2019 and $67 in 2018 | 5,171 | 4,829 | ||||||
| Prepaid expenses and other current assets | 1,824 | 1,067 | ||||||
| Total Current Assets | 13,487 | 13,870 | ||||||
| Fixed assets, net of accumulated amortization and depreciation of $15,530 in 2019 and $13,341 in 2018 | 9,139 | 10,177 | ||||||
| Other assets | 944 | 927 | ||||||
| Operating lease right-of-use assets | 3,214 | - | ||||||
| Total Assets | $ | 26,784 | $ | 24,974 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 372 | $ | 682 | ||||
| Accrued expenses | 2,727 | 2,962 | ||||||
| Current portion of long-term debt | 416 | 416 | ||||||
| Current portion of operating lease liabilities | 1,171 | - | ||||||
| Total Current Liabilities | 4,686 | 4,060 | ||||||
| Long-term debt | 900 | 1,212 | ||||||
| Deferred tax liabilities, long-term | 817 | 955 | ||||||
| Operating lease liabilities, long-term | 2,361 | - | ||||||
| Total Liabilities | 8,764 | 6,227 | ||||||
| Commitments and Contingencies (Note 7) | ||||||||
| Shareholders' Equity: | ||||||||
| Preferred stock, $0.005 par value, 873 shares authorized, no shares issued or outstanding | - | - | ||||||
| Common stock, $0.005 par value; 50,000 shares authorized Shares issued and outstanding: 6,185 in 2019 and 6,175 in 2018 | 31 | 31 | ||||||
| Additional paid-in capital | 31,999 | 31,523 | ||||||
| Accumulated deficit | (2,232 | ) | (1,326 | ) | ||||
| Less - Treasury stock, at cost, 668 shares | (10,082 | ) | (10,082 | ) | ||||
| Accumulated other comprehensive loss | (1,696 | ) | (1,399 | ) | ||||
| Total Shareholders' Equity | 18,020 | 18,747 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 26,784 | $ | 24,974 | ||||
See accompanying notes to condensed consolidated financial statements
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues | $ | 9,852 | $ | 11,016 | $ | 28,963 | $ | 32,738 | ||||||||
| Cost of revenues | 5,470 | 5,658 | 16,004 | 16,853 | ||||||||||||
| Gross profit | 4,382 | 5,358 | 12,959 | 15,885 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| General & administrative | 1,417 | 1,599 | 4,687 | 4,907 | ||||||||||||
| Marketing & selling | 1,238 | 1,267 | 3,455 | 3,807 | ||||||||||||
| Research & development | 393 | 372 | 1,213 | 1,089 | ||||||||||||
| Total Operating Expenses | 3,048 | 3,238 | 9,355 | 9,803 | ||||||||||||
| Operating income | 1,334 | 2,120 | 3,604 | 6,082 | ||||||||||||
| Other income/(expense), net | 6 | (9 | ) | 54 | 47 | |||||||||||
| Net income before provision for income taxes | 1,340 | 2,111 | 3,658 | 6,129 | ||||||||||||
| Provision for income taxes | 663 | 836 | 1,586 | 2,426 | ||||||||||||
| Net income | $ | 677 | $ | 1,275 | $ | 2,072 | $ | 3,703 | ||||||||
| Other Comprehensive Income (Loss): | ||||||||||||||||
| Foreign currency translation | (330 | ) | (180 | ) | (297 | ) | (1,346 | ) | ||||||||
| Total Comprehensive Income | $ | 347 | $ | 1,095 | $ | 1,775 | $ | 2,357 | ||||||||
| Basic net income per share | $ | 0.12 | $ | 0.23 | $ | 0.38 | $ | 0.67 | ||||||||
| Diluted net income per share | $ | 0.12 | $ | 0.23 | $ | 0.37 | $ | 0.67 | ||||||||
| Dividends declared per share | $ | 0.18 | $ | 0.18 | $ | 0.54 | $ | 0.51 | ||||||||
| Weighted average common shares outstanding, basic | 5,517 | 5,507 | 5,513 | 5,500 | ||||||||||||
| Weighted average common shares outstanding, diluted | 5,517 | 5,555 | 5,529 | 5,552 | ||||||||||||
See accompanying notes to condensed consolidated financial statements
4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
(UNAUDITED)
| Common Stock | Treasury Stock | Accumulated Other | ||||||||||||||||||||||||||||||
| $0.005 | Paid-In | Accumulated | Comprehensive | |||||||||||||||||||||||||||||
| Shares | par Value | Capital | Shares | Cost | Deficit | Income/(Loss) | Total | |||||||||||||||||||||||||
| BALANCE, December 31, 2018 | 6,175 | $ | 31 | $ | 31,523 | 668 | $ | (10,082 | ) | $ | (1,326 | ) | $ | (1,399 | ) | $ | 18,747 | |||||||||||||||
