10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
or
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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)
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Delaware
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58-1701987 |
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
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125 Nagog Park |
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Acton, MA
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01720 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if smaller reporting Company)
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Smaller Reporting Company þ |
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 o No þ
The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at
November 13, 2009 was 5,197,031.
PSYCHEMEDICS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
INDEX
2
PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
3,616,323 |
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$ |
6,630,119 |
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Short-term investments |
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1,002,781 |
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Accounts receivable, net of allowance for doubtful accounts
of $169,939 in 2009 and $246,462 in 2008 |
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3,810,216 |
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3,398,455 |
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Prepaid expenses |
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548,642 |
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1,023,841 |
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Other current assets |
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175,788 |
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82,045 |
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Deferred tax assets |
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570,089 |
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449,398 |
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Total Current Assets |
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9,723,839 |
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11,583,858 |
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Fixed Assets: |
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Equipment & leasehold improvements |
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10,911,902 |
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10,877,479 |
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Less accumulated depreciation |
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(10,308,017 |
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(10,047,755 |
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Net Fixed Assets |
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603,885 |
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829,724 |
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Deferred tax assets, long-term |
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139,021 |
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139,021 |
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Other assets |
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85,481 |
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75,183 |
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Total Assets |
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$ |
10,552,226 |
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$ |
12,627,786 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Liabilities: |
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Current Liabilities: |
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Accounts payable |
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$ |
302,755 |
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$ |
644,894 |
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Accrued expenses |
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866,633 |
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1,268,924 |
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Deferred revenue |
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44,730 |
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154,080 |
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Total Current Liabilities |
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1,214,118 |
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2,067,898 |
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Commitments and Contingencies |
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Shareholders Equity: |
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Preferred-stock, $0.005 par value, 872,521 shares authorized,
no shares issued or outstanding |
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Common stock, $0.005 par value; 50,000,000 shares authorized
5,861,554 shares issued in 2009 and 5,843,068 shares issued in 2008 |
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29,308 |
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29,216 |
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Paid-in capital |
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27,385,486 |
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27,118,743 |
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Accumulated deficit |
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(8,023,322 |
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(6,614,114 |
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Less Treasury stock, at cost, 664,523 shares in 2009 and 647,304 shares in 2008 |
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(10,053,364 |
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(9,973,957 |
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Total Shareholders Equity |
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9,338,108 |
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10,559,888 |
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Total Liabilities and Shareholders Equity |
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$ |
10,552,226 |
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$ |
12,627,786 |
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See accompanying notes to financial statements and managements discussion and analysis of financial condition and
results of operations.
3
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
4,669,894 |
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$ |
6,204,647 |
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$ |
12,683,654 |
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$ |
18,124,587 |
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Cost of Revenue |
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1,779,732 |
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2,552,014 |
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5,595,740 |
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7,374,228 |
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Gross Profit |
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2,890,162 |
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3,652,633 |
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7,087,914 |
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10,750,359 |
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General & Administrative |
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862,518 |
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1,145,486 |
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2,784,379 |
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3,262,804 |
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Marketing & Selling |
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643,139 |
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1,013,510 |
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2,325,538 |
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2,714,882 |
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Research & Development |
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111,402 |
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125,039 |
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353,965 |
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362,532 |
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Total Operating Expenses |
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1,617,059 |
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2,284,035 |
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5,463,882 |
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6,340,218 |
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Operating Income |
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1,273,103 |
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1,368,598 |
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1,624,032 |
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4,410,141 |
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Interest Income |
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11,576 |
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64,999 |
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34,166 |
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249,961 |
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Net Income Before Provision for Income Taxes |
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1,284,679 |
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1,433,597 |
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1,658,198 |
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4,660,102 |
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Provision for Income Taxes |
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516,373 |
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560,042 |
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676,986 |
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1,864,041 |
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Net Income |
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$ |
768,306 |
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$ |
873,555 |
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$ |
981,212 |
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$ |
2,796,061 |
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Basic net income per share |
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$ |
0.15 |
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$ |
0.17 |
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$ |
0.19 |
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$ |
0.54 |
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Diluted net income per share |
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$ |
0.15 |
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$ |
0.17 |
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$ |
0.19 |
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$ |
0.53 |
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Dividends declared per share |
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$ |
0.12 |
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$ |
0.17 |
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$ |
0.41 |
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$ |
0.49 |
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Weighted average common shares outstanding, basic |
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5,178,545 |
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5,226,237 |
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5,182,504 |
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5,223,581 |
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Weighted average common shares outstanding, diluted |
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5,184,061 |
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5,255,301 |
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5,194,118 |
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5,275,311 |
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See accompanying notes to financial statements and managements discussion and analysis of financial condition and
results of operations.
