UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
or
| | Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
| for the transition period from _________ to __________ |
Commission file number:
PSYCHEMEDICS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) | ||
| (Address of Principal Executive Offices) | (Zip Code) | |
| Registrant's telephone number including area code: ( |
Securities registered pursuant to section 12(b) of the act:
| Title of Class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
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.
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).
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 Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | |
| Accelerated filer | ☐ | |
| | ☒ | |
| Smaller reporting company | | |
| Emerging growth company | |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of Common Stock of the Registrant, par value $0.005 per share, outstanding at November 9, 2022 was
PSYCHEMEDICS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
INDEX
| Page |
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| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 1 - Legal Proceedings | 22 | |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ at September 30, 2022, and $ at December 31, 2021 | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income tax receivable | ||||||||
| Total Current Assets | ||||||||
| Fixed assets, net of accumulated amortization and depreciation of $ at September 30, 2022, and $ at December 31, 2021 | ||||||||
| Other assets | ||||||||
| Net deferred tax assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long-term debt | ||||||||
| Long-term portion of operating lease liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 5) | ||||||||
| Shareholders' Equity: | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued or outstanding | ||||||||
| Common stock, $ par value; shares authorized, shares and shares issued at September 30, 2022, and December 31, 2021, respectively, and shares outstanding and shares outstanding at September 30, 2022, and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Less - Treasury stock, at cost, shares | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General & administrative | ||||||||||||||||
| Marketing & selling | ||||||||||||||||
| Research & development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ||||||||||||
| Other (expense) income: | ||||||||||||||||
| Gain on forgiveness of PPP loan | ||||||||||||||||
| Settlement | ( | ) | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (expense) income | ( | ) | ||||||||||||||
| (Loss) income before (benefit from) provision for income taxes | ( | ) | ( | ) | ||||||||||||
| (Benefit from) provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic net (loss) income per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted net (loss) income per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Dividends declared per share | $ | $ | $ | $ | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
(UNAUDITED)
| For the Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Common Stock, $0.005 par value | Additional | |||||||||||||||||||||||||||||||
| Common Shares | Common | Paid-In | Treasury Stock | Accumulated | Accumulated Other | |||||||||||||||||||||||||||
| Outstanding | Stock | Capital | Shares | Cost | Deficit | Comprehensive Loss | Total | |||||||||||||||||||||||||
| BALANCE, June 30, 2022 | $ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
| Shares issued – vested | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation expense | - | - | - | |||||||||||||||||||||||||||||
| Cash dividends ($ per share) | - | - | ) | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | ) | ) | ||||||||||||||||||||||||||||
| BALANCE, September 30, 2022 | $ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
| For the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Common Stock, $0.005 par value | Additional | |||||||||||||||||||||||||||||||
| Common Shares | Common | Paid-In | Treasury Stock | Accumulated | Accumulated Other | |||||||||||||||||||||||||||
| Outstanding | Stock | Capital | Shares | Cost | Deficit | Comprehensive Loss | Total | |||||||||||||||||||||||||
| BALANCE, December 31, 2021 | $ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||
| Shares issued – vested | ( | ) | ||||||||||||||||||||||||||||||
| Tax withholding related to vested shares from employee stock plans | - | ) | - | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||||||
| Cash dividends ($per share) | - | - | ) | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | ) | ) | ||||||||||||||||||||||||||||
| BALANCE, September 30, 2022 | $ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
| For the Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Common Stock, $0.005 par value | Additional | |||||||||||||||||||||||||||||||
| Common Shares | Common | Paid-In | Treasury Stock | Accumulated | Accumulated Other | |||||||||||||||||||||||||||
| Outstanding | Stock | Capital | Shares | Cost | Deficit | Comprehensive Loss | Total | |||||||||||||||||||||||||
| BALANCE, June 30, 2021 | $ | $ | $ | ) | $ | ) | $ | ) | ||||||||||||||||||||||||
| Shares issued – vested | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||||||
| Tax withholding related to vested shares from employee stock plans | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| BALANCE, September 30, 2021 | $ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
| For the Nine Months Ended September 30, 2021 |
||||||||||||||||||||||||||||||||
| Common Stock, $0.005 par value |
Additional |
|||||||||||||||||||||||||||||||
| Common Shares |
Common |
Paid-In |
Treasury Stock |
Accumulated |
Accumulated Other |
|||||||||||||||||||||||||||
| Outstanding |
Stock |
Capital |
Shares |
Cost |
Deficit |
Comprehensive Loss |
Total |
|||||||||||||||||||||||||
| BALANCE, December 31, 2020 |
$ | $ | $ | ) | $ | ) | $ | ) | ||||||||||||||||||||||||
| Shares issued – vested |
- | - | - | - | - | |||||||||||||||||||||||||||
| Stock compensation expense |
- | - | ||||||||||||||||||||||||||||||
| Tax withholding related to vested shares from employee stock plans |
- | ( |
) | - | ( 5 | ) | ||||||||||||||||||||||||||
| Net income |
- | - | ||||||||||||||||||||||||||||||
| BALANCE, September 30, 2021 |
$ | $ | $ | ) | $ | ) | $ | ) | $ | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ) | $ | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| ROU asset amortization | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Income tax receivable | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Accrued expenses | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of equipment and leasehold improvements | ( | ) | ( | ) | ||||
| Cost of internally developed software | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of stock | ||||||||
| Employee payroll tax withholding on stock issued under the stock-based compensation plans | ( | ) | ( | ) | ||||
| Payments of equipment financing | ( | ) | ( | ) | ||||
| Cash dividends paid | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for operating leases | $ | $ | ||||||
| Right-of-use assets acquired through operating leases | $ | $ |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | Basis of Presentation |
The interim condensed consolidated financial statements of Psychemedics Corporation (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company's 2021 Annual Report on Form 10-K (“10-K”), as filed with the SEC.
The condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, the condensed consolidated statements of shareholders’ equity for the three and nine months ended September 30, 2022, and 2021, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022, and 2021 are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2021, has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes required for complete annual financial statements. The Company’s comprehensive income (loss) is equal to its net income (loss) for all periods presented.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates 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. The results of operations for the three and nine months ended September 30, 2022, may not be indicative of the results that may be expected for the year ending December 31, 2022, or any other period.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to Psychemedics Corporation and its wholly-owned consolidated subsidiaries.
| 2. | Effects of COVID-19 Pandemic and Government Response |
The outbreak of coronavirus (“COVID-19”) which was declared by the World Health Organization to be a pandemic, has impacted, and is expected to continue to impact worldwide economic activity. COVID-19 has had a significant impact on our entire operations. COVID-19’s effect on the overall economy has had an adverse impact on hiring, which has had a negative impact on our testing volume.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 2. | COVID-19 Pandemic and Government Response (continued) |
|
The Coronavirus Aid, Relieve and Economic Security Act (“CARES”) Act, enacted on March 27, 2020, and the Families First Coronavirus Response Act, in each case modified by the Consolidated Appropriations Act enacted in December 2020, were emergency economic stimulus packages that included spending provisions and tax cuts to strengthen the United States economy and to fund a nationwide effort to curtail the effect of COVID-19. One of the principal features of the CARES Act and subsequent legislation was the adoption of the Paycheck Protection Program (“PPP”). The CARES Act, together with subsequent legislation, also provided sweeping tax changes in response to the COVID-19 pandemic, including amendments to certain provisions of the previously enacted Tax Cuts and Jobs Act, and a refundable employee retention tax credit that expired on September 30, 2021. The Company had recognized a benefit of $
Liquidity and Management’s Plans
At September 30, 2022, the Company’s principal sources of liquidity included $
Accounts Receivable
The Company believes its allowance for credit losses related to its accounts receivable remained adequate as of September 30, 2022, due to the essential nature of its customers business, as well as the diversity of its large customer base. While the Company anticipates there could be an increase in the aging of its accounts receivable, the Company does not anticipate a significant increase in default risk.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Stock-Based Compensation |
The Company’s 2006 Incentive Plan (“the Plan”) provides for cash-based awards or the grant or issuance of stock-based awards. As of September 30, 2022,
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The compensation cost charged against income is included in cost of revenues and operating expenses as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Stock-based compensation related to: | ||||||||||||||||
| Stock option grants | $ | $ | $ | $ | ||||||||||||
| Stock unit awards | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
There was no income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation arrangements for the three and nine months ended September 30, 2022, and 2021.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Stock-Based Compensation (continued) |
|
A summary of the Company’s stock option activity for the nine months ended September 30, 2022, is as follows (in thousands except per share amounts and years):
| Weighted | Weighted Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise Price | Contractual Life | Intrinsic | |||||||||||||
| Shares | Per Share | (years) | Value(1) | |||||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ) | $ | ||||||||||||||
| Forfeited | ) | $ | ||||||||||||||
| Outstanding, September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2022 | $ | $ | ||||||||||||||
| (1) | Intrinsic value is calculated based on the amount by which the closing market value of the Company’s stock exceeded the exercise price of the underlying options, multiplied by the number of shares. |
A summary of the Company’s stock unit award (“SUA”) activity for the nine months ended September 30, 2022, is as follows (in thousands except per share amounts):
| Number of Shares | Weighted Average Grant-Date Fair Value Per Share | |||||||
| Outstanding & Unvested, December 31, 2022 | $ | |||||||
| Granted | $ | |||||||
| Converted to common stock | ( | ) | $ | |||||
| Cancelled | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Outstanding & Unvested, September 30, 2022 | $ | |||||||
As of September 30, 2022,
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Stock-Based Compensation (continued) |
|
The Board of Directors approved the accelerated vesting of
| 4. | Basic and Diluted Net Income (Loss) Per Share |
Basic net income (loss) per share is computed by dividing net income (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 (loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period when the effect is dilutive. 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 and nine months ended September 30, 2022, and 2021 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Weighted average common shares outstanding, basic | ||||||||||||||||