| Shares issued–vested | 10 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Tax withholding related to employee stock vesting | - | - | (33 | ) | - | - | - | - | (33 | ) | ||||||||||||||||||||||
| Stock compensation expense | - | - | 509 | - | - | - | - | 509 | ||||||||||||||||||||||||
| Cash dividends ($0.54 per share) | - | - | - | - | - | (2,978 | ) | - | (2,978 | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | - | 2,072 | - | 2,072 | ||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | (297 | ) | (297 | ) | ||||||||||||||||||||||
| BALANCE, September 30, 2019 | 6,185 | $ | 31 | $ | 31,999 | 668 | $ | (10,082 | ) | $ | (2,232 | ) | $ | (1,696 | ) | $ | 18,020 | |||||||||||||||
| BALANCE, December 31, 2017 | 6,160 | $ | 31 | $ | 31,022 | 668 | $ | (10,082 | ) | $ | (2,113 | ) | $ | (238 | ) | $ | 18,620 | |||||||||||||||
| Shares issued–vested | 15 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Tax withholding related to employee stock vesting | - | - | (93 | ) | - | - | - | - | (93 | ) | ||||||||||||||||||||||
| Stock compensation expense | - | - | 436 | - | - | - | - | 436 | ||||||||||||||||||||||||
| Cash dividends ($0.51 per share) | - | - | - | - | - | (2,806 | ) | - | (2,806 | ) | ||||||||||||||||||||||
| Net income | - | - | - | - | - | 3,703 | - | 3,703 | ||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (1,346 | ) | (1,346 | ) | ||||||||||||||||||||||
| BALANCE, September 30, 2018 | 6,175 | $ | 31 | $ | 31,365 | 668 | $ | (10,082 | ) | $ | (1,216 | ) | $ | (1,584 | ) | $ | 18,514 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 2,072 | $ | 3,703 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,219 | 2,302 | ||||||
| Deferred income taxes | (138 | ) | (152 | ) | ||||
| Non-cash interest income | 35 | - | ||||||
| Stock-based compensation | 509 | 436 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (342 | ) | (3,598 | ) | ||||
| Other current assets | (439 | ) | (147 | ) | ||||
| Accounts payable | (335 | ) | 394 | |||||
| Accrued expenses and accrued income taxes | (220 | ) | 1,069 | |||||
| Net cash provided by operating activities | 3,361 | 4,007 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from short-term investments | 3,810 | - | ||||||
| Purchases of equipment and leasehold improvements | (896 | ) | (775 | ) | ||||
| Cost of internally developed software | (225 | ) | (268 | ) | ||||
| Other assets | (47 | ) | (96 | ) | ||||
| Net cash provided by / (used in) investing activities | 2,642 | (1,139 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of stock, net of tax withholding | (33 | ) | (93 | ) | ||||
| Payments of equipment financing | (312 | ) | (717 | ) | ||||
| Cash dividends paid | (2,978 | ) | (2,806 | ) | ||||
| Net cash used in financing activities | (3,323 | ) | (3,616 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (257 | ) | (1,401 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 2,423 | (2,149 | ) | |||||
| Cash and cash equivalents, beginning of period | 4,069 | 8,165 | ||||||
| Cash and cash equivalents, end of period | $ | 6,492 | $ | 6,016 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for income taxes | $ | 1,958 | $ | 2,289 | ||||
| Cash paid for interest | $ | 47 | $ | 83 | ||||
| Cash paid for operating leases | $ | 841 | $ | - | ||||
| Right-of-use assets acquired through operating leases | $ | 4,382 | $ | - | ||||
| Purchases of equipment through accounts payable and accrued liabilities | $ | 30 | $ | 65 | ||||
See accompanying notes to condensed consolidated financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | Basis of Presentation |
The interim condensed consolidated financial statements of Psychemedics Corporation (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, included in the Company's 2018 Annual Report on Form 10-K (“10-K”), as filed with the Securities and Exchange Commission.
The condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2019 and 2018, the condensed consolidated statements of shareholders’ equity for the nine-month periods ended September 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2019 and 2018 are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three months and nine months ended September 30, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019, or any other period.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to Psychemedics Corporation and its consolidated subsidiaries.
| 2. | Cash and Cash Equivalents |
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents consisted exclusively of cash in the bank and bank certificates of deposits.
| 3. | Marketable Securities |
All investments with original maturities of more than 90 days are considered marketable securities. As of December 31, 2018, the Company had one held-to-maturity security (a CD with Bank of America in Brazil) with a maturity of 180 days, which matured April 29, 2019.
7
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Marketable Securities (continued) |
The CD had an original cost and current fair value of BRL 15 million (USD $4.0 million). As of September 30, 2019, the Company had no marketable securities.
| 4. | Fair Value Measurements |
The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, which are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.
| 5. | Stock-Based Compensation |
The Company’s 2006 Incentive Plan (“the Plan”) provides for cash-based awards or the grant or issuance of stock-based awards. As of December 31, 2018, 77 thousand shares remained available for future grant under the 2006 Plan. In 2019, an additional 350 thousand shares were approved for grant. There were no other changes to the plan as described in the 10-K. As of September 30, 2019, 221 thousand shares remained available for future grant under the Plan.
Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The compensation cost charged against income is included in cost of revenues and operating expenses as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Share-based compensation related to: | ||||||||||||||||
| Stock option grants | $ | 151 | $ | 102 | $ | 372 | $ | 233 | ||||||||
| Restricted Stock Unit awards ("RSUs") | 39 | 56 | 137 | 203 | ||||||||||||
| Total share-based compensation | $ | 190 | $ | 158 | $ | 509 | $ | 436 | ||||||||
There was no income tax benefit recognized in the condensed consolidated statements of income for share-based compensation arrangements for the three-month or nine-month periods ended September 30, 2019 and 2018.
