PSYCHEMEDICS CORP - Quarter Report: 2006 June (Form 10-Q)
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For quarterly period ended June 30, 2006
o | 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 Issuer as specified in its charter)
Delaware (State or other jurisdiction of incorporation of organization) |
58-1701987 (I.R.S. Employer Identification No.) |
|
125 Nagog Park, Acton, MA (Address of principal executive offices) |
01720 (Zip Code) |
Issuers telephone number, including area code (978) 206-8220
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the
Exchange Act during the past 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.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company.
YES o NO þ
Number of shares outstanding of only class of Issuers Common Stock as of
August 10, 2006: Common Stock $.005 par value (5,172,247 shares).
PSYCHEMEDICS CORPORATION
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PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
JUNE 30, | DECEMBER 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 1,990,076 | $ | 3,352,519 | ||||
Short-term investments |
3,575,000 | 2,550,000 | ||||||
Accounts receivable, net of allowance for doubtful
accounts of $430,212 in 2006 and $461,282 in 2005 |
4,387,158 | 3,272,278 | ||||||
Prepaid expenses and other current assets |
615,132 | 387,426 | ||||||
Deferred tax assets |
526,646 | 520,152 | ||||||
Total current assets |
11,094,012 | 10,082,375 | ||||||
PROPERTY AND EQUIPMENT: |
||||||||
Equipment and leasehold improvements, at cost |
10,188,948 | 10,119,679 | ||||||
Less-accumulated depreciation and amortization |
(9,488,581 | ) | (9,342,747 | ) | ||||
700,367 | 776,932 | |||||||
DEFERRED TAX ASSETS |
245,889 | 245,889 | ||||||
OTHER ASSETS, NET |
39,830 | 39,830 | ||||||
$ | 12,080,098 | $ | 11,145,026 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 346,625 | $ | 367,535 | ||||
Accrued expenses |
957,513 | 1,292,257 | ||||||
Deferred revenue |
623,341 | 590,670 | ||||||
Total current liabilities |
1,927,479 | 2,250,462 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $0.005 par value; 872,521
shares authorized; none issued or outstanding |
| | ||||||
Common stock; $0.005 par value; 50,000,000 shares
authorized; 5,756,044 shares and 5,750,894
shares issued in 2006 and 2005, respectively |
28,780 | 28,754 | ||||||
Paid-in capital |
25,544,767 | 25,446,781 | ||||||
Accumulated deficit |
(6,298,237 | ) | (7,458,280 | ) | ||||
Less Treasury stock, at cost; 583,797 shares |
(9,122,691 | ) | (9,122,691 | ) | ||||
Total shareholders equity |
10,152,619 | 8,894,564 | ||||||
$ | 12,080,098 | $ | 11,145,026 | |||||
See accompanying notes to financial statements and managements discussion and
analysis of financial condition and results of operations.
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF
INCOME
(UNAUDITED)
(UNAUDITED)
THREE MONTHS | ||||||||
ENDED JUNE 30, | ||||||||
2006 | 2005 | |||||||
REVENUE |
$ | 6,181,386 | $ | 5,615,329 | ||||
COST OF REVENUE |
2,331,401 | 2,224,449 | ||||||
Gross profit |
3,849,985 | 3,390,880 | ||||||
EXPENSES: |
||||||||
General and administrative |
836,679 | 755,974 | ||||||
Marketing and selling |
731,607 | 678,168 | ||||||
Research and development |
116,072 | 73,854 | ||||||
1,684,358 | 1,507,996 | |||||||
OPERATING INCOME |
2,165,627 | 1,882,884 | ||||||
INTEREST INCOME |
63,493 | 26,962 | ||||||
INCOME BEFORE INCOME TAXES |
2,229,120 | 1,909,846 | ||||||
PROVISION FOR INCOME TAXES |
828,000 | 709,000 | ||||||
NET INCOME |
$ | 1,401,120 | $ | 1,200,846 | ||||
BASIC NET INCOME PER SHARE |
$ | 0.27 | $ | 0.23 | ||||
DILUTED NET INCOME PER SHARE |
$ | 0.27 | $ | 0.23 | ||||
DIVIDENDS DECLARED PER SHARE |
$ | 0.125 | $ | 0.08 | ||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC |
5,169,361 | 5,163,506 | ||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, DILUTED |
5,238,697 | 5,173,941 | ||||||
See accompanying notes to financial statements and managements discussion and
analysis of financial condition and results of operations.
