0001171843-22-003580pmd20220331_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2022

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

1720

(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 ☒  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 ☒ 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 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 Exchange Act). Yes  No ☒

 

The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at May 6, 2022 was 5,591,656.

 

 

 

 

 

 

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022

 

INDEX

 

 

Page

PART I - FINANCIAL INFORMATION

3
   

Item 1 - Financial Statements (unaudited)

3
 

Condensed Consolidated Balance Sheets

3
 

Condensed Consolidated Statements of Operations

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

17
 

Factors that May Affect Future Results

17
 

Overview

18
 

Results of Operations

18
 

Liquidity and Capital Resources

19
     

Item 4 - Controls and Procedures

20
     

PART II - OTHER INFORMATION

21
Item 1 - Legal Proceedings 21

Item 1A - Risk Factors

21

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 6 - Exhibits

21
   

Signatures

22

 

 

 

 

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 
         

ASSETS

        

Current Assets:

        

Cash

 $2,127  $1,992 

Accounts receivable, net of allowance for doubtful accounts of $108 at March 31, 2022, and $89 at December 31, 2021

  4,704   4,116 

Prepaid expenses and other current assets

  1,033   1,499 

Income tax receivable

  2,661   2,678 
         

Total Current Assets

  10,525   10,285 
         

Fixed assets, net of accumulated amortization and depreciation of $20,272 at March 31, 2022, and $19,659 at December 31, 2021

  6,121   6,691 

Other assets

  842   864 

Net deferred tax assets

  160   160 

Operating lease right-of-use assets

  3,320   3,552 
         

Total Assets

 $20,968  $21,552 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        
         

Current Liabilities:

        

Accounts payable

 $722  $994 

Accrued expenses

  3,045   3,188 

Current portion of long-term debt

  563   664 

Current portion of operating lease liabilities

  994   984 
         

Total Current Liabilities

  5,324   5,830 
         

Long-term debt

  526   599 

Long-term portion of operating lease liabilities

  2,657   2,880 

Total Liabilities

  8,507   9,309 
         

Commitments and Contingencies (Note 5)

          
         

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, 6,259 shares and 6,257 shares issued at March 31, 2022, and December 31, 2021, respectively, and 5,590 shares outstanding and 5,589 shares outstanding at March 31, 2022 and December 31, 2021, respectively

  31   31 

Additional paid-in capital

  33,657   33,478 

Accumulated deficit

  (9,511)  (9,550)

Less - Treasury stock, at cost, 668 shares

  (10,082)  (10,082)

Accumulated other comprehensive loss

  (1,634)  (1,634)
         

Total Shareholders' Equity

  12,461   12,243 
         

Total Liabilities and Shareholders' Equity

 $20,968  $21,552 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 
                 

Revenues

  $ 6,508     $ 5,713  

Cost of revenues

    4,067       3,145  
                 

Gross profit

    2,441       2,568  
                 

Operating Expenses:

               

General & administrative

    1,327       1,529  

Marketing & selling

    806       642  

Research & development

    318       280  
                 

Total Operating Expenses

    2,451       2,451  
                 

Operating (loss) income

    (10 )     117  

Other income (expense), net

    66       (14 )
                 

Net income before provision for income taxes

    56       103  
                 

Provision for income taxes

    17       20  
                 

Net income

  $ 39     $ 83  
                 

Basic net income per share

  $ 0.01     $ 0.01  
                 

Diluted net income per share

  $ 0.01     $ 0.01  

 

See accompanying notes to condensed consolidated financial statements.

 

 

4

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(in thousands, except per share amounts)

(UNAUDITED)

 

  

Common Stock, $0.005 par value

  

Additional

              Accumulated Other     
  

Common Shares

  

Common

  

Paid-In

  

Treasury Stock

  

Accumulated

  

Comprehensive

     
  

Outstanding

  

Stock

  

Capital

  

Shares

  

Cost

  

Deficit

  

Loss

  

Total

 

BALANCE, December 31, 2021

  6,257  $31  $33,478   668  $( 10,082) $( 9,550) $( 1,634) $12,243 

Shares issued – vested

  2   -   -   -   -   -   -   - 

Stock compensation expense

  -   -   179   -   -   -   -   179 

Net income

  -   -   -   -   -   39   -   39 

BALANCE, March 31, 2022

  6,259  $31  $33,657   668  $( 10,082) $( 9,511) $( 1,634) $12,461 
                                 

BALANCE, December 31, 2020

  6,205  $31  $32,803   668  $( 10,082) $( 8,606) $( 1,634) $12,512 

Stock compensation expense

  -   -   217   -   -   -   -   217 

Net income

  -   -   -   -   -   83   -   83 

BALANCE, March 31, 2021

  6,205  $31  $33,020   668  $( 10,082) $( 8,523) $( 1,634) $12,812 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

