PSYCHEMEDICS CORP - Quarter Report: 2010 March (Form 10-Q)
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-Q
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x
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Quarterly
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
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For the
quarterly period ended March
31, 2010
or
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¨
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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
__________
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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.)
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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)
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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 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 ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
Reporting Company x
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(Do not
check if smaller reporting Company)
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 May 12, 2010 was 5,861,872.
PSYCHEMEDICS
CORPORATION
FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2010
INDEX
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Page
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PART
I - FINANCIAL INFORMATION
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Item
1 - Financial Statements (Unaudited)
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Condensed
Balance Sheets as of March 31, 2010 and December 31,
2009
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3
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Condensed
Statements of Income for the Three Months Ended March 31, 2010 and
2009
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4
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Condensed
Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009
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5
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Notes
to Condensed Financial Statements
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6
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Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Overview
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12
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Results
of Operations
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13
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Liquidity
and Capital Resources
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13
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Critical
Accounting Policies
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15
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Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
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17
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Item
4 - Controls and Procedures
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17
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PART
II - OTHER INFORMATION
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Item
1A - Risk Factors
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18
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Item
2 - Unregistered Sales of Equity Securities
and Use of Proceeds
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18
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Item
6 - Exhibits
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18
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Signatures
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19
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Exhibit
Index
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20
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2
PSYCHEMEDICS
CORPORATION
CONDENSED
BALANCE SHEETS
(UNAUDITED)
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March
31,
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December
31,
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|||||||
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2010
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2009
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|||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 3,186,458 | $ | 4,840,367 | ||||
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Short-term
investments
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2,014,203 | 1,006,436 | ||||||
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Accounts
receivable, net of allowance for doubtful accounts of $129,325 in 2010 and
$134,282 in 2009
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3,215,877 | 3,016,084 | ||||||
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Prepaid
expenses
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556,560 | 573,191 | ||||||
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Other
current assets
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326,155 | 90,242 | ||||||
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Deferred
tax assets
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291,047 | 253,221 | ||||||
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Total
current assets
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9,590,300 | 9,779,541 | ||||||
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Fixed
assets:
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Equipment
& leasehold improvements
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11,102,580 | 10,912,906 | ||||||
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Less
accumulated depreciation
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10,445,052 | 10,381,599 | ||||||
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Net
fixed assets
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657,528 | 531,307 | ||||||
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Deferred
tax assets, long term
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204,764 | 204,764 | ||||||
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Other
assets
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86,185 | 86,814 | ||||||
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Total
Assets
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$ | 10,538,777 | $ | 10,602,426 | ||||
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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||||||||
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Accounts
payable
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$ | 283,332 | $ | 180,784 | ||||
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Accrued
expenses
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748,094 | 759,067 | ||||||
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Accrued
income taxes
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205,052 | 331,831 | ||||||
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Deferred
revenue
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31,545 | 36,360 | ||||||
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Total
current liabilities
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1,268,023 | 1,308,042 | ||||||
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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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— | — | ||||||
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Common
stock, $0.005 par value, 50,000,000 shares authorized, 5,861,872 shares
issued in 2010 and 2009
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29,309 | 29,309 | ||||||
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Paid-in
capital
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27,512,987 | 27,419,359 | ||||||
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Less
– Treasury stock, at cost, 664,523 shares in 2010 and 2009
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(10,053,364 | ) | (10,053,364 | ) | ||||
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Accumulated
deficit
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(8,218,178 | ) | (8,100,920 | ) | ||||
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Total
Shareholders' Equity
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9,270,754 | 9,294,384 | ||||||
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Total
Liabilities & Shareholders' Equity
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$ | 10,538,777 | $ | 10,602,426 | ||||
See
accompanying notes to condensed financial statements.