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS | ||||||||
ENDED JUNE 30, | ||||||||
2006 | 2005 | |||||||
REVENUE |
$ | 11,248,116 | $ | 10,953,079 | ||||
COST OF REVENUE |
4,447,550 | 4,389,279 | ||||||
Gross profit |
6,800,566 | 6,563,800 | ||||||
EXPENSES: |
||||||||
General and administrative |
1,600,660 | 1,628,612 | ||||||
Marketing and selling |
1,397,174 | 1,407,249 | ||||||
Research and development |
228,650 | 145,801 | ||||||
3,226,484 | 3,181,662 | |||||||
OPERATING INCOME |
3,574,082 | 3,382,138 | ||||||
INTEREST INCOME |
122,203 | 39,598 | ||||||
OTHER INCOME |
| 1,250 | ||||||
122,203 | 40,848 | |||||||
INCOME BEFORE INCOME TAXES |
3,696,285 | 3,422,986 | ||||||
PROVISION FOR INCOME TAXES |
1,373,000 | 1,274,000 | ||||||
NET INCOME |
$ | 2,323,285 | $ | 2,148,986 | ||||
BASIC NET INCOME PER SHARE |
$ | 0.45 | $ | 0.42 | ||||
DILUTED NET INCOME PER SHARE |
$ | 0.44 | $ | 0.42 | ||||
DIVIDENDS DECLARED PER SHARE |
$ | 0.225 | $ | 0.16 | ||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, BASIC |
5,168,235 | 5,146,103 | ||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, DILUTED |
5,224,374 | 5,158,159 | ||||||
See accompanying notes to financial statements and managements discussion and
analysis of financial condition and results of operations.
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS | ||||||||
ENDED JUNE 30, | ||||||||
2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 2,323,285 | $ | 2,148,986 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
145,834 | 219,321 | ||||||
Stock-based compensation expense |
28,930 | | ||||||
Deferred income taxes |
(6,494 | ) | | |||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
(1,114,880 | ) | (272,327 | ) | ||||
Prepaid expenses and other current assets |
(227,706 | ) | (350,979 | ) | ||||
Accounts payable |
(20,910 | ) | (348,294 | ) | ||||
Accrued expenses |
(334,744 | ) | 138,819 | |||||
Deferred revenue |
32,671 | 89,920 | ||||||
Net cash provided by operating activities |
825,986 | 1,625,446 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of short-term investments |
(1,025,000 | ) | (2,000,000 | ) | ||||
Purchases of property and equipment |
(69,269 | ) | (100,078 | ) | ||||
Decrease in other assets |
| 2,228 | ||||||
Net cash used in investing activities |
(1,094,269 | ) | (2,097,850 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Tax benefit associated with exercise of options |
8,982 | 35,503 | ||||||
Cash dividends paid |
(1,163,242 | ) | (823,520 | ) | ||||
Net proceeds from the issuance of common stock |
60,100 | 433,439 | ||||||
Net cash used in financing activities |
(1,094,160 | ) | (354,578 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(1,362,443 | ) | (826,982 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period |
3,352,519 | 3,260,178 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 1,990,076 | $ | 2,433,196 | ||||
See accompanying notes to financial statements and managements discussion and
analysis of financial condition and results of operations.
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2006
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) as
reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2005. 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 six
months ended June 30, 2006 may not be indicative of the results that may be expected for the year
ending December 31, 2006, or any other period.
2. Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123R) effective January 1, 2006. SFAS 123R requires the recognition of the fair
value of stock-based compensation as a charge against earnings. The Company recognizes stock-based
compensation expense over the requisite service period of the individual grantees, which generally
equals the vesting period. Based on the provisions of SFAS 123R, the Companys stock-based
compensation is accounted for as equity instruments. Prior to January 1, 2006, the Company
followed Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for stock-based compensation. The Company elected the
modified prospective transition method for adopting SFAS 123R. Under this method, the provisions
of SFAS 123R apply to all awards granted or modified after the date of adoption, as well as to the
future vesting of awards granted and not vested as of the date of adoption.
On March 22, 2006 the Company adopted a new stock-based plan (the 2006 Equity Incentive Plan) for
officers, directors, employees and consultants, which was approved by the Companys shareholders at
the 2006 Annual Shareholders meeting. Under the 2006 Equity Incentive Plan, the Company is
authorized to grant options with terms of up to ten years, grant restricted stock, issue stock
bonuses or grant other stock-based awards.
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
The Company also has stock option plans that have expired, but shares can be issued upon exercise
of outstanding options that were granted prior to such expiration. Activity for these plans is
included in this footnote. Options granted under the plans consisted of both non-qualified and
incentive stock options and were granted in each case at a price that was not less than the fair
market value of the common stock at the date of grant. These options generally have lives of ten
years and vest either immediately or over periods up to four years.
Under the provisions of SFAS 123R, the Company recorded $21,286 and $28,930 of stock-based
compensation in the accompanying statements of income for the three months and six months ended
June 30, 2006, respectively. The Company granted 26,700 stock unit awards (SUAs) to certain
members of management and its directors on May 11, 2006. The fair value of the SUAs was $16.70 per
share, which was the closing price of the Companys stock on May 11, 2006. 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 awardee remains continuously employed throughout the
vesting periods. No stock options were granted or modified during the six months ended June 30,
2006.
SFAS 123R requires the measurement of the fair value of stock options or warrants to be included in
the statement of income or disclosed in the notes to financial statements. The Company has
computed the value of options using the Black-Scholes option pricing model.
The assumptions used and the weighted average information are as follows:
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2005 | June 30, 2005 | |||||||
Risk-free interest rates range |
3.8 | % | 3.8 | % | ||||
Expected dividend yield range |
2.3 | % | 2.3 | % | ||||
Expected lives |
5 years | 5 years | ||||||
Expected volatility range |
30.09 | % | 30.09 | % |
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SFAS 123R requires the presentation of pro forma information for the comparative period prior to
the adoption as if the Company had accounted for all its employee stock options under the fair
value method of the original SFAS 123. The following table illustrates the effect on net income
(loss) and earnings per share if the Company had applied the fair value recognition provisions of
SFAS 123R to stock-based employee compensation to the prior-year:
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2005 | June 30, 2005 | |||||||
Net income, as reported |
$ | 1,200,846 | $ | 2,148,986 | ||||
Less: Total stock-based
compensation cost determined
under the fair value based method
for all employee awards |
(919,325 | ) | (928,882 | ) | ||||
Pro forma net income |
$ | 281,521 | $ | 1,220,104 | ||||
Income per share: |
||||||||
Basic and diluted, as reported |
$ | 0.23 | $ | 0.42 | ||||
Basic and diluted, pro forma |
$ | 0.05 | $ | 0.24 | ||||
The weighted average fair value of options granted for the three months ended June 30, 2005 was
$3.76 per share. The weighted average fair value of options granted for the six months ended June
30, 2005 was $3.76 per share.