| Dilutive common equivalent shares | ||||||||||||||||
| Weighted average common shares outstanding, diluted | ||||||||||||||||
The computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2022, and 2021 excludes the effect of the potential exercise of stock awards, including stock options, when the effect is anti-dilutive. For the three and nine months ended September 30, 2022, the number of antidilutive stock awards excluded from diluted earnings per share were
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 5. | Commitments and Contingencies |
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Although it is difficult to predict the ultimate outcome of these cases, management believes, that any ultimate liability would not have a material adverse effect on the consolidated statements of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on the statements of operations or cash flows in the period in which it is recorded. Developments in legal proceedings and other matters that could cause changes in the amounts previously accrued are evaluated each reporting period.
Settlements
As previously reported in the 10-K, on December 6, 2021, the Company entered into a binding Memorandum of Understanding (the “MOU”) to settle a purported class action lawsuit against it related to certain California wage and hour laws. The lawsuit, Enma Sagastume v. Psychemedics Corporation, Case No. 2:20-CV-06624-DSF, is pending in the United States District Court for the Central District of California (the “California Lawsuit”) and is similar to numerous lawsuits filed against employers with operations in California.
In the binding MOU, the parties agreed to settle this matter for a payment by the Company of $
Although the Company believes that the allegations in the California Lawsuit lack merit, it agreed at a mediation to enter into the binding MOU to settle the claims in the California Lawsuit in order to avoid potentially significant legal fees, other expenses, and management time that would have to be devoted to protracted litigation in California regarding its wage and hour laws. The foregoing was also impacted in part by new California case law in February 2021 regarding meal period compliance. The allegations in the California Lawsuit relate to alleged discrepancies in compliance with meal and rest periods required by California law and other alleged compliance discrepancies relating to the California wage and hour laws with respect to non-exempt hourly employees of the Company in California for a period from June 9, 2017 through present. The California Lawsuit sought recovery of wages, penalties, interest, attorneys’ fees and other alleged damages. As part of the settlement, the Company continues to deny any liability or wrongdoing with respect to the claims made in the California Lawsuit.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 5. | Commitments and Contingencies (continued) |
|
The MOU assumes class certification for purposes of the settlement only. The settlement amount of $1.2 million, which includes plaintiff attorneys' fees and costs, is subject to potential increase based on any adjustments in the final class size and the exact period to be covered, as determined by the court’s final approval. However, the Company believes that such adjustments, if any, would likely be immaterial. Once court approved, in exchange for the settlement payment, the plaintiff and all class members who do not opt out of the settlement will provide a broad release of any liability relating to the subject matter of the California Lawsuit, including any claims of such persons under California’s Private Attorneys' General Act of 2004. Such release is for the benefit of the Company, its affiliates, and any successor to the Company. The Company has the right to revoke the settlement prior to court approval in the event opt-outs, if any, from the class membership exceed a specified level. While the settlement is subject to final court approval as is customary, the MOU expressly provides that it is binding on and enforceable by each of the parties thereto, including by any successor to the Company. There is a $
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 6. | Operating Leases |
The Company has five operating leases for office and laboratory space used to conduct business. The exercise of lease renewal options is at our discretion. There is one lease which contains renewal options to extend the lease terms included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the lease commencement date in determining the net present value of the lease payments.
As of September 30, 2022, the Company recognized an ROU asset of $
Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of September 30, 2022, is as follows (in thousands):
| October 1, 2022, through December 31, 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total Lease Payments | |||||
| Less: Interest expense | ( | ) | |||
| Present value of lease liabilities | $ | ||||
| Current operating lease liabilities | $ | ||||
| Long-term operating lease liabilities | |||||
| $ |
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 7. | Debt and Other Financing Arrangements |
On March 20, 2014, the Company entered into an equipment financing arrangement (“Loan Agreement”) with Banc of America Leasing & Capital, which it amended on August 8, 2014, September 15, 2015, October 30, 2017, and December 2, 2019. The terms of the arrangement are detailed in the 10-K.