8
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 5. | Stock-Based Compensation (continued) |
A summary of the Company’s stock option activity for the nine months ended September 30, 2019 is as follows (in 000’s except per share amounts):
| Weighted Average | Weighted Average | Aggregate | ||||||||||||
| Number of | Exercise Price | Remaining | Intrinsic | |||||||||||
| Shares | Per Share | Contractual Life (years) | Value(1) | |||||||||||
| Outstanding, December 31, 2018 | 398 | $ | 17.09 | 8.2 | $ | 493 | ||||||||
| Granted | 192 | $ | 10.60 | |||||||||||
| Exercised | - | - | ||||||||||||
| Forfeited | - | - | ||||||||||||
| Outstanding, September 30, 2019 | 590 | $ | 14.98 | 8.1 | $ | - | ||||||||
| Exercisable, September 30, 2019 | 239 | $ | 14.55 | 7.2 | $ | - | ||||||||
| (1) | The aggregate intrinsic value on this table was calculated based on the amount, if any, by which the closing market value of the Company’s stock on September 30, 2019 ($9.11) exceeded the exercise price of the underlying options, multiplied by the number of shares subject to each option. |
A summary of the Company’s stock unit award (“SUA”) activity for the nine months ended September 30, 2019 is as follows (in 000’s except per share amounts):
| Number of Shares | Weighted Average Price per Share (2) | Weighted Average Fair Value (2) | ||||||||||
| Outstanding & Unvested, December 31, 2018 | 19 | $ | 18.20 | $ | 343 | |||||||
| Granted | 18 | $ | 10.60 | $ | 191 | |||||||
| Converted to common stock | (10 | ) | ||||||||||
| Cancelled | (3 | ) | ||||||||||
| Forfeited | - | |||||||||||
| Outstanding & Unvested, September 30, 2019 | 24 | $ | 12.84 | $ | 311 | |||||||
| (2) | Weighted average price per share is the weighted grant price based on the closing market price of each of the stock grants related to each grant of stock unit awards. The weighted average fair value is the weighted average share price times the number of shares. |
As of September 30, 2019, a total of 835 thousand shares of common stock were reserved for issuance under the Plan. As of September 30, 2019, the unamortized fair value of awards relating to outstanding SUAs and options was $1.4 million, which is expected to be amortized over a weighted average period of 2.9 years.
9
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 6. | Basic and Diluted Net Income 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 is 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 was determined in accordance with the treasury-stock method. Common equivalent shares consisted of common stock issuable upon the exercise of outstanding options and common stock issuable upon the vesting of outstanding, unvested SUAs. Basic and diluted weighted average common shares outstanding for the three months and nine months ended September 30, 2019 and 2018 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Weighted average common shares outstanding, basic | 5,517 | 5,507 | 5,513 | 5,500 | ||||||||||||
| Dilutive common equivalent shares | - | 48 | 16 | 52 | ||||||||||||
| Weighted average common shares outstanding, diluted | 5,517 | 5,555 | 5,529 | 5,552 | ||||||||||||
The computation of diluted earnings per share for the three and nine month periods ended September 30, 2019 excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related options during the period. These stock awards are not included in the computation of diluted income per share because the effect would be antidilutive. For the three and nine month periods ended September 30, 2019, the number of antidilutive stock awards excluded from the diluted earnings per share was 614 thousand and 357 thousand, respectively.
| 7. | Commitments and Contingencies |
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of individual legal claims is inherently unpredictable, we believe that the final resolution of any pending actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
10
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 8. | Operating Leases |
The Company has seven operating leases for office and laboratory space used to conduct business (one of which is for a data center). The exercise of lease renewal options is at our discretion and the majority of renewals to extend the lease terms are not included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise. The Company includes the renewal period in our lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the lease commencement date in determining the net present value (NPV) of the lease payments.
In July 2019, the Company signed a 5-year lease for a laboratory facility in Culver, City California. The total payments for this lease is $2.8 million with a NPV of $2.5 million. This lease replaces a building in Culver City whose lease expires in January 2020. As of September 30, 2019, the Company recognized a Right-Of-Use (“ROU”) asset of $3.2 million and an operating lease liability of $3.5 million based on the present value of the minimum rental payments as a result of adoption of ASC Topic 842. The weighted average discount rate used for leases as of September 30, 2019 is 4.0%. The weighted average lease term as of September 30, 2019 is 4.2 years. The operating lease expense for the three and nine months ended September 30, 2019 was $0.3 million and $0.8 million, respectively.
Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of September 30, 2019 is as follows (in thousands):
| 2019 | $ | 273 | ||
| 2020 | 1,078 | |||
| 2021 | 644 | |||
| 2022 | 619 | |||
| 2023 | 584 | |||
| 2024 | 582 | |||
| 2025 | 145 | |||
| Total Lease Payments | 3,925 | |||
| Less Interest: | (393 | ) | ||
| Present value of lease liabilities | $ | 3,532 | ||
| Current operating lease liabilities | $ | 1,171 | ||
| Long-term operating lease liabilities | 2,361 | |||
| Total | $ | 3,532 |
11
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 9. | Debt and Other Financing Arrangements |
On March 20, 2014, the Company entered into an equipment financing arrangement (“Loan Agreement”) with Banc of America Leasing & Capital, which it amended on August 8, 2014, September 15, 2015 and October 30, 2018. The terms of the arrangement are detailed in the 10-K.
