Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the more detailed business information and financial statements and related notes that appear elsewhere in this annual report on Form 10-K. This annual report may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1A — Risk Factors.
Overview
Psychemedics Corporation is the world’s largest provider of hair testing for drugs of abuse, utilizing a patented hair analysis method involving digestion of hair, enzyme immunoassay technology and confirmation by mass spectrometry to analyze human hair to detect abused substances. The Company’s customers include Fortune 500 companies, as well as small to mid-size corporations, schools, and governmental entities, located in the United States and internationally. During the year ended December 31, 2022, the Company’s revenues were $25.2 million, an increase of 1% from $24.9 million in 2021. The increase was due to higher organic growth in the Company’s largest market segment offset by a decline in Brazil revenues, including the Brazil driver license business.
Under the provisions of the CARES Act signed into law on March 27, 2020, and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria through the fiscal year ended December 31, 2021. The Company recognized $2.6 million of employee retention credits during fiscal year 2021 of which $1.8 million was included in cost of revenues and $0.8 million in operating expenses in the statement of operations.
As the Company has disclosed previously, most recently in its Quarterly Report on Form 10-Q in the third 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 cash dividend strategies. Management and the Board of Directors are committed to continuing to evaluate all avenues for enhancing shareholder value. 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.
The following table sets forth, for the periods indicated, the selected statements of operations data as a percentage of total revenue:
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
63.2 |
% |
|
|
58.8 |
% |
|
|
77.1 |
% |
Gross profit |
|
|
36.8 |
% |
|
|
41.2 |
% |
|
|
22.9 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative |
|
|
23.2 |
% |
|
|
24.6 |
% |
|
|
28.5 |
% |
Marketing & selling |
|
|
12.6 |
% |
|
|
11.3 |
% |
|
|
16.7 |
% |
Research & development |
|
|
5.3 |
% |
|
|
4.5 |
% |
|
|
6.0 |
% |
Total Operating Expenses |
|
|
41.1 |
% |
|
|
40.4 |
% |
|
|
51.2 |
% |
Operating (loss) income |
|
|
-4.3 |
% |
|
|
0.8 |
% |
|
|
-28.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of PPP Loan |
|
|
0.0 |
% |
|
|
8.8 |
% |
|
|
0.0 |
% |
Settlements |
|
|
0.0 |
% |
|
|
-12.6 |
% |
|
|
0.0 |
% |
Other income (expense) |
|
|
0.2 |
% |
|
|
-0.2 |
% |
|
|
-0.7 |
% |
Total Other Income (Expense) |
|
|
0.2 |
% |
|
|
-4.0 |
% |
|
|
-0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for (benefit from) income taxes |
|
|
-4.1 |
% |
|
|
-3.2 |
% |
|
|
-29.0 |
% |
Provision for (benefit from) income taxes |
|
|
0.2 |
% |
|
|
-0.6 |
% |
|
|
-11.0 |
% |
Net loss |
|
|
-4.3 |
% |
|
|
-2.6 |
% |
|
|
-18.0 |
% |
Revenue by Geographic Region
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Consolidated Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
24,509 |
|
|
$ |
23,584 |
|
|
$ |
19,486 |
|
International |
|
|
731 |
|
|
|
1,325 |
|
|
|
1,874 |
|
Total Revenue |
|
$ |
25,240 |
|
|
$ |
24,909 |
|
|
$ |
21,360 |
|
Results for the Year Ended December 31, 2022, Compared to Results for the Year Ended December 31, 2021 (in thousands)
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% |
|
Revenues |
|
$ |
25,240 |
|
|
$ |
24,909 |
|
|
$ |
331 |
|
|
|
1 |
% |
Cost of revenues |
|
|
15,949 |
|
|
|
14,645 |
|
|
|
1,304 |
|
|
|
9 |
% |
Gross profit |
|
|
9,291 |
|
|
|
10,264 |
|
|
|
( 973 |
) |
|
|
-9 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative |
|
|
5,857 |
|
|
|
6,126 |
|
|
|
( 269 |
) |
|
|
-4 |
% |
Marketing & selling |
|
|
3,191 |
|
|
|
2,799 |
|
|
|
392 |
|
|
|
14 |
% |
Research & development |
|
|
1,326 |
|
|
|
1,130 |
|
|
|
196 |
|
|
|
17 |
% |
Total Operating Expenses |
|
|
10,374 |
|
|
|
10,055 |
|
|
|
319 |
|
|
|
3 |
% |
Operating (loss) income |
|
|
( 1,083 |
) |
|
|
209 |
|
|
|
( 1,292 |
) |
|
|
-618 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of PPP Loan |
|
|
- |
|
|
|
2,181 |
|
|
|
( 2,181 |
) |
|
|
-100 |
% |
Settlements |
|
|
- |
|
|
|
( 3,150 |
) |
|
|
3,150 |
|
|
|
-100 |
% |
Other income (expense) |
|
|
43 |
|
|
|
( 61 |
) |
|
|
104 |
|
|
|
-170 |
% |
Total Other Income (Expense) |
|
|
43 |
|
|
|
( 1,030 |
) |
|
|
1,073 |
|
|
|
-104 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for (benefit from) income taxes |
|
|
( 1,040 |
) |
|
|
( 821 |
) |
|
|
( 219 |
) |
|
|
27 |
% |
Provision for (benefit from) income taxes |
|
|
44 |
|
|
|
( 156 |
) |
|
|
200 |
|
|
|
-128 |
% |
Net loss |
|
$ |
( 1,084 |
) |
|
$ |
( 665 |
) |
|
$ |
( 419 |
) |
|
|
63 |
% |
Revenue: The revenue increase of 1% was primarily due to a 6% increase in average revenue per sample, offset by a 5% decrease in volume. Domestic revenues increased by 4% compared to the prior year period, due to an increase in average revenue per sample with similar volumes. International revenues decreased by 45% compared to the prior year period, due to decline in volume from unfavorable market forces in Brazil. See geographic breakdown of revenue above. The Company does not expect any material change in its Brazil driver license business as this market continues to be considerably uncertain.
Gross profit: The 9% decrease in gross profit was due to an increase in personnel and related costs, which was primarily due to the recognition of the refundable Employee Retention Tax Credits in 2021.
General and administrative (“G&A”) expenses: G&A expenses decreased 4% from 2021 to 2022, primarily driven by reductions in legal expenses related to lawsuit settlements and the exploration of possible strategic alternatives in the prior year. The decrease was also attributed to lower professional fees related to the employee retention tax credit recognized in 2021. As a percentage of revenue, G&A expenses represented 23.2% in 2022 compared to 24.6% in 2021.
Marketing and selling expenses: Marketing and selling expenses increased 14% from 2021 to 2022, primarily driven by higher personnel costs due to the employee retention tax credit recognized in 2021. As a percentage of revenue, marketing and selling expenses represented 12.6% in 2022 compared to 11.3% in 2021.
Income Taxes: During the year ended December 31, 2022, the Company recorded a tax expense of $0.04 million representing a tax rate of (4%) compared to a tax rate of 19% in 2021. For information regarding additional matters related to our taxes, please see Note 5 — "Income Taxes" to the Consolidated Financial Statements included in this Annual Report.