The weighted average interest rate on outstanding debt under the Loan Agreement for the three and nine months ended September 30, 2022, was
The annual principal repayment requirements for debt obligations as of September 30, 2022, were as follows (in thousands):
| October 1, 2022, through December 31, 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| Long-term debt from equipment financing | |||||
| Less: current portion of long-term debt from equipment financing | ( | ) | |||
| Long-term debt from equipment financing, net of current portion | $ |
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 8. | Revenue |
The table below disaggregates our external revenue by major source (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Testing | $ | $ | $ | $ | ||||||||||||
| Shipping/Collection (hair) | ||||||||||||||||
| Other | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
| 9. | Significant Customers |
The Company had
| 10. | Subsequent Events |
On November 9, 2022, the Company declared a cash dividend of $
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 the U.S. and foreign drug testing laws and regulations, 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, and the continued operation of our testing facilities) 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, changes in U.S. and foreign government regulations, including but not limited to FDA regulations, 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, 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.
Revenue for the third quarter of 2022 was $6.5 million compared to $6.7 million in the third quarter of 2021, a decrease of 3%. The Company reported a net loss of $0.1 million, or ($0.02) per diluted share for the three months ended September 30, 2022, versus net income of $0.7 million, or $0.13 per diluted share for the same period in 2021. Revenue decrease for the quarter was attributed to a decrease in domestic testing volumes. The earnings decrease was primarily attributed to the absence of the refundable employee retention tax credit for the third quarter of 2022. The refundable employee retention tax credit program under the CARES Act was terminated at the end of the third calendar quarter of 2021. Accordingly, the Company recorded zero and $1.0 million of employee retention tax credits during the three months ended September 30, 2022, and 2021, respectively, which is included in cost of revenues and operating expenses in the accompanying consolidated statements of operations. Revenue for the nine months ended September 30, 2022, and 2021, was $19.5 million and $18.5 million, respectively, an increase of 5%. The Company reported a net loss of $0.4 million for the nine months ended September 30, 2022, versus net income of $1.0 million for the nine months ended September 30, 2021. The Company recorded zero and $2.6 million of employee retention tax credits during the nine months ended September 30, 2022, and 2021, respectively, which is included in cost of revenues and operating expenses in the accompanying consolidated statements of operations. The Company paid $0.14 per share of cash dividends to its shareholders in the nine months ended September 30, 2022, compared to no cash dividends paid for the same period in 2021.
As the Company disclosed in the 10-K and in its Quarterly Report on Form 10-Q for the first quarter of 2022, the Company’s Board of Directors authorized the Company to explore shareholder enhancement opportunities, including strategic alternatives, such as the potential sale or merger of the Company, capitalization optimization and dividend strategies. The Company continues to explore such opportunities. There can be no assurances that the shareholder enhancement review process will result in a transaction or other strategic change or outcome. The Company has not set a timetable for the conclusion of its review of strategic alternatives, and it does not intend to comment further unless and until the Board has approved a specific course of action or the Company has otherwise determined that further disclosure is appropriate or required by law. The Company’s Board of Directors has designated a subcommittee of the Board to review shareholder enhancement opportunities. The Company has retained investment banking firms and corporate transaction legal advisors in connection with its exploration of shareholder enhancement opportunities.
Revenue decreased 3% for the three months ended September 30, 2022, compared to the same period in 2021, primarily due to a 46% or $0.2 million decrease in international revenues. For the nine months ended September 2022, revenue increased $1.1 million or 5%, primarily due to an increase in domestic volumes and revenues. The Company’s domestic revenues increase was primarily due to the continued recovery from the impact of the COVID-19 pandemic. While the Company’s domestic base business has continued to recover from the impact of the COVID-19 pandemic, business was negatively impacted by the continued labor shortage affecting our customers.
Gross profit: The Company had a $2.3 million gross profit for the three months ended September 30, 2022, compared to a $3.1 million gross profit for the same period in 2021. Cost of revenues increased by $0.6 million or 16% for the three months ended September 30, 2022, compared to the same period in 2021. Gross profit for the nine months ended September 30, 2022, was $7.1 million, a decrease of $1.0 million from the comparable period in 2021. Cost of revenues increased by $2.1 million or 20% for the nine months ended September 30, 2022, when compared to the same period in 2021. The gross profit margin for the nine-month period ended September 30, 2022, was 36% compared to 44% for the comparable period in 2021. The decrease in gross profit was primarily due to the absence of the refundable employee retention tax credit present in all three quarters of 2021 offset in part by higher total revenues for the nine months ended September 30, 2022.
