UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

[X]

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

 

For the quarterly period ended September 30, 2018

or

	[  ]	Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
		for the transition period from _________ to __________

 

 

Commission file number: 1-13738

 

PSYCHEMEDICS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware		58-1701987
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
289 Great Road
Acton, MA		01720
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant's telephone number including area code:     (978) 206-8220

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X     No ___

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X     No___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	☐
	Accelerated filer	☒
	Non–accelerated filer	☐
	Smaller reporting company	☒
	Emerging growth company	☐

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ___ No X

 

The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at October 19, 2018 was 5,507,262.

 

 

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

INDEX

 

		Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three months and Nine months ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2018 and 2017	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
	Overview	15
	Results of Operations	15
	Liquidity and Capital Resources	16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		18
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

 

 

 

 

 

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 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)

 

 

5.

Business Segment Reporting

 

The Company manages its operations as one segment, drug testing services. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment. All Brazil sales are through one independent distributor, which is the only customer greater than 10% of sales. The Company’s revenues by geographic region are as follows (in thousands):

 

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12.

Accounting Pronouncements Issued But Not Yet Effective (continued)

 

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to our financial reporting will be the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods. We will adopt this new rule beginning with our financial reporting for the quarter ended March 31, 2019. Upon adoption, we will include our Consolidated Statements of Stockholders’ Equity with each quarterly filing on Form 10-Q.

 

 

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, 2017, 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 third quarter of 2018 was $11.0 million compared to $10.0 million in 2017, an increase of 10%. The Company reported net income of $1.3 million, or $0.23 per diluted share for the three months ended September 30, 2018 versus $1.4 million, or $0.25 per diluted share for the same period in 2017, a decrease of 7%. The decrease in net income was primarily a result of exchange rate fluctuations that offset sales volume gains. Revenue for the nine months ended 2018 was $32.7 million compared to $29.9 million in 2017, an increase of 9%. Net income for the nine months ended September 30, 2018 was $3.7 million, or $0.67 per diluted share versus $3.8 million, or $0.68 per diluted share for the same period in 2017, a decrease of 2%. The Company declared $0.54 per share of cash dividends to its shareholders in the nine months ended September 30, 2018 compared to $0.45 for the same period in 2017. The Company has paid 88 consecutive quarterly cash dividends.

 

RESULTS OF OPERATIONS

 

Revenue growth of 10% for the three months ended September 30, 2018 was primarily due to a 19% increase in volume, offset by a 6% negative impact from foreign currency exchange and a 3% impact from decrease of average revenue per sample driven by mix of business. During the quarter, the exchange rate of the Brazilian Real to US Dollar increased 25% above the third quarter of 2017, and hit a historical high. See “Item 3. Quantitative and Qualitative Disclosure about Market Risk” on page 18. Excluding the impact of foreign currency, total revenue would have been up 15% for the quarter. Revenues from domestic business increased 10%. Revenues from international business increased 9%. Revenue for the nine months ended September 2018 was $32.7 million compared to $29.9 million for the comparable period in 2017, an increase of 9%. This was primarily due to a 17% increase in volume, offset by a 6% negative impact from foreign currency exchange and a 2% decrease of average revenue per sample driven by mix of business.

 

Gross profit was $5.4 million for the three months ended September 30, 2018, compared to $5.1 million for the same period in 2017, an increase of $237 thousand, or 5%. Direct costs increased by $730 thousand or 15% for the three months ended September 30, 2018 compared to the same period in 2017. The gross profit margin was 49% for the three months ended September 30, 2018 versus 51% for the comparable period in 2017. Gross profit was $15.9 million for the nine months ended September 30, 2018, compared to $15.0 million for the same period in 2017, an increase of $839 thousand, or 6%. Direct costs increased by $2.0 million or 13% for the nine months ended September 30, 2018 when compared to the same period in 2017. The gross profit margin for the nine month period ended September 30, 2018 was 49% compared to 50% for the comparable period in 2017. The decrease in margin for the three and nine month periods was primarily driven by the impact from foreign currency exchange on revenue.

 

General and administrative (“G&A”) expenses increased $129 thousand to $1.6 million for the three months ended September 30, 2018 compared to $1.5 million for the same period in 2017. As a percentage of revenue, G&A expenses were 15% for the three months ended September 30, 2018 and 2017. General and administrative expenses were $4.9 million for the nine months ended September 30, 2018 compared to $4.3 million for the same period in 2017, an increase of 15%. As a percentage of revenue, G&A expenses were 15% and 14% for the nine months ended September 30, 2018 and 2017, respectively.

 

 

Marketing and selling expenses were $1.3 million for the three months ended September 30, 2018 compared to $1.1 million for the same period in 2017. Total marketing and selling expenses represented 12% of revenue for the three months ended September 30, 2018 and 11% for the comparable period in 2017. Marketing and selling expenses were $3.8 million for the nine months ended September 30, 2018 compared to $3.6 million for the same period in 2017. As a percentage of revenue, marketing and selling expenses were 12% for the nine months ended September 30, 2018 and 2017.