4
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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Cash Flows From Operating Activities |
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Net income |
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$ |
981,212 |
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$ |
2,796,061 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation and amortization |
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262,435 |
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248,534 |
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Stock-based compensation |
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305,473 |
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272,765 |
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Deferred income tax |
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(120,691 |
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(102,458 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(411,761 |
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(740,950 |
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Prepaid expenses and other current assets |
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381,456 |
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(341,371 |
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Accounts payable |
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(342,139 |
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(54,427 |
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Accrued expenses |
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(440,929 |
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215,215 |
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Deferred revenue |
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(109,350 |
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(76,694 |
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Net Cash Provided By Operating Activities |
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505,706 |
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2,216,676 |
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Cash Flows (Used In) Provided by Investing Activities |
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Purchases of short-term investments |
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(1,002,781 |
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Redemptions of short-term investments |
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1,725,000 |
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Purchases of equipment and leasehold improvements |
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(34,423 |
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(87,213 |
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Other assets |
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(12,471 |
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(15,762 |
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Net Cash (Used In) Provided By Investing Activities: |
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(1,049,675 |
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1,622,025 |
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Cash Flows Used In Financing Activities |
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Tax benefit associated with exercise of options |
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11,093 |
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Net proceeds from issuance of common stock |
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180,368 |
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Acquisition of treasury stock |
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(79,407 |
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(637,599 |
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Cash dividends paid |
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(2,390,420 |
) |
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(2,562,543 |
) |
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Net Cash Used In Financing Activities: |
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(2,469,827 |
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(3,008,680 |
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Net (Decrease) Increase In Cash: |
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(3,013,796 |
) |
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|
814,019 |
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Cash and Cash Equivalents, Beginning Of Period: |
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6,630,119 |
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6,096,734 |
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Cash and Cash Equivalents, End Of Period: |
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$ |
3,616,323 |
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$ |
6,910,753 |
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Supplemental Disclosures of Cash Flow Information |
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Cash paid for income taxes |
|
$ |
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$ |
2,053,538 |
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|
See accompanying notes to financial statements and managements discussion and analysis of financial condition and
results of operations.
5
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosure required for complete financial statements
are not included herein. It is recommended that these financial statements be read in conjunction
with the financial statements and related notes of Psychemedics Corporation (the Company, our
Company, our or we) as reported in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008, filed on March 23, 2009. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations, and cash flows at the dates and for the periods
presented have been included. The results of operations for the three and nine months ended
September 30, 2009 may not be indicative of the results that may be expected for the year ending
December 31, 2009, or any other period.
2. Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with original maturities of 90 days or
less to be cash equivalents. Cash equivalents consist of cash savings and U.S. government reserve
money market accounts at September 30, 2009 and 2008. While the money-market account contains U.S.
federal government backed issues, the account itself is not federally insured. As of September 30,
2009, $1.0 million was in U.S. federal government-backed money-market accounts, and $2.0 million
was in government insured certificates of deposit with maturities under 90 days all of which are
classified as cash, cash equivalents and short-term investments.
There was also $1.0 million of CDs with maturities of 26 weeks that are classified as
short-term investments. The Company accounts for investment securities in accordance with the FASB
codification topic ASC 320. Investments - Debt and Equity
Securities,
(ASC 320). Under the FASB codification topic ASC 320, investments that the Company has positive intent and ability
to hold to maturity are classified as held-to-maturity and are reported at amortized cost, which
approximates fair market value. The company intends to hold all the CDs to maturity.
3. Stock-Based Compensation
The Companys 2006 Equity Incentive Plan provides for the grant or issuance to officers,
directors, employees and consultants of options with terms of up to ten years, restricted stock,
issuances of stock bonuses or other stock-based awards, covering up to 250,000 shares of common
stock. As of September 30, 2009, 158,100 shares remained available for future grant under the 2006
Equity Incentive Plan.