3
PSYCHEMEDICS
CORPORATION
CONDENSED
STATEMENTS OF INCOME
(UNAUDITED)
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Three
Months Ended
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Three
Months Ended
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March
31,
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March
31,
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2010
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2009
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Revenue
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$ | 4,464,243 | $ | 4,078,837 | ||||
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Costs
of revenues
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1,910,654 | 1,986,911 | ||||||
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Gross
profit
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2,553,589 | 2,091,926 | ||||||
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Operating
expenses:
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General
& administrative
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971,614 | 1,042,495 | ||||||
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Marketing
& selling
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623,631 | 871,464 | ||||||
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Research
& development
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122,481 | 125,046 | ||||||
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Total
operating expenses
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1,717,726 | 2,039,005 | ||||||
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Operating
income
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835,863 | 52,921 | ||||||
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Interest
income
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8,176 | 15,507 | ||||||
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Net
income before provision for income taxes
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844,039 | 68,428 | ||||||
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Provision
for income taxes
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337,615 | 29,903 | ||||||
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Net
income
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$ | 506,424 | $ | 38,525 | ||||
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Basic
net income per share
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$ | 0.10 | $ | 0.01 | ||||
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Diluted
net income per share
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$ | 0.10 | $ | 0.01 | ||||
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Dividends
declared per share
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$ | 0.12 | $ | 0.17 | ||||
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Weighted
average common shares outstanding, basic
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5,197,349 | 5,190,747 | ||||||
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Weighted
average common shares outstanding, diluted
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5,206,584 | 5,204,876 | ||||||
See
accompanying notes to condensed financial statements.
4
PSYCHEMEDICS
CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
UNAUDITED
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For
the three months ended
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March
31, 2010
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March
31, 2009
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
income
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$ | 506,424 | $ | 38,525 | ||||
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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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64,082 | 96,401 | ||||||
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Deferred
income taxes
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(37,826 | ) | (41,364 | ) | ||||
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Stock
compensation expense
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93,628 | 107,436 | ||||||
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Changes
in operating assets and liabilities:
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Accounts receivable
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(199,793 | ) | 656,739 | |||||
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Prepaid expenses and other current assets
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(219,282 | ) | (325,776 | ) | ||||
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Accounts
payable
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102,548 | (330,998 | ) | |||||
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Accrued
expenses
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(10,973 | ) | (322,704 | ) | ||||
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Accrued
income tax
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(126,779 | ) | -- | |||||
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Deferred
revenue
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(4,815 | ) | (30,870 | ) | ||||
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Net
cash provided by (used in) operating activities
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167,215 | (152,611 | ) | |||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchases
of short-term investments
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(1,007,768 | ) | — | |||||
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Purchases
of property and equipment
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(189,674 | ) | (27,744 | ) | ||||
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Net
cash used in investing activities
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(1,197,442 | ) | (27,744 | ) | ||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Dividends
paid
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(623,682 | ) | (883,282 | ) | ||||
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Acquisition
of treasury stock
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— | (79,407 | ) | |||||
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Net
cash used in financing activities
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(623,682 | ) | (962,689 | ) | ||||
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Net
decrease in cash and cash equivalents
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(1,653,909 | ) | (1,143,044 | ) | ||||
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CASH
AND CASH EQUIVALENTS, beginning of period
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4,840,367 | 6,630,119 | ||||||
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CASH
AND CASH EQUIVALENTS, end of period
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$ | 3,186,458 | $ | 5,487,075 | ||||
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SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
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Cash
paid for income taxes
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$ | 500,000 | — | |||||
See
accompanying notes to condensed financial statements.
5
PSYCHEMEDICS
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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1.
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Interim
Financial Statements
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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 Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, filed on March 26, 2010. 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 months ended March
31, 2010 may not be indicative of the results that may be expected for the year
ending December 31, 2010, or any other period.
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2.
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Cash,
Cash Equivalents and Short-Term
Investments
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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 insured certificate of deposit accounts at March 31, 2010.
As of March 31, 2009, $4.0 million were in U.S. federal government-backed money
market accounts. There were no money market accounts at March 31,
2010.
At March
31, 2010, the Company had $2.0 million of certificates of deposit (“CDs”) with
maturities over 13 weeks that were classified as short-term investments. The
Company accounts for investment securities in accordance with the Financial
Accounting Standards Board (“ FASB”) accounting standards codification (“ASC”)
topic 320. This was previously known as the Statement of Financial Accounting
Standards SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”. 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.
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3.
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Stock-Based
Compensation
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The
Company’s “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 March 31, 2010,
158,100 shares remained available for future grant under the 2006 Equity
Incentive Plan.
6
PSYCHEMEDICS
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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3.
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Stock-Based Compensation
(continued)
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The
Company did not grant any stock unit awards (“SUAs”) in the first quarter of
2010 or 2009. There were no SUAs that were terminated in the first quarter of
2010. The fair value of the SUAs was determined by the closing price
of the Company’s 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 Company’s 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 Company’s 2006 Equity Incentive Plan for the
three months ended March 31, 2010 is as follows:
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Number
of
Shares
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Aggregate
Intrinsic
Value
(1)
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|||||||
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(000s)
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||||||||
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Outstanding
& Unvested, December 31, 2009
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42,600 | |||||||
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Granted
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- | |||||||
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Terminated
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- | |||||||
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Converted
to common stock
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- | |||||||
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Outstanding
& Unvested, March 31, 2010
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42,600 | $ | 328 | |||||
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Available
for grant, March 31, 2010
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158,100 | |||||||
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(1)
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The
aggregate intrinsic value on this table was calculated based on the
closing market value of the Company’s stock on March 31, 2010
($7.69).