5

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

 

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 39     $ 83  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    628       687  

ROU asset amortization

    232       224  

Stock-based compensation

    179       217  

Changes in operating assets and liabilities:

               

Accounts receivable

    (588 )     (664 )

Prepaid expenses and other current assets

    466       (984 )

Income tax receivable

    17       (24 )

Accounts payable

    (272 )     525  

Operating lease liabilities

    (213 )     (243 )

Accrued expenses

    (143 )     (234 )

Net cash provided by (used in) operating activities

    345       (413 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of equipment and leasehold improvements

    (10 )     (7 )

Cost of internally developed software

    (33 )     (43 )

Other assets

    7       (9 )

Net cash used in investing activities

    (36 )     (59 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Payments of equipment financing

    (174 )     (171 )

Net cash used in financing activities

    (174 )     (171 )
                 

Net increase (decrease) in cash

    135       (643 )

Cash, beginning of period

    1,992       2,833  

Cash, end of period

  $ 2,127     $ 2,190  
                 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid for interest

  $ 10     $ 14  

Cash paid for operating leases

  $ 269     $ 269  

Right-of-use assets acquired through operating leases

  $ -     $ 193  

Purchases of equipment through accounts payable and accrued liabilities

  $ -     $ 7  

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

PSYCHEMEDICS CORPORATION

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 (“SEC”) 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, 2021, included in the Company's 2021 Annual Report on Form 10-K (“10-K”), as filed with the SEC.

 

The condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations for the three months ended March 31, 2022, and 2021, the condensed consolidated statements of shareholders’ equity for the three months ended March 31, 2022, and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2022, and 2021 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, 2021, 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 Company’s comprehensive income is equal to its net income for all periods presented.

 

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 ended March 31, 2022, may not be indicative of the results that may be expected for the year ending December 31, 2022, or any other period.

 

Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to Psychemedics Corporation and its wholly-owned consolidated subsidiaries.

 

 

2.    COVID-19 Pandemic

 

The outbreak of coronavirus (“COVID-19”) which was declared by the World Health Organization to be a pandemic, has impacted, and is expected to continue to impact worldwide economic activity. While our domestic business was deemed an essential business and we have been able to continue to provide services to our customers, COVID-19 has had a significant impact on our entire operations. COVID-19’s effect on the overall economy has had an adverse impact on hiring, which has had a negative impact on both our domestic and international testing volume.

 

7

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2.   COVID-19 Pandemic (continued)

 

The Coronavirus Aid, Relieve and Economic Security Act (“CARES”) Act, enacted on March 27, 2020, and the Families First Coronavirus Response Act, in each case modified by the Consolidated Appropriations Act enacted in December 2020, were emergency economic stimulus packages that included spending provisions and tax cuts to strengthen the United States economy and to fund a nationwide effort to curtail the effect of COVID-19. The principal impact of the CARES Act and subsequent legislation was the adoption of the Paycheck Protection Program (“PPP”). The CARES Act, together with subsequent legislation, also provided sweeping tax changes in response to the COVID-19 pandemic, including amendments to certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company recognized a benefit of zero and $0.8 million for the three months ended March 31, 2022, and 2021, respectively, as a reduction to cost of revenues and operating expenses related to the employee retention credit which was a tax provision in the CARES Act and subsequent legislation. Additionally, the CARES Act allowed the Company to fully carryback the 2020 net operating loss, for a refund of corporate income taxes previously paid.

 

Liquidity and Managements Plans

 

At March 31,2022, the Company’s principal sources of liquidity included approximately $2.1 million of cash. Management currently believes that such funds, together with future operating profits, should be adequate to fund anticipated working capital requirements, including equipment financing obligations, and capital expenditures for at least the next 12 months. Depending upon the Company’s results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could include but are not limited to, issuance of common stock, debt financing, lines of credit, or equipment leasing, although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.

 

Accounts Receivable

 

The Company believes its allowance for credit losses related to its accounts receivable remained adequate as of March 31, 2022, due to the essential nature of its customers business, as well as the diversity of its large customer base. While the Company anticipates there could be an increase in the aging of its accounts receivable, the Company does not anticipate a significant increase in default risk.