6
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Company did not grant any stock unit awards (SUAs) in the first three quarters of 2009.
The Company did grant 32,600, 1,000 and 800 SUAs to certain members of management and its directors
on May 15, October 14, and November 3, 2008, respectively. Furthermore, 1,200 SUAs were
terminated during 2008 without having been exercised or converted into common shares of common
stock. The fair value of the SUAs was determined by the closing price of the Companys common
stock on the date of grant. The SUAs vest over a period of two to four years and are convertible
into an equivalent number of shares of the Companys common stock provided that the employee
receiving the award remains continuously employed throughout the vesting period.
The Company records compensation expense related to the SUAs on a straight-line basis over the
vesting term of the SUA. Employees are issued shares upon vesting, net of tax withholdings.
A summary of activity for SUAs under the Companys 2006 Equity Incentive Plan for the nine
months ended September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Aggregate |
|
|
|
of |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Value (1) |
|
|
|
|
|
|
(000s) |
|
Outstanding Unvested, December 31, 2008 |
|
|
67,600 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(6,064 |
) |
|
|
|
|
Converted to common stock |
|
|
(18,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding Unvested, September 30, 2009 |
|
|
43,050 |
|
|
$ |
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant, September 30, 2009 |
|
|
158,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value on this table was calculated based on the closing market
price of the Companys stock on September 30, 2009 ($6.20). |
A summary of stock option activity for the nine months ended September 30, 2009 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Number |
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
of |
|
|
Price Per |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Life |
|
|
Value (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s) |
|
Outstanding, December 31, 2008 |
|
|
392,110 |
|
|
$ |
15.22 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated/Expired |
|
|
(48,751 |
) |
|
$ |
17.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2009 |
|
|
343,359 |
|
|
$ |
14.85 |
|
|
4.2 years |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2009 |
|
|
343,359 |
|
|
$ |
14.85 |
|
|
4.2 years |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant, September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Aggregate intrinsic value was calculated on the closing market price of the Companys
stock on the Sept. 30, 2009 ($6.20) that exceeded the exercise price of the underlying
options, multiplied by the shares subject to each option. |
7
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. Stock-Based Compensation (continued)
As of September 30, 2009, a total of 544,509 shares of common stock were reserved for issuance
under the various stock option and stock-based plans. As of September 30, 2009, the unamortized
fair value of awards relating to outstanding SUAs was $582 thousand.
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. The number of dilutive common equivalent shares outstanding during
the period has been determined in accordance with the treasury-stock method. Common equivalent
shares consist of common stock issuable upon the exercise of outstanding options and assume the
full vesting of all outstanding, unvested SUAs. The Companys unvested SUAs do not have stock
dividend rights and, consequently, are not included in share totals.
Basic and diluted weighted average common shares outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
5,179 |
|
|
|
5,226 |
|
|
|
5,183 |
|
|
|
5,223 |
|
Common equivalent shares |
|
|
5 |
|
|
|
29 |
|
|
|
11 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding, assuming
dilution |
|
|
5,184 |
|
|
|
5,255 |
|
|
|
5,194 |
|
|
|
5,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009 and 2008, outstanding options to purchase
348 thousand and 116 thousand common shares, respectively, were outstanding but not included in the
diluted weighted average common share calculation as the effect would have been antidilutive.
There were no options outstanding that were in-the-money. For the nine months ended September 30,
2009 and 2008, options to purchase 368 thousand and 134 thousand common shares, respectively, were
outstanding but not included in the diluted weighted average common share calculation as the effect
would have been antidilutive.
8
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. Revenue Recognition
The Company is in the business of performing drug testing services and reporting the results
thereof. The Companys drug testing services include training for collection of samples and storage
of positive samples for its customers for an agreed-upon fee per unit tested of samples. The
revenues are recognized when the predominant deliverable, drug testing, is provided and reported to
the customer.
The Company recognizes revenue under the new FASB codification topic ASC 605 Revenue
Recognition, (ASC 605). This was previously referred to as Emerging Issue Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables. In accordance with ASC 605 the Company
considers testing, training and storage elements as one unit of accounting for revenue recognition
purposes, as the training and storage costs are de minimis and do not have stand-alone value to the
customer. The Company recognizes revenue as the service is performed and reported to the customer,
since the predominant deliverable in each arrangement is the testing of the units.