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A summary
of stock option activity for the Company’s expired stock option plans for the
three months ended March 31, 2010 is as follows:
7
PSYCHEMEDICS
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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3.
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Stock-Based
Compensation (continued)
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Number
of
Shares
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Weighted
Average
Exercise
Price
Per
Share
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Weighted
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
(2)
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||||||||||
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(000s)
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|||||||||||||
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Outstanding,
December 31, 2009
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336,921 | $ | 14.80 | ||||||||||
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Granted
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- | - | |||||||||||
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Exercised
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- | - | |||||||||||
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Terminated/Expired
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(10,300 | ) | 20.52 | ||||||||||
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Outstanding,
March 31, 2010
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326,621 | $ | 14.62 |
3.9
years
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$ | - | |||||||
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Exercisable,
March 31, 2010
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326,621 | $ | 14.62 |
3.9
years
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$ | - | |||||||
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Available
for grant, March 31, 2010
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- | ||||||||||||
(2)
The aggregate intrinsic value on this table was calculated based on the
amount, if any, by which the closing market value of the Company’s stock on the
March 31, 2010 ($7.69) exceeded the exercise price of the underlying options,
multiplied by the number of shares subject to each option. At March
31, 2010, there were no options with a strike price below market
value.
As of
March 31, 2010, a total of 527,321 shares of common stock were reserved for
issuance under the various stock option and stock-based plans. As of
March 31, 2010, the unamortized fair value of awards relating to SUAs was $395
thousand.
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4.
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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 Company’s unvested SUAs do not have
stock dividend rights and, consequently, are not included in share
totals.
8
PSYCHEMEDICS
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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4.
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Basic
and Diluted Net Income Per Share
(continued)
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Basic and
diluted weighted average common shares outstanding are as follows:
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Three
Months Ended
(000s)
|
||||||||
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March
31,
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March
31,
|
|||||||
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2010
|
2009
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|||||||
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Weighted
average common shares
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5,197 | 5,191 | ||||||
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Common
equivalent shares
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10 | 14 | ||||||
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Weighted
average common shares outstanding, assuming dilution
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5,207 | 5,205 | ||||||
For the
three months ended March 31, 2010 and 2009, options to purchase 327 thousand and
392 thousand common shares, respectively, were outstanding but not included in
the diluted weighted average common share calculation as the effect would have
been antidilutive.
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5.
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Revenue
Recognition
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The
Company is in the business of performing drug testing services and reporting the
results thereof. The Company’s 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 FASB codification topic “Revenue Recognition” (ASC
605). 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 $6 thousand and $35 thousand of
revenue in the results of operations for the three months ended March 31, 2010
and 2009, respectively, related to test kits that were sold for which the
Company’s obligations to provide service were deemed remote.
9
PSYCHEMEDICS
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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5.
|
Revenue
Recognition (continued)
|
At March
31, 2010 and December 31, 2009, the Company had deferred revenue of
approximately $32 thousand and $36 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.
|
6.
|
Fair
Value Measurements
|
FASB
Topic “Fair Value Measurements
and Disclosures” (ASC 820) 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.
It
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 inputs 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 asset’s or liability’s 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. The Company’s
cash, cash equivalents and short-term investments 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
|
7.
|
Recent
Accounting Pronouncements
|
In April
2009, additional guidance was issued by the FASB under the codification topic
“Financial Instruments”
(ASC 825) and “Interim
Reporting” (ASC 270). These topics extend the disclosure
earlier requirements under FASB codification topic “Financial Instruments” (ASC
825) to interim period financial statements, in addition to the existing
requirements for annual periods. It reiterates the requirement to
disclose the methods and significant assumptions used to estimate fair value.
These topics were effective for the Company’s interim and annual periods
commencing with its June 30, 2009 financial statements and have been applied on
a prospective basis. They did not have a material impact on the Company’s
financial statements.
In
January 2010, the FASB issued “Improving Disclosures about Fair
Value Measurements”, (ASC 820) which provides
additional guidance relating to fair value measurement disclosures.