Results for the Year Ended December 31, 2021, Compared to Results for the Year Ended December 31, 2020 (in thousands)
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
% |
|
Revenues |
|
$ |
24,909 |
|
|
$ |
21,360 |
|
|
$ |
3,549 |
|
|
|
17 |
% |
Cost of revenues |
|
|
14,645 |
|
|
|
16,474 |
|
|
|
( 1,829 |
) |
|
|
-11 |
% |
Gross profit |
|
|
10,264 |
|
|
|
4,886 |
|
|
|
5,378 |
|
|
|
110 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative |
|
|
6,126 |
|
|
|
6,095 |
|
|
|
31 |
|
|
|
1 |
% |
Marketing & selling |
|
|
2,799 |
|
|
|
3,577 |
|
|
|
( 778 |
) |
|
|
-22 |
% |
Research & development |
|
|
1,130 |
|
|
|
1,280 |
|
|
|
( 150 |
) |
|
|
-12 |
% |
Total Operating Expenses |
|
|
10,055 |
|
|
|
10,952 |
|
|
|
( 897 |
) |
|
|
-8 |
% |
Operating income (loss) |
|
|
209 |
|
|
|
( 6,066 |
) |
|
|
6,275 |
|
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of PPP Loan |
|
|
2,181 |
|
|
|
- |
|
|
|
2,181 |
|
|
|
100 |
% |
Settlements |
|
|
( 3,150 |
) |
|
|
- |
|
|
|
( 3,150 |
) |
|
|
100 |
% |
Other expense |
|
|
( 61 |
) |
|
|
( 140 |
) |
|
|
79 |
|
|
|
-56 |
% |
Total Other (Expense) Income |
|
|
( 1,030 |
) |
|
|
( 140 |
) |
|
|
( 890 |
) |
|
|
636 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before benefit from income taxes |
|
|
( 821 |
) |
|
|
( 6,206 |
) |
|
|
5,385 |
|
|
|
-87 |
% |
Benefit from income taxes |
|
|
( 156 |
) |
|
|
( 2,347 |
) |
|
|
2,191 |
|
|
|
-93 |
% |
Net loss |
|
$ |
( 665 |
) |
|
$ |
( 3,859 |
) |
|
$ |
3,194 |
|
|
|
-83 |
% |
Revenue: The revenue increase of 17% was primarily due to a 9% increase in volume, compounded by an 8% increase in average revenue per sample, primarily as a result of business mix and increased domestic volumes. Domestic revenues increased by 21% compared to the prior year period, due to an increase in volume and growth in the base business. International revenues decreased by 29% from 2020 to 2021, due to decline in volume from unfavorable market forces in Brazil and the COVID-19 pandemic. See geographic breakdown of revenue above. The Company does not expect any material change in its Brazil driver license business as this market continues to be considerably uncertain.
Gross profit: The 110% increase in gross profit was due to higher sales volume and lower personnel costs. Higher volume and lower personnel costs was the primary factor in the gross profit percentage increase from 23% in 2020 to 41% in 2021. The decrease in lower labor and related costs was primarily due to the recognition of the refundable employee retention tax credits in 2021 and the retention of certain laboratory employees during 2020, to qualify for PPP Loan forgiveness with no offsetting proportional revenue.
General and administrative (“G&A”) expenses: G&A expenses increased 1% from 2020 to 2021, primarily driven by higher legal expenses related to the exploration of possible strategic alternatives in an effort to enhance shareholder value. As a percentage of revenue, G&A expenses represented 24.6% in 2021 compared to 28.5% in 2020.
Marketing and selling expenses: Marketing and selling expenses decreased 22% from 2020 to 2021, primarily driven by cost reduction initiatives; specifically, lower personnel related costs (including less travel and meals) and in addition refundable employee retention tax credits. As a percentage of revenue, marketing and selling expenses represented 11.3% in 2021 compared to 16.7% in 2020.
Income Taxes: During the year ended December 31, 2021, the Company recorded a tax benefit of $0.2 million representing a tax rate of 19% compared to a tax rate of 38% in 2020. For information regarding additional matters related to our taxes, please see Note 5 — "Income Taxes" to the Consolidated Financial Statements included in this Annual Report.
Liquidity and Capital Resources
The Company had $4.8 million and $2.0 million of cash as of December 31, 2022, and 2021, respectively. The Company’s operating activities generated net cash of $4.9 and $0.4 million in 2022 and 2021, respectively. Investing activities used net cash of $0.2 million in both 2022 and 2021. Financing activities used net cash of $1.9 million and $1.0 million in 2022 and 2021, respectively.
Operating cash generated in operations of $4.9 million in 2022 primarily reflected the net loss of $1.1 million adjusted for depreciation and amortization of $2.4 million and stock compensation expense of $0.9 million. Cash generated in operations was also affected by the following changes in assets and liabilities: collection of a tax receivable of $2.3 million, accounts receivable of $0.4 million, prepaid expenses of $0.4 million, and an increase in accrued expenses of $0.7 million. The $4.5 million change in operating cash from a positive $0.4 million in 2021 to a positive $4.9 million in 2022 was primarily driven by the income tax receivable in 2022 and the forgiveness of the PPP loan in 2021.
Operating cash generated in operations of $0.4 million in 2021 primarily reflected the net loss of $0.7 million adjusted for PPP Loan forgiveness of $2.2 million, depreciation and amortization of $2.8 million and stock compensation expense of $0.7 million. Cash generated in operations was also affected by the following changes in assets and liabilities: an increase in accounts receivable of $0.8 million and an increase in accrued expenses of $1.4 million. The $4.5 million change in operating cash from a negative $4.1 million in 2020 to a positive $0.4 million in 2021 was primarily driven by improved operating results in 2021.
Cash used in investing activities primarily reflected the purchase of capital expenditures. Capital expenditures were $0.2 million and $0.2 million in 2022 and 2021, respectively. In both 2022 and 2021, the expenditures related principally to laboratory equipment, machinery, and computer software.
During 2022 and 2021, the Company did not repurchase any shares of common stock for treasury. The Company has authorized 750,000 shares for repurchase since June of 1998, of which 250,000 shares of common stock were authorized in March of 2008 for repurchase. Since 1998, a total of 550,684 shares have been repurchased. The Company distributed cash dividends to its shareholders of $1.2 million in 2022 and $0.3 million in 2021. Cash flows used in financing activities also reflected repayments under the Equipment Loan Arrangement of $0.7 million in both 2022 and 2021.
During the last three consecutive quarters of 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.07 per common share. In March 2023, the Company announced that the Board of Directors authorized a quarterly cash dividend of $0.07 per share, payable in April 2023. There can be no assurance that the Company will pay dividends in the future. The Company will continue to evaluate the dividend as it moves forward.
At December 31, 2022, the Company’s principal sources of liquidity included $4.8 million of cash on hand. Management currently believes that such funds, together with future operating profits, should be adequate to fund anticipated working capital requirements, including debt obligations, and capital expenditures for at least the next 12 months. 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, lines of credit, or equipment leasing; although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.