A summary of stock option activity for the Companys expired stock option plans for the six months
ended June 30, 2006 is as follows:
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Number | Exercise | Remaining | Aggregate | |||||||||||||
of | Price Per | Contractual | Intrinsic | |||||||||||||
Shares | Share | Life | Value (1) | |||||||||||||
Outstanding, December 31, 2005 |
556,946 | $ | 16.09 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Terminated |
(6,438 | ) | 22.03 | |||||||||||||
Outstanding, March 31, 2006 |
550,508 | 16.01 | ||||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(5,150 | ) | 11.85 | |||||||||||||
Terminated |
| | ||||||||||||||
Outstanding, June 30, 2006 |
545,358 | $ | 16.06 | 6.2 years | $ | 1,320,847 | ||||||||||
Exercisable, June 30, 2006 |
544,508 | $ | 16.07 | 6.2 years | $ | 1,313,274 | ||||||||||
Available for grant, June 30, 2006 |
| |||||||||||||||
(1) | The aggregate intrinsic value on this table was calculated based on the amount, if any, by which the closing market value of the Companys stock on June 30, 2006 |
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
($17.56) exceeded the exercise price of the underlying options, multiplied by the number of shares subject to each option. |
A summary of activity for SUAs for the six months ended June 30, 2006 is as follows:
Number | Aggregate | |||||||
of | Intrinsic | |||||||
Shares | Value (2) | |||||||
Outstanding, December 31, 2005 |
| |||||||
Granted |
| |||||||
Vested |
| |||||||
Terminated |
| |||||||
Outstanding, March 31, 2006 |
| |||||||
Granted |
26,700 | |||||||
Vested |
| |||||||
Terminated |
| |||||||
Outstanding, June 30, 2006 |
26,700 | $ | 468,852 | |||||
Available for grant, June 30, 2006 |
223,300 | |||||||
(2) | The aggregate intrinsic value on this table was calculated based on the closing market value of the Companys stock on June 30, 2006 ($17.56). |
As of June 30, 2006, a total of 795,358 shares of common stock were reserved for issuance under the
various stock option and stock-based plans. As of June 30, 2006, the unamortized fair value of
awards relating to stock options was $1,154. As of June 30, 2006, the unamortized fair value of
awards relating to SUAs was $428,243.
3. 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 SUAs.
Basic and diluted weighted average common shares outstanding are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Weighted average common shares |
5,169,361 | 5,163,506 | 5,168,235 | 5,146,103 | ||||||||||||
Common equivalent shares |
69,336 | 10,435 | 56,139 | 12,056 | ||||||||||||
Weighted average common shares
outstanding, assuming dilution |
5,238,697 | 5,173,941 | 5,224,374 | 5,158,159 |
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
For the three months ended June 30, 2006 and 2005, options to purchase 194,481 and 522,833 common
shares, respectively, were outstanding but not included in the diluted
weighted average common share calculation as the effect would have been antidilutive. For the six
months ended June 30, 2006 and 2005, options to purchase 200,919 and 533,133 common shares,
respectively, were outstanding but not included in the diluted weighted average common share
calculation as the effect would have been antidilutive.
4. Revenue Recognition
The Company is in the business of performing drug testing 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 also provides expert testimony, when and if necessary, to support the test
results, which is generally billed separately and recognized as the services are provided.
In 2003, the Company adopted Emerging Issue Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, which was effective for all transactions entered into
subsequent to June 15, 2003. The Company applied the consensus reached under EITF 00-21 and
concluded that the testing, training and storage elements are considered 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 has concluded that the predominant deliverable in
the arrangement is the testing of the units and has recognized revenue as that service is performed
and reported to the customer.
At June 30, 2006 and December 31, 2005, the Company had deferred revenue of approximately
$623,000 and $591,000, respectively, reflecting sales of its personal drug testing service for
which the performance of the related test had not yet occurred.
5. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement process for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition and will become effective for the Company for fiscal years beginning after December
15, 2006. The Company is in the process of evaluating the impact of adoption of FIN 48.
6. 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
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PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
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.
7. Subsequent Event Dividends
On August 1, 2006, the Company declared a quarterly dividend of $.125 per share, which will be paid
on September 22, 2006 to shareholders of record on September 8, 2006.
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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 revenues, 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, cash dividends, cost
savings, capital expenditures 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, employee
hiring practices of the Companys principal customers, development of markets for new products and
services offered by the Company, the economic health of principal customers of the Company,
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), competition 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, and other factors that the Board of Directors of the Company may
take into account.
OVERVIEW
Psychemedics Corporation was incorporated in 1986. The Company utilizes a patented hair analysis
method involving radioimmunoassay technology and mass spectrometry confirmation to analyze human
hair to detect abused substances.