General and administrative (“G&A”) expenses increased 19% or $0.3 million to $1.6 million for the three months ended September 30, 2022, compared to $1.3 million for the same period in 2021. As a percentage of revenue, G&A expenses were 24% and 20% for the three months ended September 30, 2022, and 2021, respectively. The increase in G&A expenses was driven by the absence of the refundable employee retention tax credit in 2022 that was recognized in the third quarter of 2021. The increase was offset in part by lower legal fees incurred in 2022. G&A expenses were $4.4 million and $4.1 million for the nine months ended September 30, 2022, and 2021, respectively. As a percentage of revenue, G&A expenses were 22% and 22% for the nine months ended September 30, 2022, and 2021, respectively.
Marketing and selling expenses increased 21% or $0.1 million to $0.8 million for the three months ended September 30, 2022, compared to $0.7 million for the same period in 2021. Total marketing and selling expenses represented 12% and 10% of revenue for the three months ended September 30, 2022, and 2021, respectively. The increase in marketing and selling expenses was primarily driven by the absence of the refundable employee retention tax credit in 2022 that was recognized in the third quarter of 2021 and higher overall personnel costs. Marketing and selling expenses were $2.4 million and $2.0 million for the nine months ended September 30, 2022, and 2021, respectively. As a percentage of revenue, marketing and selling expenses were 12% and 11% for the nine months ended September 30, 2022, and 2021, respectively.
Research and development (“R&D”) expenses for the three months ended September 30, 2022, and 2021 were $0.3 million and $0.2 million, respectively. R&D expenses represented 5% and 4% of revenue for the three months ended September 30, 2022, and 2021, respectively. R&D expenses were $1.0 million and $0.8 million for the nine months ended September 30, 2022, and 2021, respectively. R&D expenses represented 5% and 4% of revenue for the nine months ended September 30, 2022, and 2021, respectively.
Provision for income taxes: Our provision for income taxes consisted primarily of federal and state income taxes in the United States. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended September 30, 2022, the Company recorded a tax benefit of $286 thousand (effective tax rate of 75%) and a tax provision of $186 thousand (effective tax rate of 20%) for the comparative period in 2021. During the nine months ended September 30, 2022, the Company recorded a tax benefit of $282 thousand (effective tax rate of 42%) and a tax provision of $280 thousand (effective tax rate of 23%) or the comparative period in 2021.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2022, the Company had approximately $3.5 million of cash and $4.6 million of working capital. The Company's operating activities generated net cash of $3.0 million for the nine months ended September 30, 2022. Investing activities used $0.2 million of net cash while financing activities used $1.3 million of net cash during the nine months of 2022.
Cash provided by operating activities of $3.0 million reflected net loss of $0.4 million adjusted for depreciation and amortization of $1.8 million, ROU asset amortization of $0.7 million and stock-based compensation of $0.7 million. This was also affected by a decrease in current assets of $1.0 million and an increase in accounts payable and other current liabilities of $0.6 million.
Cash used in investing activities of $0.2 million was primarily related to internally developed software. We anticipate spending less than $0.3 million in additional capital purchases for the remainder of 2022.
Cash used in financing activities of $1.3 million included cash dividends to shareholders of $0.8 million and $0.5 million from payments on equipment financing.
Contractual obligations and other commercial commitments as of September 30, 2022, include operating lease commitments and outstanding debt, described in Notes 6 and 7, respectively of the Notes to Condensed Consolidated Financial Statements.
While management currently believes that its existing funds and cash flow from operations should be adequate to fund the Company’s business for at least the next 12 months, adverse economic conditions in the United States are expected to adversely affect the Company’s operating results and cash flows. Depending upon the Company’s results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could include but are not limited to, issuance of common stock or debt financing, although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.
| 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 Assistant 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 Assistant 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.
| Legal Proceedings |
Information pertaining to legal proceedings can be found in Item 1. Financial Statements and Supplementary Data Note 5 – “Commitments and Contingencies”.
| Risk Factors |
Item 1A. of the 10-K includes a discussion of our risk factors. There have been no material changes in the risk factors described in such report.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Exhibits |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 101.INS |
Inline XBRL Instance Document |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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: |
November 10, 2022 | By: | /s/ Raymond C. Kubacki |
| Raymond C. Kubacki |
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| Chairman and Chief Executive Officer |
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| (principal executive officer) |
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| Date: |
November 10, 2022 | By: | /s/ William B. Norris |
| William B. Norris |
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| Assistant Controller |
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| (principal accounting officer) |
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