On May 4, 2020, the Company borrowed $2.2 million from Bank of America, N.A., pursuant to the PPP, established under the CARES Act. These funds were used to maintain operations, including the employment of both exempt and non-exempt employees, in order to meet the drug testing needs of our customers and adhere to strict quality standards in the midst of the worldwide COVID-19 pandemic.
During the third quarter of 2021, the PPP Loan and accrued interest was 100% forgiven by the SBA. The PPP Loan exceeded $2.0 million audit threshold established by the SBA, and therefore, could be subject to audit by the SBA in the future.
Purchase Commitment
Operating leases consist of rent obligations for the company’s facilities and corporate office. The Company has no significant contractual obligation for supply agreements as of December 31, 2022.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. Actual results may differ from these estimates, and such differences may be material.
Recent Accounting Pronouncements
See Note 2 – “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further detail on recent accounting pronouncements.
Item 8. Financial Statements and Supplementary Data
| (a) | Financial Statements: |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Psychemedics Corporation
Acton, Massachusetts
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Psychemedics Corporation (the “Company”) and subsidiaries as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2004.
Boston, Massachusetts
March 24, 2023
PSYCHEMEDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
ASSETS | | | | | | | | |
Current Assets: | | | | | | | | |
Cash | | $ | 4,750 | | | $ | 1,992 | |
Accounts receivable, net of allowance for doubtful accounts of $87 and $89 at December 31, 2022 and 2021, respectively | | | 3,739 | | | | 4,116 | |
Prepaid expenses and other current assets | | | 1,136 | | | | 1,499 | |
Income tax receivable | | | 339 | | | | 2,678 | |
| | | | | | | | |
Total Current Assets | | | 9,964 | | | | 10,285 | |
| | | | | | | | |
Property and equipment: | | | | | | | | |
Computer software | | | 4,648 | | | | 4,521 | |
Office furniture and equipment | | | 2,247 | | | | 2,195 | |
Laboratory equipment | | | 16,013 | | | | 16,005 | |
Leasehold improvements | | | 3,629 | | | | 3,629 | |
| | | 26,537 | | | | 26,350 | |
Accumulated depreciation and amortization | | | ( 21,964 | ) | | | ( 19,659 | ) |
| | | 4,573 | | | | 6,691 | |
Other assets | | | 823 | | | | 864 | |
Deferred tax assets | | | 691 | | | | 160 | |
Operating lease right-of-use assets | | | 2,681 | | | | 3,552 | |
| | | | | | | | |
Total Assets | | $ | 18,732 | | | $ | 21,552 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable | | $ | 448 | | | $ | 994 | |
Accrued expenses | | | 3,939 | | | | 3,188 | |
Current portion of long-term debt | | | 294 | | | | 664 | |
Current portion of operating lease liabilities | | | 1,037 | | | | 984 | |
| | | | | | | | |
Total Current Liabilities | | | 5,718 | | | | 5,830 | |
| | | | | | | | |
Long-term debt | | | 305 | | | | 599 | |
Long-term portion of operating lease liabilities | | | 1,938 | | | | 2,880 | |
Total Liabilities | | | 7,961 | | | | 9,309 | |
| | | | | | | | |
Commitments and Contingencies (Note 9) | | | | | | | | |
Shareholders' Equity: | | | | | | | | |
Preferred stock, $0.005 par value, 873 shares authorized, no shares issued or outstanding | | | - | | | | - | |
Common stock, $0.005 par value; 50,000 shares authorized 6,349 shares and 6,257 shares issued at December 31, 2022 and 2021, respectively, 5,681 shares outstanding and 5,589 shares outstanding at December 31, 2022 and 2021, respectively | | | 32 | | | | 31 | |
Additional paid-in capital | | | 34,275 | | | | 33,478 | |
Less - Treasury stock, at cost, 668 shares | | | ( 10,082 | ) | | | ( 10,082 | ) |
Accumulated deficit | | | ( 11,820 | ) | | | ( 9,550 | ) |
Accumulated other comprehensive loss | | | ( 1,634 | ) | | | ( 1,634 | ) |
| | | | | | | | |
Total Shareholders' Equity | | | 10,771 | | | | 12,243 | |
| | | | | | | | |
Total Liabilities and Shareholders' Equity | | $ | 18,732 | | | $ | 21,552 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(in thousands, except per share amounts)
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Revenues |
|
$ |
25,240 |
|
|
$ |
24,909 |
|
|
$ |
21,360 |
|
Cost of revenues |
|
|
15,949 |
|
|
|
14,645 |
|
|
|
16,474 |
|
Gross profit |
|
|
9,291 |
|
|
|
10,264 |
|
|
|
4,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative |
|
|
5,857 |
|
|
|
6,126 |
|
|
|
6,095 |
|
Marketing & selling |
|
|
3,191 |
|
|
|
2,799 |
|
|
|
3,577 |
|
Research & development |
|
|
1,326 |
|
|
|
1,130 |
|
|
|
1,280 |
|
Total Operating Expenses |
|
|
10,374 |
|
|
|
10,055 |
|
|
|
10,952 |
|
Operating (loss) income |
|
|
( 1,083 |
) |
|
|
209 |
|
|
|
( 6,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on forgiveness of PPP Loan |
|
|
- |
|
|
|
2,181 |
|
|
|
- |
|
Settlements |
|
|
- |
|
|
|
( 3,150 |
) |
|
|
- |
|
Other income (expense) |
|
|
43 |
|
|
|
( 61 |
) |
|
|
( 140 |
) |
Total Other Income (Expense) |
|
|
43 |
|
|
|
( 1,030 |
) |
|
|
( 140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for (benefit from) income taxes |
|
|
( 1,040 |
) |
|
|
( 821 |
) |
|
|
( 6,206 |
) |
Provision for (benefit from) income taxes |
|
|
44 |
|
|
|
( 156 |
) |
|
|
( 2,347 |
) |
Net loss |
|
$ |
(1,084 |
) |
|
$ |
(665 |
) |
|
$ |
(3,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation, net of taxes |
|
|
- |
|
|
|
- |
|
|
|
( 10 |
) |
Total Comprehensive Loss |
|
$ |
(1,084 |
) |
|
$ |
(665 |
) |
|
$ |
(3,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share |
|
$ |
(0.19 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share |
|
$ |
(0.19 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
5,626 |
|
|
|
5,549 |
|
|
|
5,524 |
|
Diluted |
|
|
5,626 |
|
|
|
5,549 |
|
|
|
5,524 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
| | Common Stock | | | | | | | Treasury Stock | | | | | | | Accumulated Other | | | | | |
| | | | | | | $0.005 | | | Paid-In | | | | | | | | | | | Accumulated | | | Comprehensive | | | | | |
| | Shares | | | par Value | | | Capital | | | Shares | | | Cost | | | Deficit | | | Income (loss) | | | Total | |
BALANCE, December 31, 2019 | | | 6,185 | | | $ | 31 | | | $ | 32,249 | | | | 668 | | | $ | ( 10,082 | ) | | $ | ( 3,754 | ) | | $ | ( 1,624 | ) | | $ | 16,820 | |
Shares issued – vested | | | 20 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | - | |
Tax withholding related to vested shares from employee stock plans | | | - | | | | - | | | | ( 9 | ) | | | - | | | | - | | | | - | | | | - | | | | ( 9 | ) |