The Company also provides expert testimony, when and if necessary, to support the results of
the tests, which is generally billed separately and recognized as the services are provided.
Deferred revenue represents payments received in advance of the performance of drug testing
procedures, generally in relation to the personal drug testing kits PDT-90. Deferred revenue is
recognized as revenue when the underlying test results are delivered. With respect to a portion of
these transactions, there may be instances where the customer ultimately does not require
performance. Revenue is then recognized when the Company can reasonably, reliably and objectively
determine that it is remote that performance will be required for an estimable portion of
transactions. The Company recorded $15 thousand and $28 thousand of revenue in the results of
operations for the three months ended September 30, 2009 and 2008, respectively, related to test
kits that were sold for which the Companys obligations to provide service were deemed remote. The
Company recorded $117 thousand and $78 thousand of revenue in the results of operations for the
nine months ended September 30, 2009 and 2008, respectively, related to test kits that were sold
for which the Companys obligations to provide service were deemed remote.
At September 30, 2009 and December 31, 2008, the Company had deferred revenue of approximately
$45 thousand and $154 thousand, respectively, reflecting sales of its personal drug testing service
for which the performance of the related test had not yet occurred and future obligations were not
deemed remote.
9
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
6. Fair Value Measurements
FASB
ASC Topic 820 Fair Value Measurements and Disclosures,
(ASC 820) (previously referred to
as SFAS No. 157, Fair Value Measurements) provides guidance for using fair value to measure assets
and liabilities. It also responds to investors requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. ASC 820 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value, and does not
expand the use of fair value in any new circumstances.
ASC
820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy prioritizes the inputs in three broad levels as follows:
|
|
|
Level 1 input are unadjusted quoted prices in active markets that are accessible at
the measurement date for identical assets and liabilities. |
|
|
|
Level 2 inputs are quoted prices for similar assets and liabilities in markets that
are not active or for which all significant inputs are observable, either directly or
indirectly. |
|
|
|
Level 3 inputs are prices or valuations that require inputs that are both
significant to the fair value measurement and unobservable. |
A financial assets or liabilitys classification within the hierarchy is determined based on
the lowest level of any input that is significant to the fair value measurement.
The financial assets of the Company measured at fair value on a recurring basis are cash, cash
equivalents and short-term investments. These are classified within level 1 of the fair value
hierarchy because they are valued using quoted market prices that are accessible at the measurement
date for identical assets and liabilities.
10
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
6. Fair Value Measurements (continued)
In February 2008, the Financial Accounting Standards Board (the FASB) issued the
codification topic ASC 820 Fair Measurements and Disclosure
(ASC 820). Previously referred to as Staff
Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), the codification
topic Fair Measurements and Disclosure defers the effective date of applying the new provisions
to the fair value measurement of nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis (or
at least annually), until fiscal years beginning after November 15, 2008. The Company believes
that the new orders under ASC 820 did not have a material impact on its results of operations and financial
condition.
7. Recent Accounting Pronouncements
In
April 2009, additional guidance was issued by the FASB under the
FASB ASC Topic 825, Financial Instruments (ASC 825) and Interim Reporting (previously known as FASB Staff Position
No. FAS 107-1 and APB 28-1, FASB ASC Topic 270 Interim
Disclosures about Fair Value of Financial Instruments (ASC
270). These topics extend the disclosure earlier requirements under FASB codification topic
ASC 825 previously known as Disclosures about Fair Value of Financial
Instruments, (SFAS 107), to interim period financial statements, in addition to the existing
requirements for annual periods and reiterates the topics requirement to disclose the methods and
significant assumptions used to estimate fair value. These topics were effective for the Companys
interim and annual periods commencing with its June 30, 2009 consolidated financial statements and
have been applied on a prospective basis. They did not have a material impact on the Companys
consolidated financial statements.
In
May 2009, the FASB issued guidance now codified as FASB ASC
Topic 855 Subsequent Events (ASC 855). This topic sets forth: (1) the period after the balance sheet
date during which management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; (2) the circumstances
under which an entity should recognize events or transactions occurring after the balance sheet
date in its financial statements; and (3) the disclosures that an entity should make about events
or transactions that occurred after the balance sheet date. ASC 855 is effective for interim and
annual periods ending after June 15, 2009. The Company adopted
ASC 855 in the quarter ended
June 30, 2009. It did not impact the financial statements for this period. The Company evaluated
all events or transactions that occurred after September 30,
2009 up through November 13, 2009, the
date the Company issued these financial statements. During this period, the Company did not have
any material recognizable subsequent events.