Revenue for the second quarter of 2006 was $6.2 million and was 10% above revenue of $5.6 million
for the second quarter of 2005. Revenue for the first six months of 2006 was $11.2 million and was
3% above revenue of $11.0 million for the first six months of 2005. The Company reported net
income of $0.27 per share in the quarter ended June 30, 2006 and net income of $0.44 per share for
the six months ended June 30, 2006. At June 30, 2006, the Company had $5.6 million of cash, cash
equivalents and short-term investments. The Company distributed $0.52 million and $0.65 million,
or $0.10 per share and $0.125 per share, of cash dividends to its shareholders in the first and
second quarters of 2006, respectively, which represented year to date totals of $1.2 million, or
$0.225 per share. The Company has paid thirty-nine consecutive quarterly cash dividends.
RESULTS OF OPERATIONS
Revenue was $6,181,386 for the three month period ended June 30, 2006 as compared to $5,615,329 for
the comparable period of 2005, representing an increase of 10%. Revenue was $11,248,116 for the
six month period ended June 30, 2006 as compared to $10,953,079 for the comparable period of 2005,
representing an increase of 3%. The
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increase in revenue for the second quarter of 2006 was due to
an increase of 14% in
testing volume from both new and existing clients, while the average revenue per sample decreased
by 4% as compared to the comparable period of 2005. The increase in revenue for the six months
ended June 30, 2006 was due to an increase of 3% in testing volume from both new and existing
clients, while the average revenue per sample remained relatively constant as compared to the
comparable period of 2005.
Gross margin was 62% of revenue for the three month period ended June 30, 2006, as compared to 60%
for the comparable period of 2005. Gross margin was 60% of revenue for both of the six month
periods ended June 30, 2006 and June 30, 2005. Even though average revenue per sample decreased by
4%, gross margin increased primarily due to the increase in testing volume of 14% as fixed and
semi-variable direct costs were spread over a greater number of tests performed for the three
months ended June 30, 2006, as compared to the same period of 2005. Fixed and semi-variable direct
costs were spread over a greater number of tests performed and were offset by a slight increase in
material costs for the six month period ended June 30, 2006, as compared to the same period of
2005. Also, reduced depreciation and amortization expense contributed to a decline in fixed costs
for the three month period and the six month period ended June 30, 2006 as compared to the
comparable periods of 2005.
General and administrative (G&A) expenses were $836,679 for the three month period ended June 30,
2006 as compared to $755,974 for the comparable period of 2005, representing an increase of 11%.
G&A expenses were $1,600,660 for the six month period ended June 30, 2006 as compared to $1,628,612
for the comparable period of 2005, representing a decrease of 2%. The increase in general and
administrative expenses for the three month period ended June 30, 2006 as compared to the
comparable period of 2005 was due primarily to an increase in personnel expenses and business
insurance costs. All other general and administrative expenses remained relatively constant. The
decrease in general and administrative expenses for the six month period ended June 30, 2006 as
compared to the comparable period of 2005 was due primarily to reduced professional fees related to
Sarbanes-Oxley compliance work performed mostly in the first quarter of 2005, reduced legal fees
and a decrease in bad debt expense, partially offset by an increase in personnel expenses and
business insurance costs. All other general and administrative expenses remained relatively
constant. As a percentage of revenue, G&A expenses were 14% for the three month periods ended June
30, 2006 and June 30, 2005 and decreased to 14% for the six months ended June 30, 2006 from 15% for
the comparable period of 2005. The Company expects general and administrative expenses to remain
relatively flat in absolute dollars and decrease as a percentage of revenue during the remainder of
2006.