Specifically, companies will be required to separately disclose significant
transfers into and out of Level 1 and Level 2 measurements in the fair
value hierarchy and the reasons for those transfers. For Level 3 fair value
measurements, the new guidance requires a gross presentation of activities
within the Level 3 roll forward. Additionally, the FASB also
clarified existing fair value measurement disclosure requirements relating to
the level of disaggregation, inputs, and valuation techniques. This ASU is
effective for interim or annual reporting periods beginning after December 15,
2009, except for the detailed Level 3 disclosures, which are effective for
interim or annual reporting periods beginning after December 15, 2010. Since ASU
820 only affects disclosure requirements, the adoption of these provisions will
have no impact on our financial condition, results of operations, or cash
flows.
|
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 Company’s results of operations
or financial condition.
|
9.
|
Subsequent
Event - Dividends
|
On May
11, 2010, the Company declared a quarterly dividend of $0.12 per share for a
total of $624 thousand, which will be paid on June 18, 2010 to shareholders of
record on June 7, 2010.
11
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, 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 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 the expansion of the Company’s sales and marketing team, employee hiring
practices of the Company’s principal customers, 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), 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 is the world’s
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
Company’s 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 first quarter of 2010 was $4.5 million, an increase of 9% from first
quarter 2009 revenue of $4.1 million. The Company reported net income of $0.10
and $0.01 per diluted share for the three months ended March 31, 2010 and 2009,
respectively. At March 31, 2010, the Company had $5.2 million of
cash, cash equivalents and short-term investments. The Company
distributed $624 thousand or $0.12 per share of cash dividends to its
shareholders in the three months ended March 31, 2010. Through March
31, 2010 the Company has paid fifty-four consecutive quarterly cash
dividends.
12
RESULTS OF
OPERATIONS
Revenue was $4.5 million for
three months ended March 31, 2010 compared to revenue of $4.1 million for the
three months ended March 31, 2009, representing an increase of 9%. The increase
was a result of an increase in testing volume from new and existing clients of
8%, while the average revenue per sample increased 1% during the same
period.
Gross profit increased
$462,000 to $2.6 million for the three months ended March 31, 2010, compared to
$2.1 million for the three months ended March 31, 2009. Cost of
revenues fell by $76 thousand or 4% for the three months ended March 31, 2010
compared to the same period in 2009, mainly due to decreased labor and
associated costs. The gross profit margin increased to 57% for the three months
ended March 31, 2010 compared to 51% for the comparable period of
2009.
General and administrative
(“G&A”) expenses were $972,000 and $1,042,000 for the three months
ended March 31, 2010 and 2009. As a percentage of revenue, G&A
expenses were 22% and 26% for the three months ended March 31, 2010 and 2009,
respectively.
Marketing and selling
expenses were $624,000 for the three months ended March 31, 2010 as
compared to $871,000 for the three months ended March 31, 2009, a decrease of
28%. Total marketing and selling expenses represented 14% and 21% of
revenue for the three months ended March 31, 2010 and 2009,
respectively. The decrease in marketing and selling expenses was due
to lower staffing levels and related expenses. It is expected that
there will be an increase in this expense associated with the appointment of the
new Vice President of Sales in April, 2010.
Research and development
(“R&D”) expenses for the three months
ended March 31, 2010 were $122,000, compared to $125,000 for the comparable
period of 2009, a decrease of 2%. R&D expenses represented 3% of
revenue in both the first quarter 2010 and 2009.
Interest income for the three
months ended March 31, 2009 of $8,000 decreased by $7,000 when compared to the
same period of 2009 in which interest income was $15,000. Interest
income represented interest and dividends 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 March 31, 2010.
Provision for income taxes
During the three months ended March 31, 2010, the Company recorded a tax
provision of $338,000. During the three months ended March 31, 2009,
the Company recorded a tax provision of $30,000. These provisions
represented effective tax rates of 40% and 44%, respectively, for the both
periods ended March 31, 2010 and 2009.
LIQUIDITY AND CAPITAL
RESOURCES
At March
31, 2010, the Company had approximately $5.2 million of cash, cash equivalents
and short-term investments. The Company's operating activities
provided net cash of $167,000 for the three months ended March 31, 2010. Cash
used in investing activities included a small amount of equipment and leasehold
improvements which were purchased during the first three months of
2010. The Company also used approximately $1.0 million in the
purchase of a certificate of deposit which had a maturity of over 90 days.
Investing activities used $1.2 million in the three month period while financing
activities used a net amount of $624,000 during the period.