The weighted average interest rate on outstanding debt under the Loan Agreement was 4.0% and 4.2% for the three and nine months ended September 30, 2019, respectively. The interest expense was $14 thousand and $46 thousand for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the interest rate was 3.9% and there was $1.3 million of outstanding debt related under the loan agreement. The Company was in compliance with all loan covenants as of September 30, 2019.
The annual principal repayment requirements for debt obligations as of September 30, 2019 were as follows (in 000’s):
| 2019 | $ | 104 | ||
| 2020 | 416 | |||
| 2021 | 416 | |||
| 2022 | 380 | |||
| Total long-term debt | 1,316 | |||
| Less current portion of long-term debt | (416 | ) | ||
| Total long-term debt, net of current portion | $ | 900 |
| 10. | Revenue |
The table below disaggregates our external revenue by major source (in thousands). For additional revenue detail relating to geographic breakdown of sales, see Note 11 – “Business Segment Reporting”.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Testing | $ | 9,069 | $ | 10,125 | $ | 26,543 | $ | 30,022 | ||||||||
| Shipping/Collection (hair) | 714 | 803 | 2,225 | 2,438 | ||||||||||||
| Other | 69 | 88 | 195 | 278 | ||||||||||||
| Total Revenue | $ | 9,852 | $ | 11,016 | $ | 28,963 | $ | 32,738 | ||||||||
12
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 11. | Business Segment Reporting |
The Company manages its operations as one segment, drug testing services. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment. All Brazil sales are through one independent distributor, which is the only customer greater than 10% of sales. The Company’s revenues by geographic region are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Consolidated Revenue: | ||||||||||||||||
| United States | $ | 7,102 | $ | 7,535 | $ | 20,969 | $ | 22,392 | ||||||||
| Brazil | 2,619 | 3,383 | 7,620 | 10,011 | ||||||||||||
| Other | 131 | 98 | 374 | 335 | ||||||||||||
| Total Revenue | $ | 9,852 | $ | 11,016 | $ | 28,963 | $ | 32,738 | ||||||||
| 12. | Significant Customers |
The Company had one customer that represented 27% and 26% of revenue for the three and nine months ended September 30, 2019, respectively. The Company had one customer that represented 31% of revenue for the three and nine months ended September 30, 2018. The Company had two customers that represented 17% and 13% of the total accounts receivable balance as of September 30, 2019 and one customer that represented 20% of the total accounts receivable balance as of December 31, 2018.
| 13. | Recently Adopted Accounting Pronouncements |
In February 2016, the FASB issued ASU 2016-02, Leases, which was subsequently amended by ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). which introduced the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard established a right-of-use ("ROU") model that requires a lessee to record a lease asset and liability on the balance sheet for all leases with terms longer than 12 months. The standard became effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted Topic 842 as of January 1, 2019 (see Note 8 – Operating Leases).
In August 2018, the SEC issued Release No. 33-10532 that amended and clarified certain financial reporting requirements. The principal change to our financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity to interim periods. We adopted this rule for the quarter ended March 31, 2019.
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 14. | Accounting Pronouncements Issued But Not Yet Effective |
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income” (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Cuts and Jobs Act (Tax Reform Act) that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. ASU 2018-02, however, does not change the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations. ASU 2018-02 will be effective for the Company’s fiscal year 2020, with the option to early adopt prior to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. The FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. ASU 2018-15 will be effective for the Company’s fiscal year 2020, with the option to early adopt prior to the effective date. The Company is currently evaluating the impact that this updated standard will have on its consolidated financial statements.
| 15. | Subsequent Events |
On October 22, 2019, the Company declared a quarterly dividend of $0.18 per share for a total of $993 thousand, which will be paid on November 15, 2019 to shareholders of record on November 5, 2019.