 

8

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

3.    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 March 31, 2022, 294 thousand shares remained available for future grant under the Plan.

 

Stock-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

 
  

March 31,

 
  

2022

  

2021

 

Share-based compensation related to:

        

Stock option grants

 $53  $145 

Restricted Stock Unit awards

  126   72 

Total share-based compensation

 $179  $217 

 

There was no income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation arrangements for the three ended March 31, 2022, and 2021.

 

 

 

 

 

 

9

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3.           Stock-Based Compensation (continued)

 

A summary of the Company’s stock option activity for the three months ended March 31, 2022, is as follows (in thousands except per share amounts and years):

 

          

Weighted Average

     
      

Weighted Average

  

Remaining

  

Aggregate

 
  

Number of

  

Exercise Price

  

Contractual Life

  

Intrinsic

 
  

Shares

  

Per Share

  

(years)

  

Value(1)

 

Outstanding, December 31, 2021

  574  $14.23   6.1  $100 

Granted

  -  $-         

Exercised

  -  $-         

Forfeited

  -  $-         

Outstanding, March 31, 2022

  574  $14.23   5.8  $93 
                 

Exercisable, March 31, 2022

  473  $14.90   5.5  $28 

 

 

(1)

Intrinsic value is calculated based on the amount by which the closing market value of the Company’s stock exceeded the exercise price of the underlying options, multiplied by the number of shares.

 

  A summary of the Company’s stock unit award (“SUA”) activity for the three months ended March 31, 2022, is as follows (in thousands except per share amounts):

 

  

Number of Shares

  

Weighted Average Grant-Date Fair Value Per Share

 
         

Outstanding & Unvested, December 31, 2021

  224  $5.48 

Granted

  -  $- 

Converted to common stock

  (1) $6.63 

Cancelled

  -   - 

Forfeited

  (9) $5.76 

Outstanding & Unvested, March 31, 2022

  214  $5.47 

 

As of March 31, 2022, 833 thousand shares of common stock were reserved for issuance under the Plan. As of March 31, 2022, the unamortized fair value of awards relating to outstanding SUAs and options was $1.0 million, which is expected to be amortized over a weighted average period of 2.7 years.

 

 

 

10

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

4.         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 when the effect is dilutive. 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 ended March 31, 2022, and 2021 were as follows (in thousands):

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 

Weighted average common shares outstanding, basic

  5,590   5,537 

Dilutive common equivalent shares

  56   107 

Weighted average common shares outstanding, diluted

  5,646   5,644 

 

The computation of diluted earnings per share for the three months ended March 31, 2022, and 2021 excludes the effect of the potential exercise of stock awards, including stock options, when the effect is anti-dilutive. For the three months ended March 31, 2022, and 2021, the number of antidilutive stock awards excluded from diluted earnings per share were 56 thousand and 107 thousand, respectively.

 

 

 

 

 

11

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

5.    Commitments and Contingencies

 

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Although it is difficult to predict the ultimate outcome of these cases, management believes, that any ultimate liability would not have a material adverse effect on the consolidated statements of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on the statements of operations or cash flows in the period in which it is recorded. Developments in legal proceedings and other matters that could cause changes in the amounts previously accrued are evaluated each reporting period.

 

Settlements

 

As previously reported in the 10-K, on December 6, 2021, the Company entered into a binding Memorandum of Understanding (the “MOU”) to settle a purported class action lawsuit against it related to certain California wage and hour laws. The lawsuit, Enma Sagastume v. Psychemedics Corporation, Case No. 2:20-CV-06624-DSF, is pending in the United States District Court for the Central District of California (the “California Lawsuit”) and is similar to numerous lawsuits filed against employers with operations in California.

 

In the binding MOU, the parties agreed to settle this matter for a payment by the Company of $1.2 million in exchange for the dismissal of the California Lawsuit and a customary release of liability, subject only to final court approval and the process described below. Factoring in that process, the Company estimates that the settlement funds will be dispersed in the second half of 2022, subject to the actual timing of final court approval.

