PSYCHEMEDICS CORP - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended March 31, 2017

or

Commission file number: 1-13738

PSYCHEMEDICS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

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

The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at April 25, 2017 was 5,460,220.

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017

INDEX

PSYCHEMEDICS CORPORATION

CONDENSED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

See accompanying notes to condensed financial statements

PSYCHEMEDICS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(UNAUDITED)

See accompanying notes to condensed financial statements

PSYCHEMEDICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

See accompanying notes to condensed financial statements

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(dollar and share amounts (except per share) in thousands, unless otherwise indicated)

(UNAUDITED)

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 (“10-K”) for the year ended December 31, 2016, filed on March 7, 2017. 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, 2017 may not be indicative of the results that may be expected for the year ending December 31, 2017, or any other period.

The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents consisted exclusively of cash in the bank as of December 31, 2016 and March 31, 2017.

The Company’s 2006 Incentive Plan (“the Plan”) provides for cash based awards or the grant or issuance of stock-based awards including; options, restricted stock or stock unit awards (SUA’s). As of March 31, 2017, 307 thousand shares remained available for future grant under the Plan.

A summary of the Company’s stock option activity for the three months ended March 31, 2017 is as follows:

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(dollar and share amounts (except per share) in thousands, unless otherwise indicated)

(UNAUDITED)

A summary of the Company’s stock unit award activity for the three months ended March 31, 2017 is as follows:

As of March 31, 2017, a total of 541 thousand shares of common stock were reserved for issuance under the Plan. As of March 31, 2017, the unamortized fair value of awards relating to outstanding SUAs and options was $819 thousand, which is expected to be amortized over a weighted average period of 2.4 years.

Basic net income/(loss) per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted net income/(loss) per share is computed by dividing net income or loss 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 was determined in accordance with the treasury-stock method. Common equivalent shares consisted of common stock issuable upon the exercise of outstanding options and common stock issuable upon the vesting of outstanding, unvested SUAs. Basic and diluted weighted average common shares outstanding for the three months ended March 31, 2017 are as follows:

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(dollar and share amounts (except per share) in thousands, unless otherwise indicated)

(UNAUDITED)

Options outstanding to purchase common stock were excluded from the computation of diluted net loss per share for the three months ended March 31, 2016 because the effect of including such shares would have been anti-dilutive for the period. There were no anti-dilutive shares for the three months ended March 31, 2017.

The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, which are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.

On April 25, 2017, the Company declared a quarterly dividend of $0.15 per share for a total of $819 thousand, which will be paid on May 18, 2017 to shareholders of record on May 8, 2017.

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business including, without limitations, the legal matters discussed in the 10K. We continue to believe these lawsuits are without merit and we intend to vigorously defend them. While the ultimate outcome of individual legal claims is inherently unpredictable, we believe that the final resolution of these actions will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

On March 20, 2014, the Company entered into an equipment financing arrangement (“Loan Agreement”) with Banc of America Leasing & Capital, LLC, which it amended on September 15, 2015. The terms of this arrangement are detailed in the 10-K.

The weighted average interest rate for all notes related to the Loan Agreement for the quarter ended March 31, 2017 was 2.76%, and represented $22 thousand of interest expense as compared to a rate of 2.41% and interest expense of $35 thousand for the comparable period in 2016. As of March 31, 2017, the interest rate was 2.93% and there was $3.1 million of outstanding debt related to the loan. The Company was in compliance with all loan covenants as of March 31, 2017.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(dollar and share amounts (except per share) in thousands, unless otherwise indicated)

(UNAUDITED)

The annual principal repayment requirements for debt obligations as of March 31, 2017 were as follows:

The Company had one customer that exceeded 10% of revenue for the three months ended March 31, 2017. There were no customers that exceeded 10% of revenue for the same periods in 2016. The Company had one customer that accounted for 34% of the total accounts receivable balance as of December 31, 2016. There were no customers who exceeded 10% of the accounts receivable balance as of March 31, 2017.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(dollar and share amounts (except per share) in thousands, unless otherwise indicated)