11
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
In June 2009, the
FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement
modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing
only two levels of GAAP, authoritative and non-authoritative accounting literature. Effective
July 2009, the FASB Accounting Standards Codification (ASC), also known collectively
as the Codification, is considered the single source of authoritative U.S. accounting
and reporting standards, except for additional authoritative rules and interpretive releases
issued by the SEC. Non-authoritative guidance and literature would include, among other things,
FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and
Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP
pronouncements by topic so that users can more easily access authoritative accounting guidance. It
is organized by topic, subtopic, section, and paragraph, each of which is identified by a
numerical designation. This statement applies beginning in third quarter 2009. All accounting
references have been updated, and therefore SFAS references have been replaced with ASC references.
8. Contingencies
The Company is subject to legal proceedings and claims, which arise in the ordinary course of
its business. The Company believes that based upon information available to the Company at this
time, the expected outcome of these matters would not have a material impact on the Companys
results of operations or financial condition.
9. Subsequent Event Dividends
On November 3, 2009, the Company declared a quarterly dividend of $0.12 per share for a total
of $623 thousand, which will be paid on December 17, 2009 to shareholders of record on December 3,
2009.
12
|
|
|
Item 2. |
|
MANAGEMENTS 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 Companys expectations regarding earnings, earnings per share, revenues, operating cash flows,
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, 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 Companys
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 Companys principal customers, economic conditions in general, development of
markets for new products and services offered by the Company, the economic health of principal
customers of the Company, global credit market volatility, financial and operational risks
associated with possible expansion of testing facilities used by the Company, government regulation
(including, but not limited to, Food and Drug Administration regulations), and competition. With
respect to the continued payment of cash dividends, factors include, but are not limited to,
available surplus, cash flow, capital expenditure reserves required, and other factors that the
Board of Directors of the Company may take into account.
OVERVIEW
Psychemedics Corporation was incorporated in 1986. The Company is the worlds largest
provider of hair testing for drugs of abuse, utilizing a patented hair analysis method involving
radioimmunoassay technology and confirmation by mass spectrometry to analyze human hair to detect
abused substances. The Companys customers include Fortune 500 companies, as well as small to
mid-size corporations, schools and governmental entities located primarily in the United States.
Revenue for the third quarter of 2009 was $4.7 million, a decrease of 25% from third quarter
2008 revenue of $6.2 million. A drop in testing volume was the reason for the decrease in revenue.
The Company reported net income of $0.15 and $0.17 per diluted share for the three months ended
September 30, 2009 and 2008, respectively. At September 30, 2009, the Company had $3.6 million of
cash, cash equivalents and short-term investments. The Company distributed $623 thousand or $0.12
per share of cash dividends to its shareholders in the three months ended September 30, 2009. The
Company has paid fifty-two consecutive quarterly cash dividends.
13
RESULTS OF OPERATIONS
Revenue was $4.7 million for three months ended September 30, 2009 compared to revenue of $6.2
million for the three months ended September 30, 2008, representing a decrease of 25%. The decrease
in revenue for the three months ended September 30, 2009 was a result of a decrease in testing
volume from new and existing clients of 24%, while the average revenue per sample fell by 1% during
the same period. Revenue for the nine months ended September 30, 2009 was $12.7 million,
representing a decrease of 30% in revenue from the comparable period of 2008 of $18.1 million. The
reason was a decrease in volume, as test samples were down 31% from the first nine months of 2008.
Gross profit decreased $0.8 million to $2.9 million for the three months ended September 30, 2009,
compared to $3.7 million for the three months ended September 30, 2008. Direct costs fell by $0.8
thousand or 30% for the three months ended September 30, 2009 compared to the same period in 2008,
mainly due both to lower direct cost of service and from decreased labor and labor-related costs.
The gross profit margin increased to 62% for the three months ended September 30, 2009 compared to
59% for the comparable period of 2008. Gross profit for the nine months ended September 30, 2009
decreased $3.7 million to $7.1 million compared to $10.8 million for the comparable period in 2008.