 

Although the Company believes that the allegations in the California Lawsuit lack merit, it agreed at a mediation to enter into the binding MOU to settle the claims in the California Lawsuit in order to avoid potentially significant legal fees, other expenses, and management time that would have to be devoted to protracted litigation in California regarding its wage and hour laws. The foregoing was also impacted in part by new California case law in February 2021 regarding meal period compliance. The allegations in the California Lawsuit relate to alleged discrepancies in compliance with meal and rest periods required by California law and other alleged compliance discrepancies relating to the California wage and hour laws with respect to non-exempt hourly employees of the Company in California for a period since June 9, 2017. The California Lawsuit sought recovery of wages, penalties, interest, attorneys’ fees and other alleged damages. As part of the settlement, the Company continues to deny any liability or wrongdoing with respect to the claims made in the California Lawsuit.

 

12

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

5.    Commitments and Contingencies (continued)

 

 

The MOU assumes class certification for purposes of the settlement only. The settlement amount of $1.2 million, which includes plaintiff attorneys' fees and costs, is subject to potential increase based on any adjustments in the final class size and the exact period to be covered, as determined by the court’s final approval. However, the Company believes that such adjustments, if any, would likely be immaterial. Once court approved, in exchange for the settlement payment, the plaintiff and all class members who do not opt out of the settlement will provide a broad release of any liability relating to the subject matter of the California Lawsuit, including any claims of such persons under California’s Private Attorneys' General Act of 2004. Such release is for the benefit of the Company, its affiliates, and any successor to the Company. The Company has the right to revoke the settlement prior to court approval in the event opt-outs, if any, from the class membership exceed a specified level. While the settlement is subject to final court approval as is customary, the MOU expressly provides that it is binding on and enforceable by each of the parties thereto, including by any successor to the Company. The Company has accrued $1.2 million as of March 31, 2022 related to the California Lawsuit, which is included in accrued expenses on the accompanying consolidated balance sheets.

 

 

 

 

 

 

 

 

 

 

13

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

6.        Operating Leases

 

The Company has five operating leases for office and laboratory space used to conduct business. The exercise of lease renewal options is at our discretion. There is one lease which contains renewal options to extend the lease terms included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise. 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.

 

As of March 31, 2022, the Company recognized a Right-Of-Use (“ROU”) asset of $3.3 million and an operating lease liability of $3.7 million based on the present value of the minimum rental payments. The weighted average discount rate used for leases as of March 31, 2022, is 3.9%. The weighted average lease term as of March 31, 2022, is 3.8 years. The operating lease expense for the three months ended March 31, 2022, was $269 thousand.

 

Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of March 31, 2022, is as follows (in thousands):

 

April 1, 2022, through December 31, 2022

 $822 

2023

  1,118 

2024

  1,034 

2025

  544 

2026

  460 

Total lease payments

  3,978 

Less: interest

  (327)

Present value of lease liabilities

 $3,651 
     

Current operating lease liabilities

 $994 

Long-term operating lease liabilities

  2,657 
  $3,651 

 

 

 

14

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

7.           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, October 30, 2017, and December 2, 2019. The terms of the arrangement are detailed in the 10-K.

 

The weighted average interest rate on outstanding debt under the Loan Agreement was 3.6% for the three months ended March 31, 2022. The interest expense was $9 thousand for the three months ended March 31, 2022. As of March 31, 2022, the weighted average interest rate was 3.3% and there was $1.1 million of outstanding debt related under the Loan Agreement. The Company was in compliance with all loan covenants under the Loan Agreement as of March 31, 2022.

 

The annual principal repayment requirements for debt obligations as of March 31, 2022, were as follows (in thousands):

 

April 1, 2022, through December 31, 2022

 $490 

2023

  294 

2024

  305 

Long-term debt from equipment financing

  1,089 

Less: current portion of long-term debt from equipment financing

  (563)

Long-term debt from equipment financing, net of current portion

 $526 

 

 

 

 

 

 

15

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

8.          Revenue

 

         The table below disaggregates our external revenue by major source (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 

Testing

  $ 5,724     $ 5,049  

Shipping/Collection (hair)

    750       615  

Other

    34       49  

Total Revenue

  $ 6,508     $ 5,713  

 

 

9.         Significant Customers

 

The Company had no customers that represented over 10% of revenue during either of the three-month periods ended March 31, 2022, or 2021. The Company had one customer that represented 17% and 15% of the total accounts receivable balance as of March 31, 2022, and 2021, respectively.

 

 

10.       Subsequent Events

 

On May 10, 2022, the Company declared a cash dividend of $0.07 per share, which will be paid on June 24, 2022, to shareholders of record on May 27, 2022.