Stock compensation expense | | | - | | | | - | | | | 563 | | | | - | | | | - | | | | - | | | | - | | | | 563 | |
Cash dividends declared ($0.18 per share) | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 993 | ) | | | - | | | | ( 993 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 3,859 | ) | | | - | | | | ( 3,859 | ) |
Foreign currency translation, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 10 | ) | | | ( 10 | ) |
BALANCE, December 31, 2020 | | | 6,205 | | | | 31 | | | | 32,803 | | | | 668 | | | | ( 10,082 | ) | | | ( 8,606 | ) | | | ( 1,634 | ) | | | 12,512 | |
Shares issued – vested | | | 51 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Exercise of stock options | | | 1 | | | | - | | | | 4 | | | | - | | | | - | | | | - | | | | - | | | | 4 | |
Tax withholding related to vested shares from employee stock plans | | | - | | | | - | | | | ( 72 | ) | | | - | | | | - | | | | - | | | | - | | | | ( 72 | ) |
Stock compensation expense | | | - | | | | - | | | | 743 | | | | - | | | | - | | | | - | | | | - | | | | 743 | |
Cash dividends declared ($0.05 per share) | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 279 | ) | | | - | | | | ( 279 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 665 | ) | | | - | | | | ( 665 | ) |
BALANCE, December 31, 2021 | | | 6,257 | | | | 31 | | | | 33,478 | | | | 668 | | | | ( 10,082 | ) | | | ( 9,550 | ) | | | ( 1,634 | ) | | | 12,243 | |
Shares issued – vested | | | 91 | | | | 1 | | | | ( 1 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
Exercise of stock options | | | 1 | | | | - | | | | 4 | | | | - | | | | - | | | | - | | | | - | | | | 4 | |
Tax withholding related to vested shares from employee stock plans | | | - | | | | - | | | | ( 78 | ) | | | - | | | | - | | | | - | | | | - | | | | ( 78 | ) |
Stock compensation expense | | | - | | | | - | | | | 872 | | | | - | | | | - | | | | - | | | | - | | | | 872 | |
Cash dividends declared ($0.21 per share) | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 1,186 | ) | | | - | | | | ( 1,186 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | ( 1,084 | ) | | | - | | | | ( 1,084 | ) |
BALANCE, December 31, 2022 | | | 6,349 | | | $ | 32 | | | $ | 34,275 | | | | 668 | | | $ | ( 10,082 | ) | | $ | ( 11,820 | ) | | $ | ( 1,634 | ) | | $ | 10,771 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (1,084 | ) | | $ | (665 | ) | | $ | (3,859 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
Forgiveness of PPP loan | | | - | | | | ( 2,181 | ) | | | - | |
Depreciation and amortization | | | 2,367 | | | | 2,784 | | | | 2,691 | |
ROU asset amortization | | | 949 | | | | 906 | | | | 935 | |
Deferred income taxes | | | ( 531 | ) | | | ( 371 | ) | | | ( 339 | ) |
Loss on sale of fixed assets | | | - | | | | - | | | | 94 | |
Stock compensation expense | | | 872 | | | | 743 | | | | 563 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 377 | | | | ( 760 | ) | | | 424 | |
Prepaid expenses and other current assets | | | 363 | | | | ( 585 | ) | | | 392 | |
Income tax receivable | | | 2,339 | | | | ( 183 | ) | | | ( 2,013 | ) |
Accounts payable | | | ( 546 | ) | | | 417 | | | | ( 281 | ) |
Operating lease liabilities | | | ( 967 | ) | | | ( 1,078 | ) | | | ( 914 | ) |
Accrued expenses | | | 751 | | | | 1,387 | | | | ( 1,776 | ) |
Net cash provided by (used in) operating activities | | | 4,890 | | | | 414 | | | | ( 4,083 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Proceeds from sale of fixed assets | | | - | | | | - | | | | 140 | |
Other assets | | | ( 21 | ) | | | ( 38 | ) | | | ( 7 | ) |
Purchases of property and equipment and capitalized software development costs | | | ( 187 | ) | | | ( 182 | ) | | | ( 991 | ) |
Net cash used in investing activities | | | ( 208 | ) | | | ( 220 | ) | | | ( 858 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Cash dividends paid | | | ( 1,186 | ) | | | ( 279 | ) | | | ( 993 | ) |
Proceeds from stock options and tax withholding related to vested shares from employee stock plans | | | ( 74 | ) | | | ( 68 | ) | | | ( 9 | ) |
Proceeds from PPP Loan | | | - | | | | - | | | | 2,181 | |
Payments of equipment financing | | | ( 664 | ) | | | ( 688 | ) | | | ( 678 | ) |
Net cash (used in) provided by financing activities | | | ( 1,924 | ) | | | ( 1,035 | ) | | | 501 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | - | | | | - | | | | ( 10 | ) |
Net increase (decrease) in cash | | | 2,758 | | | | ( 841 | ) | | | ( 4,450 | ) |
Cash, beginning of year | | | 1,992 | | | | 2,833 | | | | 7,283 | |
Cash, end of year | | $ | 4,750 | | | $ | 1,992 | | | $ | 2,833 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for income taxes | | $ | - | | | $ | 405 | | | $ | 249 | |
Cash paid for interest | | $ | 33 | | | $ | 50 | | | $ | 75 | |
Cash paid for operating leases | | $ | 1,044 | | | $ | 1,151 | | | $ | 1,038 | |
Right-of-use assets acquired through operating leases | | $ | 78 | | | $ | 172 | | | $ | 2,346 | |
Non-cash investing and financing activities: | | | | | | | | | | | | |
Purchases of equipment through accounts payable and accrued liabilities | | $ | - | | | $ | - | | | $ | 241 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
1. Nature of Business
Company Overview
Psychemedics Corporation (the “Company”) provides hair testing for drugs of abuse, utilizing a patented hair analysis method involving digestion of hair, enzyme immunoassay and mass spectrometry to analyze hair to detect abused substances. The Company’s customers include Fortune 500 companies, as well as small to mid-size corporations, schools and governmental entities located in the United States and Internationally.
COVID-19 Pandemic
The outbreak of coronavirus (“COVID-19”) which was declared by the World Health Organization to be a pandemic, has, and is expected to continue to impact worldwide economic activity. COVID-19 has had a significant impact on our entire operations. Additionally, COVID-19’s effect on the overall economy has had an adverse impact on hiring, which is having a negative impact on our testing volume.
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. The principal impact 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. The Company recognized a benefit of $2.6 million and $0.2 million for the years ended December 31, 2021, and December 31, 2020, respectively, as a reduction to cost of revenues and operating expenses related to the employee retention credit which was a tax provision in the CARES Act and subsequent legislation. Additionally, the CARES Act allowed the Company to fully carryback the 2020 net operating loss, for a refund of corporate income taxes previously paid.