Direct costs decreased by over $1.8 million or 24% for the nine months ended September 30, 2009
when compared to the same period in 2008, mainly due to decreased materials, labor and associated
costs. The gross profit margin fell to 56% for the nine month period ended September 30, 2009 from
59% during the same period in 2008 due to the fact that labor costs were adjusted late in the
period and their full financial impact did not take effect.
General and administrative (G&A) expenses were $0.9 million for the three months ended September
30, 2009 and $1.1 million for the same period in 2008. As a percentage of revenue, G&A expenses
were 18% for both the three months ended September 30, 2009 and 2008. General and administrative
expenses were $2.8 million for the nine months ended September 30, 2009 compared to $3.3 million
for the comparable period in 2008, representing a 15% decrease. As a percentage of revenue, G&A
expenses were 22% and 18% for the nine months ended September 30, 2009 and 2008, respectively. The
decrease in general and administrative expenses for the three and nine month periods was primarily
driven by a decrease in outside services the largest being a decrease in legal fees associated
with pending cases that were pushed out in 2009 compared to a higher level of legal activity on
more active cases in 2008.
Marketing and selling expenses were $643 thousand for the three months ended September 30, 2009 as
compared to $1.0 million for the three months ended September 30, 2008, a decrease of 37%. Total
marketing and selling expenses represented 14% and 16% of revenue for the three months ended
September 30, 2009 and 2008. The decrease in marketing and selling expenses was due to lower
staffing levels and related salary expenses. For the nine months ended September 30, 2009,
marketing and selling expenses were $2.3 million, which was $0.4 million lower than the prior year
due to lower staffing levels and related salary expenses, particularly in the third quarter.
Marketing and selling expenses represented 18% and 15% of revenue for the nine months ended
September 30, 2009 and 2008 respectively, as cost reductions began to match the effect of lower
revenue compared to 2008.
14
Research and development (R&D) expenses for the three months ended September 30, 2009 were $111
thousand, compared to $125 thousand for the comparable period of 2008, a decrease of 11%. R&D
expenses represented 2% of revenue in the third quarters 2009 and 2008. Research and development
expenses for the nine months ended September 30, 2009 were $354 thousand compared to $363 thousand
for the nine months ended September 30, 2008. During these periods, R&D expenses represented 3%
and 2% of revenue respectively.
Interest income for the three months ended September 30, 2009 decreased by $53 thousand to $12
thousand when compared to the same period of 2008 in which interest income was $65 thousand.
Interest income represented interest earned on cash, cash equivalents and short-term investments.
Decreasing interest rates on our mix of cash, cash equivalents and short-term investments caused
the decrease in interest income for the three month period ended September 30, 2009. Interest
income for the nine months ended September 30, 2009 decreased $216 thousand to $34 thousand as
compared to $250 thousand for the same period in 2008. Decreasing interest rates on our mix of
cash, cash equivalents and short-term investments, and a decline in the overall cash balances
caused the decrease in interest income for the nine month periods ended September 30, 2009,
compared to the same period in 2008.
Provision for income taxes During the three months ended September 30, 2009 and September 30, 2008,
the Company recorded tax provisions of $516 thousand and $560 thousand respectively, representing
effective tax rates of 40% and 39% for the periods. During the nine months ended September 30,
2009 and September 30, 2008, the Company recorded tax provisions of $677 thousand and $1.9 million
respectively. These provisions represented effective tax rates of 41% and 40% for the nine month
periods ended September 30, 2009 and 2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, the Company had approximately $4.6 million of cash, cash equivalents
and short-term investments. The Companys operating activities provided net cash of $544 thousand
for the nine months ended September 30, 2009. Investing activities used $1.0 million in the nine
month period while financing activities used $2.5 million during the period.
Cash provided by operating activities of $544 thousand reflected net income of $981 thousand
adjusted for depreciation and amortization of $262 thousand, stock-based compensation expense of
$305 thousand, along with income tax deferrals and a decrease in prepaid expenses and other current
assets offset by higher accounts receivable balances, lower accounts payable and our accrued
expense balances in 2009 versus 2008. Cash used in investing activities included a small amount of
equipment and leasehold improvements which were purchased during the first nine months of 2009.