Marketing and selling expenses were $731,607 for the three month period ended June 30, 2006 as
compared to $678,168 for the comparable period of 2005, an increase of 8%. Marketing and selling
expenses were $1,397,174 for the six month period ended June 30, 2006 as compared to $1,407,249 for
the comparable period of 2005, a decrease of 1%. The variation in marketing and selling expenses
for both the three month and six month periods ended June 30, 2006 as compared to the comparable
periods of 2005 was due primarily to short-term fluctuations in personnel expenses pertaining to
the Companys sales and support staff. Total marketing and selling expenses represented 12% of
revenue in the second quarter of 2006 and in the second quarter of 2005. Total marketing and
selling expenses represented 12% of revenue for the six month period ended June 30, 2006 and 13% of
revenue for the six month period
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ended June 30, 2005. The Company expects marketing and selling
expenses to increase in absolute dollars and decrease as a
percentage of revenue during the remainder of 2006 as resources are committed to direct selling
efforts to aggressively promote its drug testing services in order to expand its client base.
Research and development (R&D) expenses for the three month period ended June 30, 2006 increased
by $42,218 from the comparable period of the prior year to $116,072, an increase of 57%. Research
and development (R&D) expenses for the six month period ended June 30, 2006 increased by $82,849
from the comparable period of the prior year to $228,650, an increase of 57%. The increase for
both periods was primarily due to an increase in personnel expenses. R&D expenses represented 2%
of revenue for the three month period and the six month period ended June 30, 2006 as compared to
1% of revenue for the three month period and the six month period ended June 30, 2005. The Company
expects research and development expenses to increase slightly during the remainder of 2006 as
compared to 2005.
Interest income for the three month period ended June 30, 2006 increased by $36,531 and increased
by $82,605 for the six month period ended June 30, 2006 as compared to the comparable periods of
2005 and represented interest and dividends earned on cash equivalents and short-term investments.
Higher average investment balances along with an increase in the yield on investment balances in
2006 as compared to 2005 caused the increase in interest income.
During the three months ended June 30, 2006 and June 30, 2005, the Company recorded tax provisions
of $828,000 and $709,000 representing effective tax rates of 37.1% for both periods. During the
six months ended June 30, 2006 and June 30, 2005, the Company recorded tax provisions of $1,373,000
and $1,274,000 representing effective tax rates of 37.1% and 37.2%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, the Company had approximately $5.6 million of cash, cash equivalents and
short-term investments. The Companys operating activities provided net cash of $825,986 in the
six months ended June 30, 2006. Investing activities used $1,094,269 in the six month period while
financing activities used a net amount of $1,094,160 during the period.
Cash provided by operating activities of $825,986 principally reflected net income of $2,323,285
adjusted for depreciation and amortization of $145,834, partially offset by an increase in accounts
receivable along with a lesser decrease in accrued expenses and a lesser increase in prepaid
expenses. The increase in accounts receivable was due to stronger than usual revenue amounts
during the latter part of the second quarter of 2006. The decrease in accrued expenses was due to
the payment during the first two quarters of increased income tax amounts and of bonus expense that
was accrued as of December 31, 2005. The increase in prepaid expenses was due primarily to the
payment of annual insurance premiums during the first quarter of 2006.
Capital expenditures in the first six months of 2006 were $69,269. The expenditures primarily
consisted of new equipment, including laboratory and computer equipment. The Company currently
plans to make capital expenditures of approximately $500,000 in 2006, primarily in connection with
the purchase of additional laboratory and computer equipment. The Company believes that within the
next two to five years it may be
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required to expand its
existing laboratory or develop a second laboratory, the cost of which is currently believed to
range from $2 million to $4 million, which the Company expects to fund primarily through its
operating cash flows.
During the six months ended June 30, 2006, the Company distributed $1,163,242 in cash dividends to
its shareholders. The Company did not repurchase any shares for treasury during the six months
ended June 30, 2006. The Company has authorized 500,000 shares for repurchase since June of 1998,
of which 466,351 shares have been repurchased.