(UNAUDITED)

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The new standard will become effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard’s implementation date, as amended by ASU 2015-14, is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have done a preliminary review of the impact of our pending adoption of ASU 2014-09 on our financial statements and have determined the implementation of this standard should not have a material impact on the financial statements. The Company intends to adopt the standard at the date required for public companies.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including, but not limited to, the Company's expectations regarding earnings, earnings per share, revenues, operating cash flows, profitability, margins, pricing, dividends, future business, growth opportunities, new accounts, customer base, test volume, sales and marketing strategy, business strategy, general and administrative expenses, marketing and selling expenses, research and development expenses, anticipated operating results, foreign drug testing laws and regulations and the enforcement of such laws and regulations, including effective dates of such laws and regulations, required investments in plant, property and equipment, strategies with respect to governmental agencies and regulations, cost savings, capital expenditures, liquidity of investments and anticipated cash requirements) may be "forward-looking" statements. The Company's actual results may differ from those stated in any "forward-looking" statements. Factors that may cause such differences include, but are not limited to, risks associated with employee hiring practices of the Company’s principal customers, development of markets for new products and services offered by the Company, costs associated with capacity expansion, government regulation (including, but not limited to, Food and Drug Administration regulations and foreign government regulation including Brazilian commercial drivers license drug test laws and regulations), risks associated with the delay in the implementation of new regulations, currency risks, R&D spending, competition (including, without limitation, competition from other companies pursuing the same growth opportunities), the Company’s ability to maintain its reputation and brand image, the ability of the Company to achieve its business plans, cost controls, leveraging of its global operating platform, risks of information technology system failures and data security breaches, the uncertain global economy, the Company’s ability to attract, develop and retain executives and other qualified employees and independent contractors, including distributors, the Company’s ability to obtain and protect intellectual property rights, litigation risks, and general economic conditions. With respect to the continued payment of cash dividends, factors include, but are not limited to, available surplus, cash flow, capital expenditure reserves required, debt service obligations, and other factors that the Board of Directors of the Company may take into account.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent the Company’s estimates and assumptions only as of the filing date of this Report. The Company expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the filing date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as well as the risks and uncertainties discussed elsewhere in this Report. The Company qualifies all of its forward-looking statements by these cautionary statements. The Company cautions you that these risks are not exhaustive. The Company operates in a continually changing business environment and new risks emerge from time to time.

OVERVIEW

Revenues for the first quarter of 2017 were $10.2 million, an increase of 53% from first quarter 2016 revenue of $6.7 million. The Company reported net income of $1.5 million, or $0.27 per diluted share for the three months ended March 31, 2017, compared to a near break-even level (loss of $23 thousand) for the same period in 2016. The increase in revenue and earnings was primarily the result of higher volume from the Brazil drivers market. The Brazil drivers opportunity started in March 2016. The Company had $6.9 million of cash as of March 31, 2017 and $3.1 million of long term debt. The Company distributed $819 thousand or $0.15 per share of cash dividends to its shareholders in the three months ended March 31, 2017. The Company has paid 82 consecutive quarterly cash dividends.

RESULTS OF OPERATIONS

Revenues were $10.2 million for three months ended March 31, 2017 compared to revenues of $6.7 million for the three months ended March 31, 2016, representing an increase of 53%. The increase in revenues for the three months ended March 31, 2017 was primarily from an increase in sales from Brazil professional drivers market.

Gross profit was $5.3 million for the three months ended March 31, 2017, representing a margin of 52%, compared to $2.7 million and a margin of 41%, for the same period in 2016, representing a gross profit increase of 94%. Direct costs increased by $964 thousand or 25% for the three months ended March 31, 2017 compared to the same period in 2016, mainly due to increased volume. In addition, 2016 results reflected capacity expansion and ramp up costs, which adversely impacted margins.