Liquidity and Management’s Plans
At December 31, 2022, the Company’s principal sources of liquidity included $4.8 million of cash on hand. Management currently believes that such funds, together with future operating profits, should be adequate to fund anticipated working capital requirements, including debt obligations, and capital expenditures for at least the next 12 months. 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, lines of credit, or equipment leasing, although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.
2. Summary of Significant Accounting Policies
Risks and Uncertainties
The Company is subject to a number of risks and uncertainties similar to those of other companies, such as those associated with the continued expansion of the Company’s sales and marketing network, technological developments, intellectual property protection, development of markets for new products and services offered by the Company, the economic health of principal customers of the Company, financial and operational risks associated with expansion of testing facilities used by the Company, government regulation (including, but not limited to, FDA regulations, proposed laws and regulations, and delays in implementation of laws and regulations), competition and general economic conditions.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates, including those related to bad debts, long-lived asset lives, income tax valuation and share based compensation, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities at the date of purchase of 90 days or less as cash equivalents. As of December 31, 2022, and 2021, there were no investments classified as cash equivalents.
Property and Equipment
Property & equipment are recorded at cost. Depreciation and amortization is computed over the estimated useful lives of the assets, using the straight-line method. Repair and maintenance costs are expensed as incurred. The estimated useful lives of the assets are:
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
2. Summary of Significant Accounting Policies (continued)
Computer software | 3 to 5 years |
Office furniture and equipment | 3 to 7 years |
Laboratory equipment | 5 to 7 years |
Leasehold improvements | Lesser of estimated useful life or lease term |
The Company recorded depreciation and amortization related to property and equipment and capitalized software of $2.4 million, $2.8 million, and $2.7 million in 2022, 2021 and 2020, respectively. The Company had $0.5 million of capitalized software and equipment that was not placed in service as of December 31, 2022, which is included as a component of computer software on the accompanying consolidated balance sheets.
Capitalized Software Development Costs
We capitalize costs related to significant software projects developed or obtained for internal use, including costs incurred in a cloud computing arrangement. Costs incurred during the preliminary project work stage or conceptual stage, such as determining the performance requirements, system requirements and data conversion, are expensed as incurred. Costs incurred in the application development phase, such as coding, testing for new software and upgrades that result in additional functionality, are capitalized and are amortized using the straight-line method over the useful life of the software for three to five years. Costs incurred during the post-implementation/operation stage, including training costs and maintenance costs, are expensed as incurred. In accordance with Company policy, during the years ended December 31, 2022, and 2021, we capitalized internally developed software costs of $127 thousand and $99 thousand, respectively. Amortization expense related to software development costs was $282 thousand, $421 thousand and $293 thousand in 2022, 2021 and 2020, respectively. Determining whether particular costs incurred are more properly attributable to the preliminary or conceptual stage, and thus expensed, or to the application development phase, and thus capitalized and amortized, depends on subjective judgments about the nature of the development work, and our judgments in this regard may differ from those made by other companies. General and administrative costs related to developing or obtaining such software is expensed as incurred.
Other Assets
Other assets primarily consist of capitalized legal costs relating to patent applications. The Company amortizes these costs over the lesser of the legal life or estimated useful life of the patent from the date of grant of the applicable patent. The typical life is twenty years. As of December 31, 2022, the Company had capitalized legal costs relating to patent applications of $1.1 million with accumulated amortization of $0.5 million, for a net balance of $0.6 million. As of December 31, 2021, the Company had capitalized legal costs relating to patent applications of $1.1 million with accumulated amortization of $0.4 million, for a net balance of $0.7 million. Amortization expense was $62 thousand, $62 thousand, and $62 thousand in 2022, 2021 and 2020, respectively. Based on payments made as of December 31, 2022, remaining amortization expense is expected to be $62 thousand for each of the five years ending December 31, 2027 and $109 thousand thereafter.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on management’s assessment of the ability to collect amounts owed to it by its customers. Management reviews its accounts receivable aging for doubtful accounts and uses a methodology based on calculating the allowance using a combination of factors including the age of the receivable along with management’s judgment to identify accounts that may not be collectible. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. The Company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. Bad debt expense has been within management’s expectations.
Revenue Recognition
The Company is in the business of performing drug testing services and reporting the results thereof. The Company’s services are primarily drug and alcohol testing for its customers for an agreed-upon fee per unit tested. The revenues are recognized when the drug test is performed and reported to the customer.
Revenue is recognized when control of the services is transferred to our customers, in an amount that reflects the consideration (none of which is variable) the Company expects to be entitled to in exchange for those services. The Company typically invoices customers monthly for services provided and payments are generally due within 30 to 60 days of the invoice date.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
2. Summary of Significant Accounting Policies (continued)
The table below disaggregates our external revenue by major source (in thousands). For additional revenue detail relating to geographic breakdown of sales, see Note 13 – “Business Segment Reporting” to the Consolidated Financial Statements included in this Annual Report.
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Consolidated Revenue: | | | | | | | | | | | | |
Testing | | $ | 21,608 | | | $ | 21,894 | | | $ | 19,068 | |
Shipping / Collection (hair) | | | 3,476 | | | | 2,847 | | | | 2,174 | |
Other | | | 156 | | | | 168 | | | | 118 | |
Total Revenue | | $ | 25,240 | | | $ | 24,909 | | | $ | 21,360 | |
Testing Revenue
Drug and alcohol tests for drugs of abuse using hair, performed in the Company’s forensic laboratory in California, represents our primary service. Sales to customers are initiated through sales agreements, most of which have standard terms. Most tests are identified through a chain of custody form (“CCF”) and can therefore be uniquely tracked. Revenue is recognized when performance obligations under the terms of the contract with a customer are satisfied; generally, this occurs with the transfer of control of our service, which occurs at a specific point-in-time. The specific point-in-time is the completion of the test and availability of test results to the customer. Most tests are completed the same day that the hair specimen is received.
Substantially all tests are completed within a few days once received for processing at our laboratory in California. As the tests are performed in a forensic laboratory, the exact date and time of each test completion is available and used in the timing of recognition of revenue.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services. Sales taxes the Company pays concurrent with revenue-producing activities are excluded from revenue.
Shipping and Hair Collection Revenue
Shipping revenue represents the amount billed to customers related to shipping of the hair specimen and CCF (collectively called the “sample”) to the Company’s laboratory. Collection revenue represents the amount billed to customers related to the collection of the hair specimen. This collection is done by third parties who have contracted with the Company. Shipping and hair collection revenue is recognized when performance obligations under the terms of the contract with a customer are satisfied; generally, this occurs with the transfer of control of the Company’s service, which occurs at a specific point-in-time. The specific point-in-time is the completion of the test (associated with the shipping or hair collection charge) and availability of test results to the customer.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services. As the Company controls the service before transferring to the customer, it is considered a principal in the transaction, and therefore records revenues on gross basis, with shipping and hair collection costs in costs of revenues.
