PSYCHEMEDICS CORP - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended March 31, 2021

or

Commission file number: 1-13738

PSYCHEMEDICS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

Securities registered pursuant to section 12(b) of the act:

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at May 6, 2021 was 5,536,493.

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021

INDEX

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(in thousands, except per share amounts)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

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 that involves risks and uncertainties. In particular, statements contained in this report that are not historical facts (including but not limited to statements concerning earnings, earnings per share, revenues, cash flows, dividends, future business, growth opportunities, profitability, pricing, new accounts, customer base, market share, test volume, sales and marketing strategies, market demand for drug testing services in Brazil, U.S. and foreign drug testing laws and regulations, including, without limitation, Brazilian professional driver drug testing requirements, required investments in plant, equipment and people and new test development, the effect of the COVID- 19 pandemic on our business, including its effects on our business and profitability, and on the well-being and availability of our employees, the continued operation of our testing facilities and loan forgiveness under the PPP program) may be “forward looking” statements. 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 severity of the COVID-19 pandemic, and its impact on the Company’s markets, including its impact on the Company’s customers, suppliers and employees, as well as its risk on the United States and worldwide economies, the timing, scope and effectiveness of further governmental, regulatory, fiscal monetary and public health responses to the COVID-19 pandemic, compliance by the Company with repayment forgiveness requirements under the PPP, changes in U.S. and foreign government regulations, including but not limited to FDA regulations, changes in Brazilian laws and regulations and proposed laws and regulations and the implementation of such laws and 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, general economic conditions With respect to the continued payment of cash dividends, factors include, but are not limited to, all of the factors listed above with respect to the impact of the COVID-19 pandemic on the our business generally, plus cash flows, available surplus, capital expenditure reserves required, debt service obligations, regulatory requirements 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 10-K for the year ended December 31, 2020, as well as the risks and uncertainties discussed elsewhere in this Report. The Company qualifies all of its forward-looking statements by these cautionary statements. The Company cautions you that these risks are not exhaustive. The Company operates in a continually changing business environment and new risks emerge from time to time.

OVERVIEW

Revenue for the first quarter of 2021 was $5.7 million compared to $7.5 million in 2020, a decrease of 24%. The Company reported a net income of $0.1 million, or $0.01 per diluted share for the three months ended March 31, 2021 versus net loss of $0.2 million, or ($0.03) per diluted share for the same period in 2020. Revenue decrease for the quarter were attributed to a reduction of international and domestic sales volume, primarily as a result of the coronavirus pandemic (“COVID-19”) and slower new job creation. Earnings increase was primarily driven by a refundable retention tax credit. Under the provisions of the CARES Act, we became entitled to a refundable retention tax credit against a certain amount of payroll taxes otherwise payable by us as an employer, subject to certain criteria. Accordingly, we recorded a $0.8 million employee retention tax credit during the three months ended March 31, 2021, which is included in cost of revenues and operating expenses in the statements of operations and comprehensive income/(loss).

RESULTS OF OPERATIONS

Revenue: Decreased 24% for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a 36% decrease in volume resulting from COVID-19, both domestically and internationally, offset by a 12% increase in average revenue per sample. For the same period, domestic revenues decreased $0.9 million (15%) and international revenues decreased $0.9 million (73%). The Company’s domestic revenues were impacted by the shut-down of the economy due to COVID-19, with some lesser impact in safety sensitive industries. In March 2020, we experienced a material decline in testing volumes due to COVID-19. During third quarter of 2020, we began to experience a recovery in base testing volume, which continued in the fourth quarter of 2020 and first quarter of 2021. For the first quarter of 2021, our domestic testing volume was 14% below comparable period in 2020. The international revenue decline was primarily from Brazil testing volume. The decline was expected due to the continued declining economic Brazilian market.

Gross profit: The Company had a gross profit of $2.6 million for the three months ended March 31, 2021, compared to $2.7 million for the same period in 2020. Direct costs decreased by $1.7 million or 35% for the three months ended March 31, 2021 compared to the same period in 2020. The gross profit margin for the three-month period ended March 31, 2021 was 45%, compared to 36% for the comparable period in 2020. The increase in gross profit margin was due to employee retention tax credits and lower personnel related costs offset by lower sales volume as noted above.