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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 earnings, earnings per share, revenues, operating cash flows, profitability, margins, pricing, dividends, future business, growth opportunities, new accounts, customer base, test volume, sales and marketing strategy, business strategy, general and administrative expenses, marketing and selling expenses, research and development expenses, anticipated operating results, foreign drug testing laws and regulations and the enforcement of such laws and regulations, including effective dates of such laws and regulations, investments in plant, property, equipment and leasehold improvements, strategies with respect to governmental agencies and regulations, cost savings, capital expenditures, liquidity of investments, our relationship with our Brazilian distributor and market demand for drug testing services in Brazil 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 employee hiring practices of the Company’s principal customers, development of markets for new products and services offered by the Company, costs associated with capacity expansion, government regulation (including, but not limited to, Food and Drug Administration regulations and foreign government regulation including Brazilian commercial drivers license drug test laws and regulations), risks associated with the delay in the implementation of new regulations, risks associated with foreign currency fluctuations, R&D spending, competition (including, without limitation, competition from other companies pursuing the same growth opportunities), the Company’s ability to maintain its reputation and brand image, the ability of the Company to achieve its business plans, cost controls, leveraging of its global operating platform, risks of information technology system failures and data security breaches, the uncertain global economy, the Company’s ability to attract, develop and retain executives and other qualified employees and independent contractors, including distributors, the Company’s ability to obtain and protect intellectual property rights, litigation risks, and general economic conditions. With respect to the continued payment of cash dividends, factors include, but are not limited to, available surplus, cash flow, capital expenditure reserves required, debt service obligations, and other factors that the Board of Directors of the Company may take into account.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent the Company’s estimates and assumptions only as of the filing date of this Report. The Company expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the filing date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as the risks and uncertainties discussed elsewhere in this Report. The Company qualifies all of its forward-looking statements by these cautionary statements. The Company cautions you that these risks are not exhaustive. The Company operates in a continually changing business environment and new risks emerge from time to time.
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Revenue for the third quarter of 2019 was $9.9 million compared to $11.0 million for the comparable period in 2018, a decrease of 11%. The Company reported net income of $0.7 million, or $0.12 per diluted share for the three months ended September 30, 2019 versus $1.3 million, or $0.23 per diluted share for the same period in 2018, a decrease of 47%. The decrease in net income was primarily a result of lower international revenue. Revenue for the nine months ended 2019 was $29.0 million compared to $32.7 million in 2018, a decrease of 12%. Net income for the nine months ended September 30, 2019 was $2.1 million, or $0.37 per diluted share versus $3.7 million, or $0.67 per diluted share for the same period in 2018, a decrease of 44%. The Company declared $0.54 per share of cash dividends to its shareholders in the nine months ended September 30, 2019 and 2018. The Company has paid 92 consecutive quarterly cash dividends.
Revenue decline of 11% for the three months ended September 30, 2019 was primarily due to a 12% decrease in volume. Revenues from domestic business decreased 6%. Revenues from international business decreased 21%. Revenue for the nine months ended September 2019 was $29.0 million compared to $32.7 million for the comparable period in 2018, a decrease of 12%. This was primarily due to a 10% decrease in volume and a 2% negative impact from foreign currency exchange.