Other Revenue
Other revenue represents several items including: urine testing performed by other labs, medical review officer charges, legal/testifying services, and other miscellaneous charges. The total of all these items is less than 1% of total revenue. The amounts are generally billed to customers as services are performed, which occurs at a specific point-in-time.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred as they are typically not related to costs to fulfill customer contracts but relate to overall sales targets. These costs are recorded within marketing and selling expense on the accompanying consolidated statements of operations.
Research and Development Expenses
The Company expenses all research and development costs as incurred.
Contingencies
Loss contingencies from legal proceedings and claims may occur from government investigations, shareholder lawsuits, product liability, contractual claims, tax and other matters. Accruals are recognized when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. Legal fees are expensed as incurred.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the liability method pursuant to ASC 740, “Income Taxes”. Under this method, the Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company evaluates uncertain tax positions annually and considers whether the amounts recorded for income taxes are adequate to address the Company’s tax risk profile. The Company analyzes the potential tax liabilities of specific transactions and tax positions based on management’s judgment as to the expected outcome.
Concentration of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and accounts receivable. The Company’s policy is to place its cash in high quality financial institutions. At times, these deposits may exceed or be exempt from federally insured limits. The Company does not believe significant credit risk exists with respect to these institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. The Company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. The Company does not require collateral. The Company has no significant off-balance-sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Significant Customers and Concentration of Credit Risk
The Company had no customers that represented 10% or more of total revenue for the years ended December 31, 2022, 2021, and 2020, respectively. The Company had one customer that represented 11% and 12% of the total accounts receivable balance as of December 31, 2022 and 2021, respectively.
Stock-Based Compensation
The Company accounts for equity awards in accordance with ASC 718, “Compensation — Stock Compensation” (“ASC 718”). ASC 718 requires employee equity awards to be accounted for under the fair value method. It also requires the measurement of compensation cost at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Accordingly, share-based compensation is measured at the grant date based on the fair value of the award. The Company uses the straight-line method to recognize share-based compensation over the service period of the award, which is generally equal to the vesting period. The Company uses the simplified approach to calculate the expected exercise date of options, which is one of the components used to determine the fair value of the options. This approach is used due to the small number of recipients receiving stock options not providing a reasonable basis for estimating expected term. In 2016, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. As a result, we recognize the impact of forfeitures when they occur with no adjustment for estimated forfeitures and recognize excess tax benefits as a reduction of income tax expense regardless of whether the benefit reduces income taxes payable.
Stock compensation expense by statements of operations account is as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Cost of revenues | | $ | 63 | | | $ | 63 | | | $ | 50 | |
General & administrative | | | 626 | | | | 503 | | | | 380 | |
Marketing & selling | | | 113 | | | | 114 | | | | 74 | |
Research & development | | | 70 | | | | 63 | | | | 59 | |
Total stock compensation | | $ | 872 | | | $ | 743 | | | $ | 563 | |
See Note 7 – “Stock-Based Awards” to the Consolidated Financial Statements included in this Annual Report for additional information relating to the Company’s stock plan.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
2. Summary of Significant Accounting Policies (continued)
Basic and Diluted Net Loss per Share
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. The number of dilutive common stock equivalents outstanding during the period has been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options and the unvested portion of stock unit awards (“SUAs”).
Basic and diluted weighted average common shares outstanding are as follows (in thousands):
| | 2022 | | | 2021 | | | 2020 | |
Weighted average common shares outstanding, basic | | | 5,626 | | | | 5,549 | | | | 5,524 | |
Dilutive common equivalent shares | | | - | | | | - | | | | - | |
Weighted average common shares outstanding, assuming dilution | | | 5,626 | | | | 5,549 | | | | 5,524 | |
For the years ended December 31, 2022, 2021 and 2020, options to purchase 508 thousand, 574 thousand and 588 thousand common shares were outstanding but not included in the dilutive common equivalent share calculation as their effect would have been anti-dilutive.
Fair Value Measurements
The fair values of the Company’s cash, accounts receivable and accounts payable approximate their carrying values due to their short maturities. The carrying value of the Company’s note payable approximates its fair value, as it is based on current market rates at which the Company could borrow funds with similar terms.
Basis of Preparation and Consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated.
Segment Reporting
The Company manages its operations as one segment, drug testing services. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment. See Note 14 – “Business Segment Reporting” to the Consolidated Financial Statements included in this Annual Report for geographic breakdown of revenue.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
2. Summary of Significant Accounting Policies (continued)
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments. The Company will adopt ASU 2016-13 in its first quarter of 2023. Based on the Company’s historical credit loss activity, the adoption of ASU 2016-13 will not have a material impact on its consolidated financial statements.
3. Accounts Receivable
The Company maintains an allowance for uncollectible accounts receivable based on management’s assessment of the collectability of its customer accounts by reviewing customer payment patterns and other relevant factors. The Company reviews the adequacy of the allowance for uncollectible accounts on a quarterly basis and adjusts the balance as determined necessary. Write-offs are recorded at the time a customer account is deemed uncollectable. The following is a rollforward of the Company’s allowance for doubtful accounts (in thousands):
| | As of December 31, | |
| | 2022 | | | 2021 | |
Balance, beginning of period | | $ | 89 | | | $ | 37 | |
Provision for doubtful accounts | | | 9 | | | | 55 | |
Write-offs | | | ( 11 | ) | | | ( 3 | ) |
Balance, end of period | | $ | 87 | | | $ | 89 | |
4. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | As of December 31, | |
| | 2022 | | | 2021 | |
Accrued compensation and employee benefits | | $ | 442 | | | $ | 507 | |
Accrued vacation expense | | | 409 | | | | 373 | |
Accrued taxes | | | 771 | | | | 200 | |
Accrued shipping expense | | | 338 | | | | 488 | |
Accrued legal settlement | | | 1,150 | | | | 1,150 | |
Other accrued expenses | | | 829 | | | | 470 | |
Total Accrued Expenses | | $ | 3,939 | | | $ | 3,188 | |
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
5. Income Taxes
The income tax provision consists of the following (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Current | | | | | | | | | | | | |
Federal | | $ | 552 | | | $ | 131 | | | $ | ( 2,006 | ) |
State | | | 23 | | | | 84 | | | | ( 2 | ) |
Total Current | | | 575 | | | | 215 | | | | ( 2,008 | ) |
Federal | | | ( 959 | ) | | | ( 704 | ) | | | ( 13 | ) |
State | | | 428 | | | | 333 | | | | ( 326 | ) |
Total Deferred | | | ( 531 | ) | | | ( 371 | ) | | | ( 339 | ) |
Income Tax Provision | | $ | 44 | | | $ | ( 156 | ) | | $ | ( 2,347 | ) |
A reconciliation of the effective rate with the federal statutory rate is as follows:
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Federal statutory rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
State income taxes, net of federal benefit | | | 12.0 | % | | | 10.4 | % | | | 4.4 | % |
Permanent differences | | | (0.4% | ) | | | 47.6 | % | | | 0.0 | % |
Stock based compensation | | | 0.5 | % | | | 1.4 | % | | | (0.4% | ) |
Federal R&D Credits | | | 8.9 | % | | | 0.0 | % | | | 1.6 | % |
Foreign taxes, net of federal benefit | | | 0.0 | % | | | (10.9% | ) | | | (2.2% | ) |
Difference in tax rate for carryback claim | | | 0.0 | % | | | 0.0 | % | | | 13.4 | % |
Increase/(decrease) in valuation reserve | | | (46.2% | ) | | | (50.5% | ) | | | 0.0 | % |
Effective tax rate | | | -4.2 | % | | | 19.0 | % | | | 37.8 | % |
The change in effective tax rate from 2021 to 2022 was primarily driven by the Company’s 2021 non-taxable debt forgiveness from the Paycheck Protection Plan in 2021 that was included in income for GAAP purposes partially offset by the decrease in foreign taxes in 2022. As of December 31, 2022, the Company had no federal net operating loss carryforwards. As of December 31, 2022, the Company had $1.3 million of state net operating loss carryforwards, of which $1.2 million expire at various dates between 2030 and 2040, and $0.1 million do not expire. As of December 31, 2022, the Company had no federal tax credit carryforwards and $1.4 million of California tax credit carryforwards relating to the years 2013 through 2022 which have an unlimited carryforward period. In 2022, the 12.0% state income tax effective rate primarily consisted of California research tax credits of 8.3%.