 

Research and development (“R&D”) expenses for the three months ended September 30, 2018 were $372 thousand compared to $353 thousand for the comparable period of 2017. R&D expenses represented 3% of revenue for the three months ended September 30, 2018 and 4% for the comparable period in 2017. R&D expenses were $1.1 million for the nine months ended September 30, 2018 compared to $1.0 million for the comparable period of 2017. As a percentage of revenue, R&D expenses were 3% for the nine months ended September 30, 2018 and 2017.

 

Provision for income taxes consists primarily of federal and state income taxes in the United Sates and income taxes in Brazil. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended September 30, 2018 and 2017, the Company recorded tax provisions of $0.8 million and $0.9 million, respectively. These provisions represented effective tax rates of 40% for the three months ended September 30, 2018 and 39% for the comparable period of 2017. During the nine months ended September 30, 2018 and 2017, the Company recorded tax provisions of $2.4 million each. These provisions represented effective tax rates of 40% for the nine months ended September 30, 2018 and 39% for the comparable period of 2017. The Company currently expects the year-end tax rate to be approximately 40%. This rate can fluctuate significantly based on the mix of business and pre-tax income, as Brazil taxes are based on revenue.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2018, the Company had approximately $6.0 million of cash and cash equivalents. The Company's operating activities generated net cash of $4.0 million for the nine months ended September 30, 2018. Investing activities used $1.1 million of cash while financing activities used $3.6 million of cash during the first nine months of 2018.

 

Cash provided by operating activities of $4.0 million reflected net income of $3.7 million adjusted for depreciation and amortization of $2.3 million, stock-based compensation of $436 thousand and a decrease of deferred income taxes of $152 thousand. This was affected by the following changes in assets and liabilities: an increase in accounts receivable of $3.6 million (primarily from the Company’s Brazilian distributor as a result of revised billing terms adopted late in the quarter – these invoices have been paid subsequent to quarter end), an increase in prepaid expenses and other current assets of $147 thousand, an increase in accounts payable of $394 thousand and an increase in accrued expenses of $1.1 million.

 

Cash used in investing activities included purchases of equipment and leasehold improvements of $775 thousand, cost of internally developed software of $268 thousand and other assets of $96 thousand. We anticipate spending less than $0.3 million in additional capital purchases for the remainder of 2018.

 

 

Cash used by financing activities of $3.6 million included cash dividends to shareholders of $2.8 million and $717 thousand from long-term debt payments.

 

Contractual obligations and other commercial commitments as of September 30, 2018 were as follows (in thousands):

 

		Less Than One Year				1-3 Years				4-5 Years				After 5 Years				Total
Debt principal		$	941			$	1,234			$	485			$	-			$	2,660
Operating leases			773				819				153				-				1,745
Total		$	1,714			$	2,053			$	638			$	-			$	4,405

 

At September 30, 2018, the Company's principal sources of liquidity included an aggregate of approximately $6.0 million of cash and cash equivalents.  The Company had $9.8 million and $9.6 million of working capital as of September 30, 2018 and December 31, 2017, respectively. Management currently believes that such funds, together with cash generated from operations, 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. 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Sensitivity. The long-term debt agreement entered into in March 2014 (as amended), is subject to the 30 day Libor rate, which changes the Company’s interest rate on a monthly basis. The Company does not expect any changes in this rate to materially affect the Company’s performance.

 

Foreign Exchange Risk. We are exposed to foreign currency risk in the ordinary course of business. See risk factors in our 2017 Annual Report on Form 10-K for further explanation of Foreign Exchange Risk. During the third quarter of 2018, the Company’s Brazilian distributor agreed to share the exchange rate risk, which had previously been borne entirely by the Company. Since this risk was minimized, but not eliminated, fluctuations in exchange rates will continue to affect the Company’s operating results.

 

Based on our ability to access our cash and cash equivalents, 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.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management evaluated, with the participation of our Chief Executive Officer and Vice President of Finance, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2018.

 

Based on this evaluation, our Chief Executive Officer and Vice President Finance have concluded that, because of the material weakness in internal control over financial reporting described in our 2017 Form 10-K, our disclosure controls and procedures were not effective as of September 30, 2018. However, we believe that we have designed and implemented the appropriate controls to fully remediate the material weakness. These controls include conducting a risk assessment and updating the testing and documentation of certain key reports.  The Company also hired a third party to review, implement and test the Company’s internal controls. In addition, the Company hired a finance manager whose primary responsibility is internal controls. The Company is required to demonstrate the effectiveness of the new processes for a sufficient period of time, which the Company expects will conclude at the end of 2018. Until the control review is completed, including the testing of these controls, the material weakness identified will continue to exist.

 

Changes in Internal Control Over Financial Reporting

 

Other than the actions taken to remediate the previously reported material weakness related to our control environment, there have been no significant changes in the Company's internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls 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 2017 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 nine months of 2018.

 

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		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

 

 

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:    October 25, 2018		By:	/s/ Raymond C. Kubacki
		Raymond C. Kubacki
		Chairman and Chief Executive Officer
		(principal executive officer)
Date:    October 25, 2018		By:	/s/ Neil L. Lerner
		Neil L. Lerner
		Vice President - Finance
		(principal accounting officer)

 

 

 

 

19