 

 

 

 

 

 

16

 

 

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 that involves risks and uncertainties. In particular, statements contained in this report that are not historical facts (including but not limited to statements concerning earnings, earnings per share, revenues, cash flows, dividends, future business, growth opportunities, profitability, pricing, new accounts, customer base, market share, test volume, sales and marketing strategies, market demand for drug testing services in the U.S. and foreign drug testing laws and regulations, required investments in plant, equipment and people and new test development, the effect of the COVID- 19 pandemic on our business, including its effects on our business and profitability, and on the well-being and availability of our employees, and the continued operation of our testing facilities) may be “forward looking” statements. 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 severity of the COVID-19 pandemic, and its impact on the Company’s markets, including its impact on the Company’s customers, suppliers and employees, as well as its risk on the United States and worldwide economies, the timing, scope and effectiveness of further governmental, regulatory, fiscal monetary and public health responses to the COVID-19 pandemic, changes in U.S. and foreign government regulations, including but not limited to FDA regulations, 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, general economic conditions With respect to the continued payment of cash dividends, factors include, but are not limited to, all of the factors listed above with respect to the impact of the COVID-19 pandemic on the our business generally, plus cash flows, available surplus, capital expenditure reserves required, debt service obligations, regulatory requirements 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 10-K, 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.

 

 

17

 

OVERVIEW

 

Revenue for the first quarter of 2022 was $6.5 million compared to $5.7 million in 2021, an increase of 14%. The Company reported net income of 39 thousand, or $0.01 per diluted share for the three months ended March 31, 2022, versus net income of 83 thousand, or $0.01 per diluted share for the same period in 2021. Revenue increase for the quarter was attributed primarily to an increase in domestic sales volume. The slight earnings decrease was primarily attributable to the absence of a refundable retention tax credit in 2022. The refundable retention tax credit program under the CARES Act was terminated at the end of the third calendar quarter of 2021. Accordingly, we recorded zero and $0.8 million of employee retention tax credits during the three months ended March 31, 2022, and 2021, respectively, which is included in cost of revenues and operating expenses in the statements of operations. The Company did not declare or pay any cash dividends to its shareholders during the three months ended March 31, 2022.

 

As the Company disclosed in the 10-K, the Company’s Board of Directors authorized the Company to explore shareholder enhancement opportunities, including strategic alternatives, such as the potential sale or merger of the Company, capitalization optimization and dividend strategies. The Company continues to explore such opportunities. There can be no assurances that the shareholder enhancement review process will result in a transaction or other strategic change or outcome. The Company has not set a timetable for the conclusion of its review of strategic alternatives, and it does not intend to comment further unless and until the Board has approved a specific course of action or the Company has otherwise determined that further disclosure is appropriate or required by law. The Company’s Board of Directors has designated a subcommittee of the Board to review shareholder enhancement opportunities. The Company has retained investment banking firms and corporate transaction legal advisors in connection with its exploration of shareholder enhancement opportunities.

 

 

RESULTS OF OPERATIONS

 

Revenue increased 14% for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to a 14% increase in total volume, as 2021. For the same period, domestic revenues increased $0.9 million (17%) and international revenues decreased $0.1 million (42%). The Company’s domestic revenues increase was impacted by higher testing volumes in the base business due to continued recovery from the impact of the COVID-19 pandemic as well new business accounts. The international revenue decline was primarily from lower Brazil testing volume.

 

Gross profit: The Company had a $2.4 million gross profit for the three months ended March 31, 2022, compared to a $2.6 million gross profit for the same period in 2021. Cost of revenues increased by $0.9 million or 29% for the three months ended March 31, 2022, compared to the same period in 2021. The decrease in gross profit was primarily due to absence of the refundable employee retention tax credit present in the first quarter of 2021, as noted above. In addition, gross profit was negatively impacted by higher shipping charges incurred in the first quarter of 2022 as we incurred soaring variable fuel surcharges from our main transportation provider. This was offset in part by higher sales volume.

 

 

18

 

General and administrative (G&A) expenses decreased 13% or $0.2 million to $1.3 million for the three months ended March 31, 2022, compared to $1.5 million for the same period in 2021.  As a percentage of revenue, G&A expenses were 20% and 27% for the three months ended March 31, 2022, and 2021, respectively. The decrease in G&A expenses was primarily driven by the absence of certain non-recurring legal fees incurred in 2021 involving two different case settlements previously reported.

 

Marketing and selling expenses increased 26% or $0.2 million to $0.8 million for the three months ended March 31,2022, compared to $0.6 million for the same period in 2021. Total marketing and selling expenses represented 12% and 11% of revenue for the three months ended March 31, 2022, and 2021, respectively. The increase was primarily driven by higher overall personnel costs including the absence of the refundable employee retention tax credit present in the first quarter of 2021.