The components of the net deferred tax liabilities included in the accompanying balance sheets are as follows (in thousands):
| | As of December 31, | |
| | 2022 | | | 2021 | |
Deferred Tax Assets | | | | | | | | |
Allowance for doubtful accounts | | $ | 21 | | | $ | 21 | |
Accrued expenses | | | 414 | | | | 129 | |
Stock-based compensation | | | 381 | | | | 325 | |
R&D tax credits | | | 1,086 | | | | 1,083 | |
Operating lease | | | 701 | | | | 944 | |
Capitalized research expenses | | | 404 | | | | - | |
NOL carryforward | | | 72 | | | | 219 | |
Gross Deferred Tax Assets | | | 3,079 | | | | 2,721 | |
Valuation Allowance | | | ( 895 | ) | | | ( 414 | ) |
Deferred Tax Assets After Valuation Allowance | | | 2,184 | | | | 2,307 | |
| | | | | | | | |
Deferred Tax Liabilities | | | | | | | | |
Excess of tax over book depreciation and amortization | | | ( 783 | ) | | | ( 1,249 | ) |
Prepaid expenses | | | ( 78 | ) | | | ( 61 | ) |
Operating lease | | | ( 632 | ) | | | ( 837 | ) |
Gross Deferred Tax Liabilities | | | ( 1,493 | ) | | | ( 2,147 | ) |
| | | | | | | | |
Net Deferred Tax Assets | | $ | 691 | | | $ | 160 | |
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
5. Income Taxes (continued)
Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized. The Company adopted ASU 2019-12 as of January 1, 2021, with no material impact to the Company’s consolidated financial statements.
ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on an audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company had immaterial uncertain tax positions at December 31, 2022, and 2021, respectively.
The Company operates within multiple taxing jurisdictions and could be subject to audit in these jurisdictions. These audits may involve complex issues, which may require an extended period of time to resolve. The Company has provided for its estimated taxes payable in the accompanying financial statements. The Company’s policy is to recognize interest and penalties related to income tax matters as a general and administrative expense, when and if incurred. Interest and penalties for the years ended December 31, 2022, 2021 or 2020 were not material.
6. Preferred Stock
The Board of Directors has the authority to designate authorized preferred shares in one or more series and to fix the relative rights and preferences without vote or action by the stockholders. The Board of Directors has no present plans to designate or issue any shares of preferred stock.
7. Stock-Based Awards
The 2006 Incentive Plan initially adopted in 2006 provides for grants of options with terms of up to ten years, grants of restricted stock or stock unit awards (“SUAs”), issuances of stock bonuses or grants other stock-based awards plus cash-based awards, to officers, directors, employees, and consultants. Such shares are issuable out of the Company’s authorized but unissued common stock. In May 2021, the 2006 Incentive Plan was amended to increase the total number of shares issuable thereunder from 1.2 million to 1.6 million. As of December 31, 2022, 183 thousand shares remained available for future grant under the 2006 Incentive Plan.
The fair value of the SUAs is determined by the closing price on the date of grant. The fair value of options is determined using a Black-Scholes model. The SUAs and options vest over a period of two to four years and are convertible or exercisable into an equivalent number of shares of the Company’s common stock provided that the employee receiving the award remains continuously employed throughout the vesting period. The Company records stock compensation expense related to the SUAs and options on a straight-line basis over the vesting term. Employees are issued shares upon vesting of SUAs, net of tax withholdings. As a result of our adoption of ASU 2016-09 in 2016, we recognize the impact of forfeitures when they occur with no adjustment for estimated forfeitures and recognize excess tax benefits as a reduction of income tax expense regardless of whether the benefit reduces income taxes payable.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
7. Stock-Based Awards (continued)
On April 4, 2022, the Company granted SUAs covering two thousand shares of common stock. On May 20, 2022, the Company granted SUAs covering 126 thousand shares of common stock. On August 12, 2022, the Company granted SUAs covering 18 thousand shares of common stock.
