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 March 31, 2019

or

	[ x]	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

 

 

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 and posted 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 and post 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 April 19, 2019 was 5,507,262.

 

 

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

 

INDEX

 

		Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three months ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Shareholders’ Equity as of March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
	Overview	16
	Results of Operations	16
	Liquidity and Capital Resources	17
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		19
Item 6 - Exhibits		19
Signatures		19
Exhibit Index		20

 

 

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(UNAUDITED)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

(UNAUDITED)

 

 

See accompanying notes to condensed consolidated financial statements

 

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

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, required investments in plant, property and equipment, strategies with respect to governmental agencies and regulations, cost savings, capital expenditures, liquidity of investments 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.

 

 

 

OVERVIEW

 

Revenue for the first quarter of 2019 was $9.8 million compared to $10.9 million in 2018, a decrease of 10%. The Company reported net income of $0.6 million, or $0.11 per diluted share for the three months ended March 31, 2019 versus $1.3 million, or $0.23 per diluted share for the same period in 2018, a decrease of 50%. Earnings decrease was primarily attributed to a reduction of international revenue, including the impact of change in exchange rate. The Company distributed $0.9 million or $0.18 per share of cash dividends to its shareholders in the three months ended March 31, 2019. The Company has paid 90 consecutive quarterly cash dividends.

 

 

RESULTS OF OPERATIONS

 

Revenue decline of 10% noted above consisted of 4% negative impact from foreign currency exchange, 4% decrease in volume (in part due to one less day for the quarter) and 2% impact from decrease of average revenue per sample, primarily as a result of business mix. The domestic business decreased 3%. The international business decreased 24%. The international revenue decrease was driven by foreign currency exchange and lower volume.

 

Gross profit was $4.4 million for the three months ended March 31, 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 March 31, 2019 compared to the same period in 2018. The gross profit margin was 45% for the three months ended March 31, 2019 and 49% for the comparable period of 2018. The margin was adversely impacted by foreign currency exchange and lower sales volume as noted above.

 

General and administrative (“G&A”) expenses were $1.9 million for the three months ended March 31, 2019 and 2018. As a percentage of revenue, G&A expenses were 19% for the three months ended March 31, 2019 and 17% for the same period in 2018.

 

Marketing and selling expenses for the three months ended March 31, 2019 were $1.1 million compared to $1.2 million for the comparable period of 2018. Total marketing and selling expenses represented 11% of revenue for the three months ended March 31, 2019 and 2018.

 

Research and development (“R&D”) expenses were $0.4 million for the three months ended March 31, 2019 and 2018. R&D expenses represented 4% of revenue for the three months ended March 31, 2019 and 3% for the same period in 2018.

 

Provision for income taxes Our 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 March 31, 2019 and 2018, the Company recorded tax provisions of $343 thousand and $687 thousand, respectively. These provisions represented effective tax rates of 35% for the three months ended March 31, 2019 and 2018. The Company currently expects the year-end tax rate to be to be approximately 35%. 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 March 31, 2019, the Company had approximately $3.2 million of cash and $9.1 million of working capital. The Company's operating activities generated net cash of $0.4 million for the three months ended March 31, 2019. Investing activities used $0.1 million of cash while financing activities used $1.1 million of cash during the first three months of 2019.

 

Cash provided by operating activities of $0.4 million reflected net income of $0.6 million adjusted for depreciation and amortization of $765 thousand, stock-based compensation of $158 thousand, a decrease of deferred income taxes of $48 thousand and non-cash interest income of $55 thousand. This was affected by an increase in current assets of $0.4 million and a decrease in current liabilities of $0.6 million.

 

Cash used in investing activities of $0.1 million consisted primarily of costs related to internally developed software. We anticipate spending $0.5 million to $2.0 million in additional capital purchases for the remainder of 2019.

 

Cash used by financing activities of $1.1 million included cash dividends to shareholders of $1.0 million and $0.1 million from payments on long term debt. On April 23, 2019, the Company declared a quarterly dividend of $0.18 per share for an estimated total of $991 thousand, which will be paid on May 17, 2019 to shareholders of record on May 7, 2019.

 

Contractual obligations and other commercial commitments as of March 31, 2019 include operating lease commitments and outstanding debt, described in Notes 8 and 9, respectively of the Notes to Condensed Consolidated Financial Statements.

 

At March 31, 2019, the Company's principal sources of liquidity included an aggregate of approximately $3.2 million of cash and $3.9 of marketable securities (bank CD).  The Company had $9.1 million and $9.8 million of working capital as of March 31, 2019 and December 31, 2018, respectively. The new lease accounting standard negatively impacted the working capital amount by $1.0 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. 

 

Brazilian Distributor Risks and Uncertainties

 

As the Company has previously disclosed, there are greater challenges and uncertainties in a new, large and developing market, such as Brazil. Psychemedics Brasil, our independent distributor in Brazil, has had 55% of its shares acquired by Instituto Hermes Pardini S.A., a provider of medical and diagnostic services in Brazil, including reference laboratory services. We are continuing our discussions with our distributor and its acquirer about the future of our distribution agreement (which either party may terminate upon prior written notice following July 2019), including whether it will be extended, terminated or replaced by a transition agreement for us to continue to sell our drug tests to our current distributor for a period of time. The outcome of these discussions is not certain, and any significant decrease in sales to our distributor would have a materially adverse impact on our business. However, we believe that the overall market demand for drug testing services in Brazil will continue to grow, and it remains uncertain whether the acquirer will have the capacity to supply our distributor with the volume of drug tests that we currently provide, at least in the near term. At the same time, we have also been exploring additional options in Brazil.

 

 

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 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.

 

 

 

PART II OTHER INFORMATION

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors from those disclosed in our 2018 Annual Report on Form 10-K.

 

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

 

There were no purchases of treasury stock in the first three months of 2019.

 

Item 6. Exhibits

 

See Exhibit Index included in this Report

 

 

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:   April 25, 2019	By:	/s/ Raymond C. Kubacki
		Raymond C. Kubacki
		Chairman and Chief Executive Officer
		(principal executive officer)
Date:   April 25, 2019	By:	/s/ Neil L. Lerner
		Neil L. Lerner
		Vice President - Finance
		(principal accounting officer)

 

 

 

 

 

 

PSYCHEMEDICS CORPORATION

FORM 10-Q

March 31, 2019

EXHIBIT INDEX

 

  

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		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

 

 

 

 

 

20