The company also used approximately $1.0 million in the purchase of a certificate of deposit which
had a maturity of over 90 days.
During the nine months ended September 30, 2009, the Company distributed $2.4 million in cash
dividends to its shareholders. The Company repurchased 17,219 shares during the nine months ended
September 30, 2009 for $79 thousand. As of September 30, 2009, an additional 202,923 shares were
available for repurchase under the Companys stock repurchase programs.
15
Contractual obligations as of September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than One |
|
|
13 |
|
|
45 |
|
|
After 5 |
|
|
|
|
|
|
Year |
|
|
Years |
|
|
years |
|
|
Years |
|
|
Total |
|
|
|
(in thousands) |
|
Operating leases |
|
$ |
526 |
|
|
$ |
945 |
|
|
$ |
103 |
|
|
$ |
|
|
|
$ |
1,574 |
|
Purchase commitment |
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
671 |
|
|
$ |
945 |
|
|
$ |
103 |
|
|
$ |
|
|
|
$ |
1,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a supply agreement with a vendor which requires the Company to purchase
isotopes used in its drug testing procedures from this sole supplier in exchange for variable
annual payments based upon prior year purchases. Purchases amounted to $439 thousand for the nine
months ended September 30, 2009 as compared to $455 thousand for the comparable period of 2008.
The Company expects to purchase approximately $147 thousand for the remainder of 2009. In exchange
for exclusivity, among other things, the supplier has provided the Company with the right to
purchase the isotope technology at fair market value under certain conditions, including the
failure to meet the Companys purchase commitments. This agreement does not include a fixed
termination date; however, it is cancelable upon mutual agreement by the parties or six months
after termination notice by the Company of its intent to use a different technology in connection
with its drug testing procedures.
At September 30, 2009, the Companys principal sources of liquidity included an aggregate of
approximately $4.6 million of cash and short-term investments. Management currently believes that
such funds, together with cash generated from operations, should be adequate to fund anticipated
working capital requirements and capital expenditures within the next 12 months. At September 30,
2009, the Company had no long-term debt.
16
CRITICAL ACCOUNTING POLICIES & ESTIMATES
Management believes the most critical accounting policies are as follows:
Revenue Recognition
The Company is in the business of performing drug testing services and reporting the results
thereof. The Companys drug testing services include training for collection of samples and storage
of positive samples for its customers for an agreed-upon fee per unit tested of samples. The
revenues are recognized when the predominant deliverable, drug testing, is provided and reported to
the customer.
The
Company recognizes revenue under the FASB ASC Topic 605 Revenue Recognition (ASC
605), formerly referred to as the Emerging Issue Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. In accordance with the revenue recognition topic of the
FASB codification, the Company considers testing, training and storage elements as one unit of
accounting for revenue recognition purposes, as the training and storage costs are de minimis and
do not have stand-alone value to the customer. The Company recognizes revenue as the service is
performed and reported to the customer, since the predominant deliverable in each arrangement is
the testing of the units.
The Company also provides expert testimony, when and if necessary, to support the results of
the tests, which is generally billed separately and recognized as the services are provided.
Deferred revenue represents payments received in advance of the performance of drug testing
procedures, generally in relation to the personal drug testing kits PDT-90. Deferred revenue is
recognized as revenue when the underlying test results are delivered. With respect to a portion of
these transactions, there may be instances where the customer ultimately does not require
performance. Revenue is then recognized when the Company can reasonably, reliably and objectively
determine that it is remote that performance will be required for an estimable portion of
transactions. The Company recorded $15 thousand and $28 thousand of revenue in the results of
operations for the three months ended September 30, 2009 and 2008, respectively, related to test
kits that were sold for which the Companys obligations to provide service were deemed remote. The
Company recorded $128 thousand and $78 thousand of revenue in the results of operations for the
nine months ended September 30, 2009 and 2008, respectively, related to test kits that were sold
for which the Companys obligations to provide service were deemed remote.
Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates, including bad debts and income
taxes, 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. Actual results could differ from those
estimates.
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Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on managements assessment of the collectability
of its customer accounts. Management reviews its accounts receivable aging for doubtful accounts
and specifically identifies accounts that may not be collectible. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its accounts
receivable credit risk exposure is limited. The Company maintains an allowance for potential
credit losses but historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area. Bad debt expense
has been within managements expectations.