13
Cash
provided by operating activities of $167,000 reflected net income of $506,000
adjusted for depreciation and amortization of $64,000, stock based compensation
of $94,000 and an increase in accounts payable of $102,000 offset by an increase
in receivables of $200,000, an increase in prepaid expenses and other current
assets (primarily insurance) of $219,000, a decrease in accrued income taxes of
$127,000 and an increase in deferred tax assets of $38,000.
During
the three months ended March 31, 2010, the Company distributed $624,000 in cash
dividends to its shareholders. The Company repurchased no treasury
shares in the first quarter 2010 but did purchase 17,219 shares for treasury
during the three months ended March 31, 2009 for $79,000. In March
2008, the Board of Directors of the Company authorized, under a new repurchase
program, 250,000 shares for repurchase of which 47,077 shares have been
repurchased since March 2008. In total, 664,523 shares have been
repurchased under the current and all prior stock repurchase
programs.
Contractual
obligations as of March 31, 2010 were as follows:
|
Less Than
One Year
|
1-3
Years
|
4-5
years
|
After 5
Years
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Operating
leases
|
$ | 507 | $ | 678 | $ | 131 | $ | - | $ | 1,316 | ||||||||||
|
Purchase
commitments
|
353 | - | - | - | 353 | |||||||||||||||
| $ | 860 | $ | 678 | $ | 131 | $ | - | $ | 1,669 | |||||||||||
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 $118,000 for the three months ended
March 31, 2010 as compared to $145,000 for the comparable period of
2009. The Company expects to purchase approximately $353,000 for the
remainder of 2010. 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 Company’s 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 March
31, 2010, the Company's principal sources of liquidity included an aggregate of
approximately $5.2 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 Company's results of operations and capital
needs, the Company may use various financing sources to raise additional funds,
although the Company does not have any such plans at this time. At
March 31, 2010, the Company had no long-term debt.
14
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 Company’s 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 “Revenue Arrangements with Multiple
Deliverables” (ASC 605). In accordance with EITF 00-21, 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 $6 thousand and $35 thousand of
revenue in the results of operations for the three months ended March 31, 2010
and 2009, respectively, related to test kits that were sold for which the
Company’s 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.
15
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based on management's 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 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 management’s 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 topic “Accounting for Uncertainty in Income
Taxes” (ASC 740). ASC 740 contains a two-step approach to
recognizing and measuring uncertain tax positions (tax contingencies) accounted
for in accordance with SFAS No. 109. 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 March 31, 2010 or December 31, 2009. The
Company does not expect the unrecognized tax benefits to change significantly
over the next twelve months.
The above
listing is not intended to be a comprehensive list of all of the Company’s
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 management’s judgment in their
application. There are also areas in which management’s judgment in selecting
any available alternative would not produce a materially different
result.
16
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate
Sensitivity. The Company maintains cash, cash equivalents and
short-term investments which consist of cash 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.
Item
4. 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 Company’s
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and
Controller concluded that the Company’s disclosure controls and procedures were
effective for ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and disclosed within the time periods
specified in the SEC’s rules and forms, and that its disclosure controls and
procedures were also effective to ensure that information required to be
disclosed in the reports that it files or submits under the Exchange Act is
accumulated and communicated to management, including the Company’s principal
executive and principal financial officers, to allow timely decisions regarding
required disclosure.. There were no significant changes in the
Company’s 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.
17
PART
II OTHER INFORMATION
Item
1A. Risk Factors
There
have been no material changes in our risk factors from those disclosed in our
2009 Annual Report on Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
6. Exhibits
See
Exhibit Index included in this Report
18
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Psychemedics
Corporation
|
|||
|
Date: May
14, 2010
|
By:
|
/s/
|
Raymond C. Kubacki, Jr.
|
|
Raymond
C. Kubacki, Jr.
|
|||
|
Chairman
and Chief Executive Officer
|
|||
|
(principal
executive officer)
|
|||
|
Date: May
14, 2010
|
By:
|
/s/
|
Raymond J. Ruddy
|
|
Raymond
J. Ruddy
|
|||
|
Vice
President and Controller
|
|||
|
(principal
accounting officer)
|
19
PSYCHEMEDICS
CORPORATION
FORM
10-Q
March
31, 2010
EXHIBIT
INDEX
|
Page No.
|
||||
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
21
|
||
|
31.2
|
Certification
of Principal Accounting Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
22
|
||
|
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
|
23
|
||
|
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
|
|
24
|
20