General and administrative (“G&A”) expenses were $1.5 million for the three months ended March 31, 2017 compared to $1.3 million for the same period in 2016. As a percentage of revenue, G&A expenses were 14% for the three months ended March 31, 2017, compared to 19% for the same period in 2016.

Marketing and selling expenses were $1.2 million for the three months ended March 31, 2017, compared to $1.1 million for the same period in 2016. Marketing and selling expenses represented 12% of revenue for the three months ended March 31, 2017, compared to 17% for the same period in 2016.

Research and development (“R&D”) expenses for the three months ended March 31, 2017 were $330 thousand compared to $360 thousand for the comparable period of 2016, a decrease of 8%. R&D expenses represented 3% and 5% of revenue for the three months ended March 31, 2017 and 2016, respectively.

Provision for income taxes During the three months ended March 31, 2017 the Company recorded a tax provision of $746 thousand, representing an effective tax rate or 33%. During the three months ended March 31, 2016, the Company recorded a tax benefit of $13 thousand, representing an effective tax rate of 36%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2017, the Company had approximately $6.9 million of cash. The Company's operating activities generated net cash of $4.4 million for the three months ended March 31, 2017. Investing activities used $365 thousand of cash while financing activities used $1.1 million of cash during the first three months of 2017.

Cash provided by operating activities of $4.4 million reflected net income of $1.5 million adjusted for depreciation and amortization of $686 thousand, stock-based compensation of $163 thousand and a decrease of deferred income taxes of $55 thousand. This was affected by the following changes in assets and liabilities: a decrease in accounts receivable of $2.1 million, an increase in prepaid expenses, other current assets and income tax receivable of $92 thousand, a decrease in accounts payable of $752 thousand and an increase in accrued expenses of $901 thousand.

Cash used in investing activities included purchases of equipment and leasehold improvements of $152 thousand and internally capitalized software of $210 thousand. We anticipate spending $0.5 million to $1.0 million in additional capital purchases for the remainder of 2017.

Cash used by financing activities of $1.1 million included cash dividends to shareholders of $819 thousand and $286 thousand from payments on long term debt. On April 25, 2017, the Company declared a quarterly dividend of $0.15 per share for an estimated total of $819 thousand, which will be paid on May 18, 2017 to shareholders of record on May 8, 2017.

Contractual obligations and other commercial commitments as of March 31, 2017 were as follows:

At March 31, 2017, the Company's principal sources of liquidity included an aggregate of approximately $6.9 million of cash.  The Company had $7.2 million and $6.4 million of working capital as of March 31, 2017 and December 31, 2016, respectively. Management currently believes that such funds, together with cash generated from operations, should be adequate to fund anticipated working capital and capital equipment requirements for the next 12 months.   Depending upon the Company's results of operations and capital needs, the Company may use various financing sources to raise additional funds. 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity. The long-term debt agreement entered into in March 2014 and amended in September 2015, is subject to the 30 day Libor rate, which changes the Company’s interest rate on a monthly basis. The Company does not expect any changes in this rate to materially affect the Company’s performance.

Based on our ability to access our cash and cash equivalents, our expected operating cash flows and our other sources of cash; we do not anticipate that any lack of liquidity will materially affect our ability to operate our business.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company’s management under the supervision and with the participation of, the Company’s Chief Executive Officer and Vice President – Finance, 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-15. Based upon that evaluation, the Chief Executive Officer and Vice President - Finance 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 reported within the time periods specified in the SEC’s rules and forms, and that its disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

There has been no significant change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2016 Annual Report on Form 10-K.

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

There were no purchases of treasury stock in the first three months of 2017.

Item 6. Exhibits

See Exhibit Index included in this Report

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PSYCHEMEDICS CORPORATION

FORM 10-Q

March 31, 2017

EXHIBIT INDEX