Gross profit was $4.4 million for the three months ended September 30, 2019, compared to $5.4 million for the same period in 2018, a decrease of $1.0 million, or 18%. Direct costs decreased by $0.2 million or 3% for the three months ended September 30, 2019, compared to the same period in 2018. The gross profit margin was 44% for the three months ended September 30, 2019 versus 49% for the comparable period in 2018. The decrease in margin for the three months was primarily driven by the impact from lower revenue and from an increase in Brazil sales taxes as a result of a new distributor agreement (discussed below). Gross profit was $13.0 million for the nine months ended September 30, 2019, compared to $15.9 million for the same period in 2018, a decrease of $2.9 million, or 18%. Direct costs decreased by $0.9 million or 5% for the nine months ended September 30, 2019 when compared to the same period in 2018. The gross profit margin for the nine month period ended September 30, 2019 was 45% compared to 49% for the comparable period in 2018. The decrease in margin for the nine months was primarily driven by the impact from lower revenue.
General and administrative (“G&A”) expenses decreased 11% to $1.4 million for the three months ended September 30, 2019 from $1.6 million for the same period in 2018. As a percentage of revenue, G&A expenses were 14% and 15% for the three months ended September 30, 2019 and 2018, respectively. General and administrative expenses decreased 4% to $4.7 million for the nine months ended September 30, 2019 from $4.9 million for the same period in 2018. As a percentage of revenue, G&A expenses were 16% and 15% for the nine months ended September 30, 2019 and 2018, respectively.
Marketing and selling expenses decreased 2% to $1.2 million for the three months ended September 30, 2019 compared to $1.3 million for the same period in 2018. As a percentage of revenue, marketing and selling expenses were 13% and 12% for the three months ended September 30, 2019 and 2018, respectively. Marketing and selling expenses decreased 9% to $3.5 million for the nine months ended September 30, 2019 from $3.8 million for the same period in 2018. As a percentage of revenue, marketing and selling expenses were 12% for the nine months ended September 30, 2019 and 2018.
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Research and development (“R&D”) expenses were $0.4 million for the three months ended September 30, 2019 and 2018. As a percentage of revenue, R&D expenses were 4% and 3% for the three months ended September 30, 2019 and 2018, respectively. R&D expenses increased 11% to $1.2 million for the nine months ended September 30, 2019 compared to $1.1 million for the comparable period of 2018. As a percentage of revenue, R&D expenses were 4% and 3% for the nine months ended September 30, 2019 and 2018, respectively.
Provision for income taxes consists primarily of federal and state income taxes in the United Sates and income taxes in Brazil. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended September 30, 2019 and 2018, the Company recorded tax provisions of $0.7 million and $0.8 million, respectively. These provisions represented effective tax rates of 49% for the three months ended September 30, 2019 and 40% for the comparable period of 2018. During the nine months ended September 30, 2019 and 2018, the Company recorded tax provisions of $1.6 and $2.4 million, respectively. These provisions represented effective tax rates of 43% for the nine months ended September 30, 2019 and 40% for the comparable period of 2018. The Company currently expects the year-end tax rate to be approximately 43%. This rate can fluctuate significantly based on the mix of business and pre-tax income, as Brazil taxes are based on revenue.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2019, the Company had approximately $6.5 million of cash and cash equivalents and $8.8 million of working capital. The Company's operating activities generated net cash of $3.4 million for the nine months ended September 30, 2019. Investing activities provided $2.6 million of cash while financing activities used $3.3 million of cash during the first nine months of 2019.
Cash provided by operating activities of $3.4 million reflected net income of $2.1 million adjusted for depreciation and amortization of $2.2 million, stock-based compensation of $0.5 million and a decrease of deferred income taxes of $0.1 million. This was affected by an increase in current assets of $0.8 million and a decrease in current liabilities of $0.6 million.
Cash provided by investing activities of $2.6 million reflected the sale of marketable securities of $3.8 million, purchases of equipment and leasehold improvements of $0.9 million and cost of internally developed software of $0.2 million. We anticipate spending approximately $0.5 million in additional equipment purchases for the remainder of 2019. Additionally, approximately $2.2 to $2.7 million will be spent on leasehold improvements. These improvements relate to a transition the Company is making from one facility in Culver City to a new facility in Culver City.
Cash used by financing activities of $3.3 million included cash dividends to shareholders of $3.0 million and $0.3 million from long-term debt payments.