Contractual obligations as of June 30, 2006 were as follows:
Less Than | 1-3 | 4-5 | After 5 | |||||||||||||||||
One Year | Years | years | Years | Total | ||||||||||||||||
Operating leases |
$ | 496,000 | $ | 900,000 | $ | 787,000 | $ | 434,000 | $ | 2,617,000 | ||||||||||
Purchase commitment |
272,000 | | | | 272,000 | |||||||||||||||
$ | 768,000 | $ | 900,000 | $ | 787,000 | $ | 434,000 | $ | 2,889,000 |
Purchase Commitment
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 $271,916 for the six months ended
June 30, 2006 as compared to $247,152 for the comparable period of 2005. The Company expects to
purchase approximately $272,000 for the remainder of 2006. In exchange for exclusivity, 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 both 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 June 30, 2006, the Companys principal sources of liquidity included an aggregate of
approximately $5.6 million of cash, cash equivalents 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 in the near
term. Depending upon the Companys results of operations, its future capital needs and available
marketing opportunities, the Company may use various financing sources to raise additional funds.
Such sources could potentially include joint ventures, issuances of common stock or debt financing,
although the Company does not have any such plans at this time. At June 30, 2006, the Company had
no long-term debt.
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CRITICAL ACCOUNTING POLICIES
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 also provides expert testimony, when and if necessary, to support the
test results, which is generally billed separately and recognized as the services are provided.
In 2003, the Company adopted Emerging Issue Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, which was effective for all transactions entered into
subsequent to June 15, 2003. The Company applied the consensus reached under EITF 00-21 and
concluded that the testing, training and storage elements are considered 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 has concluded that the predominant deliverable in
the arrangement is the testing of the units and has recognized revenue as that service is performed
and reported to the customer.
Deferred revenue represents payments received in advance of the performance of drug testing
procedures. 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 (referred to as breakage). Realized gain is then
recognized (as other income) when the Company can reasonably, reliably and objectively determine
that an estimated amount of breakage has occurred. Breakage is deemed to occur only at the point
it becomes remote that performance will be required for an estimable portion of transactions. The
Company has not recorded any breakage in the first two quarters of 2006 or during all of 2005. The
Company continues to monitor this to determine whether breakage can be reasonably, reliably and
objectively determined.
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.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on managements assessment of the collectibility 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
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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.
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.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity. The Company maintains a short-term investment portfolio consisting
principally of money market securities and Taxable Auction Rate Preferred, 7 and 28 day Dutch
Auction securities that are not sensitive to sudden interest rate changes. The Company does not
use derivative financial instruments for speculative or trading purposes.
Item 4. Controls and Procedures
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial
Officer 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 Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in ensuring the reporting of material information
required to be included in the Companys periodic filings with the Securities and Exchange
Commission. 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
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our 2005 Annual
Report on Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Psychemedics Corporation was held on May 11, 2006 for the
purpose of electing a board of directors. Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to
managements solicitations.
Description and tabulation by the Companys transfer agent of each matter voted upon at the Annual
Meeting of Shareholders of Psychemedics Corporation held on May 11, 2006:
All of managements nominees for directors, as listed in the proxy statement, were elected with the
following votes:
Election of Directors:
Number of Shares | ||||||||
For | Withheld | |||||||
Raymond C. Kubacki, Jr. |
4,673,766 | 97,229 | ||||||
Harry F. Connick |
4,556,555 | 214,440 | ||||||
Walter S. Tomenson, Jr. |
4,556,794 | 214,201 | ||||||
Fred J. Weinert |
4,375,488 | 395,507 |
Ratification of the Companys 2006 Equity Incentive Plan:
Number of Shares | ||||
For |
2,678,494 | |||
Against |
361,919 | |||
Abstain |
2,895 | |||
Delivered
not voted |
1,727,687 |
Item 6. Exhibits
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.
Psychemedics Corporation | ||||
Date: August 10, 2006
|
By: | /s/ Raymond C. Kubacki, Jr. | ||
Raymond C. Kubacki, Jr. | ||||
Chairman and Chief Executive Officer | ||||
Date August 10, 2006
|
By: | /s/ Peter C. Monson | ||
Peter C. Monson | ||||
Vice President, Treasurer & | ||||
Chief Financial Officer |
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PSYCHEMEDICS CORPORATION
FORM 10-Q
June 30, 2006
FORM 10-Q
June 30, 2006
EXHIBIT INDEX
Page No. | ||||||
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 22 | ||||
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 24 | ||||
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 | 26 | ||||
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 27 |
21