UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

[X]

Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2020

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: 1-13738

 

PSYCHEMEDICS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware		58-1701987
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
289 Great Road
Acton, MA		01720
(Address of Principal Executive Offices)		(Zip Code)

 

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

 

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

 

Title of Class	Trading Symbol(s)	Name of each exchange on which registered
Common stock. $0.005 par value	PMD	The Nasdaq Stock Market, LLC.

 

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 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 X     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.

 

	Large accelerated filer	☐
	Accelerated filer	☐
	Non–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 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 8, 2020 was 5,525,880.

 

 

 

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020

 

INDEX

 

		Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income /(Loss)	4
	Condensed Consolidated Statements of Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
	Overview	16
	Results of Operations	16
	Liquidity and Capital Resources	17
Item 4 - Controls and Procedures		17
PART II - OTHER INFORMATION
Item 1A - Risk Factors		18
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 6 - Exhibits		19
Signatures		20

 

 

 

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

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

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 coronavirus / 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, 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 2020 was $7.5 million compared to $9.8 million in 2019, a decrease of 23%. The Company reported net loss of $0.2 million, or ($0.03) per diluted share for the three months ended March 31, 2020 versus net income of $0.6 million, or $0.11 per diluted share for the same period in 2019, a decrease of $0.14 per diluted share. Earnings decrease was attributed to a reduction of revenue, primarily as a result of the coronavirus which adversely affected Brazil and domestic revenue. During the quarter, the Company took steps to reduce costs, including a 14% reduction in operating expenses.

 

RESULTS OF OPERATIONS

 

Revenue decline of 23% noted above was primarily due to a 34% decrease in volume and a 11% increase in price/mix (from domestic/international mix). International revenue was down 57% compared to the prior year quarter due to decline in volume from Brazil, and continued the trend in declining quarterly revenues from Brazil experienced during 2019. Due to the coronavirus pandemic, the Brazilian government has closed all driver license bureaus and extended the renewal period for all drivers licenses including commercial transportation licenses. This created a major fall off in volume and revenues in March. We expect this trend to continue during the next 12 months. Domestic revenue was down 10% in the first quarter of 2020 compared to the prior-year quarter, due to a decline in volume during the month of March as a result of the coronavirus pandemic.

 

Gross profit was $2.7 million for the three months ended March 31, 2020, compared to $4.4 million for the same period in 2019, a decrease of $1.7 million, or 38%. Direct costs decreased by $0.6 million or 11% for the three months ended March 31, 2020 compared to the same period in 2019. The gross profit margin was 36% for the three months ended March 31, 2020 and 45% for the comparable period of 2019. The margin was adversely impacted by lower sales volume as noted above.

 

General and administrative (“G&A”) expenses were $1.5 million compared to $1.9 million for the comparable period of 2019. As a percentage of revenue, G&A expenses were 20% for the three months ended March 31, 2020 and 19% for the same period in 2019.

 

Marketing and selling expenses were $1.1 million for the three months ended March 31, 2020 and 2019. Total marketing and selling expenses represented 15% of revenue for the three months ended March 31, 2020 and 11% for the same period in 2019.

 

Research and development (“R&D”) expenses were $0.3 million compared to $0.4 million for the comparable period of 2019. R&D expenses represented 4% of revenue for the three months ended March 31, 2020 and 2019.

 

Provision for income taxes Our provision for income taxes consisted primarily of federal and state income taxes in the United Sates and income taxes in Brazil. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended March 31, 2020 the Company recorded a tax benefit of $156 thousand, calculated using a tax benefit rate of 50%. During the three months ended March 31, 2019 the Company recorded a tax provision of $343 thousand, representing an effective tax rate or 35%. The Company currently expects the year-end tax rate to be to be approximately 40%.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2020, the Company had approximately $5.3 million of cash and $5.9 million of working capital. The Company's operating activities used $0.5 million of cash for the three months ended March 31, 2020. Investing activities used $0.2 million of cash while financing activities used $1.2 million of cash during the first three months of 2020.

 

Cash used by operating activities of $0.4 million reflected net loss of $0.2 million adjusted for depreciation and amortization of $610 thousand, stock-based compensation of $163 thousand, loss on sale of fixed assets of $94 thousand and decrease of deferred income taxes of $55 thousand. This was affected by a decrease in current assets of $0.1 million and a decrease in current liabilities of $1.2 million.