 

Research and development (R&D) expenses for the three months ended March 31, 2022, and 2021, were $0.3 million and $0.3 million, respectively. R&D expenses represented 5% and 5% of revenue for the three months ended March 31, 2022, and 2021, respectively.

 

Provision for income taxes consisted primarily of federal and state income taxes in the United States. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended March 31, 2022, the Company recorded a tax provision of $17 thousand (effective tax rate of 30%) and a tax provision of $20 thousand (effective tax rate of 19%) for the comparative period in 2021.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2022, the Company had approximately $2.1 million of cash and $5.2 million of working capital. The Company's operating activities generated net cash of $0.3 million for the three months ended March 31, 2022. Investing activities used $36 thousand of net cash while financing activities used $0.2 million of net cash during the first three months of 2021.

 

Cash generated by operating activities of $0.4 million reflected net income of $39 thousand adjusted for depreciation and amortization of $0.6 million, ROU asset amortization of $0.2 million and stock-based compensation of $0.2 million. This was also affected by an increase in current assets of $0.1 million and a decrease in accounts payable and accrued expenses of $0.6 million.

 

Cash used in investing activities of $36 thousand is primarily related to internally developed software. We anticipate spending less than $1.0 million in additional capital purchases for the remainder of 2021.

 

Cash used in financing activities of $0.2 million consisted entirely of payments on equipment financing.

 

Contractual obligations and other commercial commitments as of March 31, 2022, include operating lease commitments and outstanding debt, described in Notes 6 and 7, respectively of the Notes to Condensed Consolidated Financial Statements.

 

 

19

 

While management currently believes that its existing funds and cash flow from operations should be adequate to fund the Company’s business for at least the next 12 months, economic conditions related to COVID-19 are expected to continue to adversely affect the Company’s operating results and cash flows. Depending upon the Company’s results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could include but are not limited to, issuance of common stock or debt financing, lines of credit, or equipment leasing, although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.

 

Item 4. 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, Controller, 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, Controller 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.

 

 

 

 

 

 

 

 

 

 

20

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Information pertaining to legal proceedings can be found in Item 1. Financial Statements and Supplementary Data – Note 5 “Commitments and Contingencies”.

 

Item 1A. Risk Factors

 

Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2021, includes a discussion of our risk factors. There have been no material changes in the risk factors described in such report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no purchases of treasury stock in the first three months of 2022.

 

Item 6. Exhibits

 

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

21

 

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:         May 11, 2022 By: /s/ Raymond C. Kubacki  
    Raymond C. Kubacki  
    Chairman and Chief Executive Officer  
    (principal executive officer)  
       
Date:         May 11, 2022 By: /s/ Andrew P. Limbek    
    Andrew P. Limbek  
    Vice President, Controller  
    (principal accounting officer)  

 

 

 

 

                                                   

 

22
HTML Editor

Exhibit 31.1

 

CERTIFICATION PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Raymond C. Kubacki, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Psychemedics Corporation (“the registrant”);
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal controls over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

    

  a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:      May 11, 2022   /s/ Raymond C. Kubacki          
  Raymond C. Kubacki
  Chairman and Chief Executive Officer
  (principal executive officer)

 

                                                                   

 

 

 

 

 

 

 
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Exhibit 31.2

 

CERTIFICATION PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Andrew P. Limbek, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Psychemedics Corporation (“the registrant”);
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal controls over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

          

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

  

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:      May 11, 2022 /s/ Andrew P. Limbek          
  Andrew P. Limbek
  Vice President, Controller
  (principal accounting officer)

 

 

 

 
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Exhibit 32.1

 

CERTIFICATION PURSUANT TO

U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Raymond C. Kubacki, Chairman and Chief Executive Officer of Psychemedics Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as the principal executive officer of the Company, that:

 

 

(1)

The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on May 11, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:   May 11, 2022  /s/ Raymond C. Kubacki          
  Raymond C. Kubacki
  Chairman and Chief Executive Officer
  (principal executive officer)
 
HTML Editor

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Andrew P. Limbek, Vice President, Controller of Psychemedics Corporation (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as the principal accounting officer of the Company, that:

 

 

(1)

The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on May 11, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:   May 11, 2022  /s/ Andrew P. Limbek         
  Andrew P. Limbek
  Vice President, Controller
  (principal accounting officer)