General and administrative (“G&A”) expenses: No change for the three months ended March 31, 2021, compared for the same period in 2020. The Company had G&A expenses of $1.5 million for three months ended March 31, 2021 and 2020, respectively. As a percentage of revenue, G&A expenses were 27% and 20% for the three months ended March 31, 2021and 2020, respectively.

Marketing and selling expenses: Decreased 42% or $0.5 million to $0.6 million for the three months ended March 31, 2021compared to $1.1 million for the same period in 2020. Total marketing and selling expenses represented 11% and 15% of revenue for the three months ended March 31, 2021and 2020, respectively. Expenses were primarily reduced from personnel and related costs (including less travel).

Research and development (“R&D”) expenses: For the three months ended March 31, 2021and 2020 were $0.3 million and $0.3 million, respectively. R&D expenses represented 5% and 4% of revenue for the three months ended March 31, 2021and 2020, respectively.

Provision for income taxes: Our provision for income taxes consisted primarily of federal and state income taxes in the United Sates. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended March 31, 2021, the Company recorded a tax provision of $20 thousand (effective tax rate of 20%). During the three months ended March 31, 2020, the Company recorded a tax benefit of $156 thousand (tax benefit rate of 50%).

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2021, the Company had approximately $2.2 million of cash and cash equivalents and $6.3 million of working capital. This includes $2.5 million of income tax receivables which the Company expects to receive by the end of the fourth quarter of 2021. The Company's operating activities used $0.4 million of cash for the three months ended March 31, 2021. Investing activities used $0.1 million of cash while financing activities used $0.2 million of cash during the three months ended March 31, 2021.

Cash used in operating activities of $0.4 million reflected net income of approximately $0.1 million adjusted for depreciation and amortization of $0.7 million, ROU asset amortization of $0.2 million and stock-based compensation of $0.2 million. This was also affected by an increase in current assets of $1.7 million and was partially offset by an increase in accounts payable, operating lease liabilities and accrued expenses of $0.05 million.

Cash used in investing activities of $0.1 million consisted primarily of costs related to internally developed software. We anticipate spending less than $1.0 million in additional capital purchases for the remainder of 2021.

Cash used in financing activities of $0.2 million consisted entirely of payments on equipment financing.

Contractual obligations and other commercial commitments as of March 31, 2021 include operating lease commitments and outstanding debt, described in Notes 6 and 7, respectively of the Notes to Condensed Consolidated Financial Statements.

At March 31, 2021, the Company's principal sources of liquidity included $6.5 million of working capital, including $2.2 million of cash on hand. There was $5.7 million of working capital as of December 31, 2020. On May 4, 2020, the Company borrowed approximately $2.2 million from Bank of America, N.A., pursuant to the PPP, established under the CARES Act. The PPP Loan is subject to forgiveness under the PPP upon the Company’s request to the extent that the proceeds are used to pay expenses permitted by the PPP.

On November 6, 2020, the Company applied for forgiveness of the entire amount due on the loan. The application and recommendation from Bank of America, N.A., has been provided to the SBA. Notwithstanding our application for loan forgiveness, we are unable to predict the actual amount of loan forgiveness the SBA will approve. The decision from the SBA is expected in second quarter of 2021. As of March 31, 2021, we had approximately $2.2 million outstanding under the PPP Loan.

While management currently believes that its existing funds and quarterly cash flow from operations should be adequate to fund the Company’s business for the next 12 months, economic conditions related to COVID-19 are expected to continue to adversely affect the Company’s operating results and cash flows. As a result, the Company has temporarily suspended its quarterly dividend in an effort to prioritize the Company’s liquidity and balance sheet.

Item 4. Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”) the Company’s management under the supervision and with the participation of the Company’s Chief Executive Officer and Vice President, Controller, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act. Based upon that evaluation, the Chief Executive Officer and Vice President, Controller concluded as of the evaluation date, 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

Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2020 includes a discussion of our risk factors. There have been no material changes in the risk factors described in such report.

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

There were no purchases of treasury stock in the first three months of 2021.

Item 6. Exhibits

SIGNATURES

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

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