Income Taxes
The Company accounts for income taxes using the liability method, which requires the Company
to recognize a current tax liability or asset for current taxes payable or refundable and a
deferred tax liability or asset for the estimated future tax effects of temporary differences
between the financial statement and tax reporting bases of assets and liabilities to the extent
that they are realizable. Deferred tax expense (benefit) results from the net change in deferred
tax assets and liabilities during the year. A deferred tax valuation allowance is required if it
is more likely than not that all or a portion of the recorded deferred tax assets will not be
realized.
In
July 2006, the FASB issued FASB ASC Topic 740 Income
Taxes, (ASC 740) (previously referred to as FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No.
109.) The income taxes topic under the FASB codification contains a two-step approach to
recognizing and measuring uncertain tax positions (tax contingencies) accounted for in accordance
with SFAS No. 109 (also now included as part of the income taxes topic of the FASB codification).
The first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will be sustained on an
audit, including resolution of related appeals or litigation processes, if any. The second step is
to measure the tax benefit as the largest amount which is more than 50% likely of being realized
upon ultimate settlement. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments and which may not accurately
forecast actual outcomes. The Company adopted the provisions of ASC 740, effective January 1,
2007, without material effect in the financial statements.
The Company operates within multiple taxing jurisdictions and could be subject to audit in
these jurisdictions. These audits may involve complex issues, which may require an extended period
of time to resolve. The Company has provided for its estimated taxes payable in the accompanying
financial statements. Interest and penalties related to income tax matters are recognized as a
general and administrative expense. The Company did not have any unrecognized tax benefits and did
not have any interest or penalties accrued as of September 30, 2009 or December 31, 2008. The
Company does not expect the unrecognized tax benefits to change significantly over the next twelve
months.
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The above listing is not intended to be a comprehensive list of all of the Companys
accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United States, with no
need for managements judgment in their application. There are also areas in which managements
judgment in selecting any available alternative would not produce a materially different result.
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Item 3. |
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Quantitative and Qualitative Disclosures about Market Risk |
Interest Rate Sensitivity. The Company maintains cash, cash equivalents and short-term
investments which consist of cash, money market funds and certificates of deposit with financial
institutions. Due to the conservative nature and relatively short duration of our cash, cash
equivalents and short-term investments, interest rate risk is mitigated.
Based on our ability to access our cash, cash equivalents and short-term investments, our
expected operating cash flows and our other sources of cash, we do not anticipate that any lack of
liquidity will materially affect our ability to operate our business.
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Item 4. |
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Controls and Procedures |
As of the date of this report, our Chief Executive Officer and our Controller performed an
evaluation of the effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Controller concluded that the Companys 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 disclosed within the time periods specified in the SECs 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 Companys principal executive and principal financial
officers, to allow timely decisions regarding required disclosure. There were no significant
changes in the Companys internal controls over financial reporting or in other factors that could
significantly affect these internal controls over financial reporting subsequent to the date of the
most recent evaluation.
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PART II OTHER INFORMATION
There have been no material changes in our risk factors from those disclosed in our 2008
Annual Report on Form 10-K.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
On March 18, 2008, the Board of Directors authorized a new repurchase program. Under the 2008
program, the Company is authorized to repurchase up to 250,000 shares of the Companys common
stock, subject to certain market conditions. However, there were no purchases of equity securities
in the third quarter of 2009. As of September 30, 2009, there have been 47,077 shares repurchased
under this program, leaving 202,923 available for future repurchases.
See Exhibit Index included in this Report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Psychemedics Corporation |
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Date: November 13, 2009 |
By: |
/s/ Raymond C. Kubacki, Jr. |
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Raymond C. Kubacki, Jr. |
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Chairman and Chief Executive Officer
(principal executive officer) |
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Date: November 13, 2009 |
By: |
/s/ Raymond J. Ruddy |
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Raymond J. Ruddy |
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Vice President of Finance and Controller
(principal financial and accounting officer) |
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PSYCHEMEDICS CORPORATION
FORM 10-Q
September 30, 2009
EXHIBIT INDEX
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Page No. |
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31.1 |
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Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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23 |
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31.2 |
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Certification of Principal Financial and Accounting Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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24 |
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32.1 |
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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
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25 |
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32.2 |
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Certification of Principal Financial and Accounting Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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26 |
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22