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Contractual obligations and other commercial commitments as of September 30, 2019 include operating lease commitments and outstanding debt, described in Notes 8 and 9, respectively of the Notes to Condensed Consolidated Financial Statements.
At September 30, 2019, the Company's principal sources of liquidity included an aggregate of approximately $6.5 million of cash and cash equivalents. The Company had $8.8 million and $9.8 million of working capital as of September 30, 2019 and December 31, 2018, respectively. The new lease accounting standard negatively impacted the working capital amount by $1.2 million. Management currently believes that such funds should be adequate to fund anticipated working capital and capital equipment requirements for the next 12 months. Depending upon the Company's results of operations and capital needs, the Company may use various financing sources to raise additional funds.
New Brazilian Distributor Agreement
In September 2019, the Company entered into a new distribution agreement in Brazil with its existing independent distributor in Brazil and a related entity. As previously disclosed, in 2018, a majority interest in Psychemedics Brasil was acquired by Instituto Hermes Pardini S.A. (IHP). Under the new agreement, the Company’s existing distributor was appointed as a non-exclusive distributor to sell, promote and distribute Psychemedics’ hair drug testing services for an indefinite term. The agreement may be terminated for any reason by either Psychemedics or the distributor following 90 days’ written notice. IHP and its controlled companies are restricted to distributing only Psychemedics’ hair drug tests and the hair drug tests of one other IHP Company. The agreement provides for Psychemedics’ hair drug tests to be marketed, sold, and reported in Brazil under the Psychemedics Corporation brand name, with all related materials so identified. This agreement also allows the Company to pursue other distribution opportunities in Brazil.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”) the Company’s management under the supervision and with the participation of the Company’s Chief Executive Officer and Vice President of Finance, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act. Based upon that evaluation, the Chief Executive Officer and Vice President - Finance concluded as of the evaluation date, that the Company’s disclosure controls and procedures were effective for ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that its disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
There has been no significant change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II OTHER INFORMATION
We are subject to numerous political, legal, operational and other risks as a result of our international operations which could impact our business in many ways.
Although we conduct a majority of our business in the United States, a significant portion of our business is derived from Brazil. Our international operations increase our exposure to the inherent risks of doing business in international markets. Depending on the market, these risks include without limitation:
| • | changes in the local economic environment or local laws or regulations |
| • | political instability, social changes, local market practices and changes |
| • | intellectual property legal protections and remedies |
| • | trade regulations |
| • | foreign currency exchange rate fluctuations |
| • | attracting and retaining qualified employees and independent contractors including distributors |
| • | export and import and exchange controls |
| • | weak legal systems which may affect our ability to enforce contractual rights |
| • | the Company reliance on one distributor in Brazil |
As the Company has previously disclosed, there are greater challenges and uncertainties in a new, large and developing market, such as Brazil.
Under the Company’s new distribution agreement with its Brazilian distributor (see Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – New Brazilian Distributor Agreement), the distribution agreement may be terminated for any reason by either the Company or its distributor following 90 days’ written notice. Although the agreement permits Psychemedics to pursue other distribution policies in Brazil, any significant decrease in our sales to our distributor in Brazil absent a suitable replacement would have a materially adverse impact on our business.
International operations also require us to devote significant management resources to implement our controls and systems in new markets, to comply with the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws in non-U.S. jurisdictions and to overcome challenges based on differing languages and cultures.
Except as noted above, there have been no material changes in our risk factors from those disclosed in our 2018 Annual Report on Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no purchases of treasury stock in the first nine months of 2019.
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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: October 24, 2019 | By: /s/ Raymond C. Kubacki | |
| Raymond C. Kubacki | ||
| Chairman and Chief Executive Officer | ||
| (principal executive officer) | ||
| Date: October 24, 2019 | By: /s/ Neil L. Lerner | |
| Neil L. Lerner | ||
| Vice President - Finance | ||
| (principal accounting officer) |
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