 

Cash used in investing activities of $0.3 million consisted primarily of costs related to internally developed software. We anticipate spending $0.3 million to $0.8 million in additional capital purchases for the remainder of 2020.

 

Cash used by financing activities of $1.2 million included cash dividends to shareholders of $1.0 million and $0.2 million from payments on long term debt.

 

Contractual obligations and other commercial commitments as of March 31, 2020 include operating lease commitments and outstanding debt, described in Notes 8 and 9, respectively of the Notes to Condensed Consolidated Financial Statements.

 

At March 31, 2020, the Company's principal sources of liquidity included an aggregate of approximately $5.3 million of cash.  The Company had $5.9 million and $7.0 million of working capital as of March 31, 2020 and December 31, 2019, respectively. On May 4, 2020, the Company received SBA loan proceeds of approximately $2.2 million through the CARES act. While management currently believes that its existing funds and recently received loan proceeds should be adequate to fund operations for the next 12 months, economic conditions related to the coronavirus including an obligation under the CARES Act loan to maintain certain payroll levels in order to obtain later forgiveness, are expected to adversely affect the Company’s operating results and cash-flow. As a result, the Company has temporarily suspended its quarterly dividend until the economic situation stabilizes.

 

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 of Finance, 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 - Finance 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

 

Risks associated with the Coronavirus (“COVID-19”).

 

The COVID-19 pandemic is expected to materially affect the Company’s operating results during at least the next fiscal quarter and likely longer. The recent closing of drivers license bureaus in Brazil in response to COVID-19 is expected to continue to have a material adverse impact on expected testing volume in Brazil for the next year. In addition, COVID-19’s effect on the world economy has caused significant increases in unemployment which has historically had a negative impact on our testing volume. COVID-19’s negative impact on the Company’s domestic and foreign-based revenue and operating results in the fiscal first quarter is anticipated to continue into the second quarter, and potentially beyond. However, this risk was mitigated in part by the Company’s recent receipt of proceeds from the CARES Act loan noted above.

 

While the primary COVID-19 related risk to the business is from reduced sales volume, there is also a risk from a disrupted supply chain or personnel availability. The Company has obtained additional supplies to reduce the impact of a disrupted supply chain, and has taken other protective measures to lessen the impact of COVID-19 on our own operations, including the use of personal protective equipment, enhanced cleaning and split shifts at our laboratory, however, there can be no assurance that our own operations will not be adversely impacted by COVID-19.

 

Risks associated with CARES Act PPP loan (“loan”)

 

Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments and covered utilities during the eight-week period beginning on the date of loan approval. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest. While we believe we satisfied all eligibility criteria for the loan, and that our receipt of the loan is consistent with the broad objectives of the CARES Act, it is possible that the SBA will determine we were ineligible to receive the loan, in which event we would be required to repay the loan. In addition, if these events were to transpire, they could have a material adverse effect on our business, results of operations and financial condition.

 

We are subject to numerous political, legal, operational and other risks as a result of our international operations which could impact our business in many ways.

 

Although we conduct a majority of our business in the United States, over the last several years, a significant portion of our business has been derived from Brazil. As we have previously disclosed, our international operations increased our exposure to the inherent risks of doing business in international markets, including, without limitation, changes in the local economic environment and local laws and regulations, and the Company’s reliance upon one distributor in Brazil. The Company’s distribution agreement with its Brazilian distributor may be terminated for any reason by either the Company or its distributor following 90 days’ written notice.

 

 

International operations also require us to devote significant management resources to implement our controls and systems in foreign markets, to comply with the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws in non-U.S. jurisdictions and to overcome challenges based on differing languages and cultures.

 

Except as noted above, there have been no material changes in our risk factors from those disclosed in the 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 2020.

 

Item 6. Exhibits

 

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
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
101. INS		XBRL Instance Document
101. SCH		XBRL Taxonomy Extension Schema
101. CAL		XBRL Taxonomy Extension Calculation Linkbase
101. DEF		XBRL Taxonomy Extension Definition Linkbase
101. LAB		XBRL Taxonomy Extension Label Linkbase
101. PRE		XBRL Taxonomy Extension Presentation Linkbase

 

 

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 15, 2020		By:	/s/ Raymond C. Kubacki
			Raymond C. Kubacki
			Chairman and Chief Executive Officer
			(principal executive officer)
Date:   May 15, 2020		By:	/s/ Neil L. Lerner
			Neil L. Lerner
			Vice President - Finance
			(principal accounting officer)

 

 

 

 

20