The following table represents all shares granted by the Company under the 2006 Incentive Plan for the last three years (shares in thousands):
Grant Date | Type | | Shares | | | Fair Value Per Share (1) | |
August 12, 2022 | SUA | | | 18 | | | $ | 6.65 | |
May 20, 2022 | SUA | | | 126 | | | $ | 6.51 | |
April 4, 2022 | SUA | | | 2 | | | $ | 7.04 | |
May 13, 2021 | SUA | | | 116 | | | $ | 6.55 | |
March 16, 2021 | SUA | | | 2 | | | $ | 7.04 | |
January 25, 2021 | SUA | | | 2 | | | $ | 5.54 | |
December 16, 2020 | SUA | | | 5 | | | $ | 4.71 | |
November 11, 2020 | Options | | | 40 | | | $ | 1.13 | |
November 11, 2020 | SUA | | | 190 | | | $ | 4.07 | |
| (1) | The fair value for the SUA’s is the closing price of the Company’s stock on that date. The fair value for options represents the fair value calculated using the Black-Scholes model. Options have contractual lives of 10 years. The options granted on November 11, 2020, have a fair value of $1.13 per share based on the $4.07 grant date and exercise prices and assuming 6.25 and 5.75 year estimated terms, 45% volatility, 0.9% interest rate and a 4.0% dividend yield rate. No options were granted during fiscal years ended December 31, 2022, and 2021. For options granted during fiscal year ended December 31, 2020, the weighted average grant date fair value was $3.47. For SUAs granted during fiscal years ended December 31, 2022, 2021 and 2020, the weighted average grant date fair values were $6.53, $6.55, and $4.89, respectively. |
A summary of the Company’s stock option activity is as follows (in thousands, except price per share):
| | Number of Shares | | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (2) | |
Outstanding, December 31, 2021 | | | 574 | | | $ | 14.23 | | 6.1 years | | $ | 100 | |
Granted | | | - | | | $ | - | | | | | | |
Exercised | | | (1 | ) | | $ | 4.07 | | | | | | |
Forfeited | | | (1 | ) | | $ | 4.07 | | | | | | |
Canceled | | | (64 | ) | | $ | 15.03 | | | | | | |
Outstanding, December 31, 2022 | | | 508 | | | $ | 14.19 | | 5.1 years | | $ | 25 | |
| | | | | | | | | | | | | |
Exercisable, December 31, 2022 | | | 467 | | | $ | 14.70 | | 4.9 years | | $ | 14 | |
| (2) | The aggregate intrinsic value on this table was calculated based on the amount, if any, by which the closing market price of the Company’s stock on December 31 of the applicable year exceeded the exercise price of any of the underlying options, multiplied by the number of shares subject to each such option. The closing stock price as of December 31, 2022, and 2021 was $4.90 and $7.02, respectively. |
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
7. Stock-Based Awards (continued)
A summary of the Company’s stock unit award activity is as follows (in thousands, except price per share):
| | Number of Shares | | | Weighted Average Grant-Date Fair Value per Share (3) | |
Outstanding & Unvested, December 31, 2021 | | | 224 | | | $ | 5.48 | |
Granted | | | 146 | | | $ | 6.53 | |
Converted to common stock | | | ( 90 | ) | | $ | 6.33 | |
Cancelled | | | ( 12 | ) | | $ | 6.29 | |
Forfeited | | | ( 30 | ) | | $ | 6.26 | |
Outstanding & Unvested, December 31, 2022 | | | 238 | | | $ | 6.10 | |
| (3) | Weighted average price per share is the weighted grant price based on the closing market price of each of the stock grants related to each transaction type. The weighted average fair value is the weighted average share price times the number of shares. |
The fair value of stock unit award vesting was $548 thousand, $296 thousand and $274 thousand for the years ended December 31, 2022, 2021, and 2020, respectively. The intrinsic value of stock unit awards converted to common stock was based on the stock price on the vesting date and amounted to $650 thousand, $501 thousand and $115 thousand for the years ended December 31, 2022, 2021, and 2020, respectively.
As of December 31, 2022, a total of 1,032 thousand shares of common stock were reserved for issuance under 2006 Incentive Plan. As of December 31, 2022, the unamortized fair value of outstanding options and awards was $1.2 million to be amortized over a weighted average period of 2.3 years.
The Board of Directors approved the accelerated vesting of 35 thousand SUAs to certain directors upon retirement from the Board of the Company during the year ended December 31, 2022. The Company determined the value of the modifications to be $230 thousand, which is included in stock-based compensation in the accompanying consolidated financial statements, for the year ended December 31, 2022.
8. Employee Benefit Plan
The Psychemedics Corporation 401(k) Savings and Retirement Plan (the “401(k) Plan”) is a qualified defined contribution plan in accordance with Section 401(k) of the Internal Revenue Code. All employees over the age of 21 are eligible to make pre-tax contributions up to a specified percentage of their compensation. Under the 401(k) Plan, the Company may, but is not obligated to, match a portion of the employees’ contributions up to a defined maximum. Matching contributions of zero, zero, and $198 thousand were made in the years ended December 31, 2022, 2021 and 2020, respectively.
9. Commitments and Contingencies
Commitments
The Company leases certain of its facilities and equipment under operating lease agreements expiring on various dates through December 2026. Total minimum lease payments, including scheduled increases, are charged to operations on the straight-line basis over the life of the respective lease. Rent expense was $1.0 million, $1.1 million and $1.1 million in 2022, 2021 and 2020, respectively. See Note 10 – “Operating Leases” to the Consolidated Financial Statements included in this Annual Report for commitments remaining under lease agreements.
Contingencies
In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product liability, contractual claims and tax matters. We recognize accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. These estimates are subject to uncertainties that are difficult to predict and, as such, actual results could vary from these estimates.
Settlements
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 $1.2 million in exchange for the dismissal of the California Lawsuit and a customary release of liability, subject only to final court approval and the process described below. Factoring in that process, the Company estimates that the settlement funds will be dispersed in the second half of 2023, subject to the actual timing of final court approval.
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 since June 9, 2017. 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.
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 $1.2 million liability reserve in connection with the California Lawsuit as of December 31, 2022, and 2021 included in accrued expenses in the accompanying balance sheets.
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
10. 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 and there are no renewals to extend the lease terms included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are not 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 (NPV) of the lease payments.
The weighted average discount rate used for leases as of December 31, 2022, is 3.8%. The weighted average lease term as of December 31, 2022, is 3.2 years. The operating lease expense for the twelve months ended December 31, 2022, and 2021, was $1.0 million and $1.1 million, respectively.
Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of December 31, 2022, is as follows (in thousands):
2023 |
|
$ |
1,134 |
|
2024 |
|
|
1,061 |
|
2025 |
|
|
553 |
|
2026 |
|
|
460 |
|
Total lease payments |
|
|
3,208 |
|
Less: interest |
|
|
( 233 |
) |
Present value of lease liabilities |
|
$ |
2,975 |
|
|
|
|
|
|
Current operating lease liabilities |
|
$ |
1,037 |
|
Long-term operating lease liabilities |
|
|
1,938 |
|
Total |
|
$ |
2,975 |
|
11. Debt and Other Financing Arrangements
On March 20, 2014, the Company entered into an equipment financing arrangement with Banc of America Leasing & Capital, LLC (the “Lender”), which it amended on various dates, most recently on March 23, 2021, including a Master Loan and Security Agreement and related documentation (collectively the “Equipment Loan Arrangement”) which provided the Company with the ability to finance, at its option, up to $16 million of new and used equipment purchases. Each such purchase financed under the Equipment Loan Arrangement was documented by the execution of an equipment note with a maturity date of 60 months from the applicable loan date. The loans bore interest at the then current 30-day LIBOR rate plus a premium ranging from 1.75% to 3.79%. Principal and interest were payable over the 60 month repayment period. Borrowings under the Equipment Loan Arrangement were secured by a first priority security interest in the equipment acquired with the proceeds of the equipment notes. Under the Equipment Loan Arrangement, the Company has been subject to a maximum quarterly funded debt to EBITDA ratio and a minimum fixed charge coverage ratio each of which was waived for certain quarters in 2020 and 2021. The Company was in compliance with all covenants under the Equipment Loan Arrangement as of December 31, 2022.
Under the Equipment Loan Arrangement, the Company executed notes on various dates between March 24, 2014, and December 4, 2019 in the aggregate amount of $12.2 million, of which $0.7 million and $0.7 million was repaid in 2022 and 2021, respectively. As of December 31, 2022, the aggregate amount outstanding under the equipment notes was $0.6 million. The weighted average interest rate for these notes for the year ended December 31, 2022, was 3.7% and represented $32 thousand of interest expense. As of December 31, 2022, weighted average interest rate was 3.8%.
On May 1, 2020, the Company entered into a term loan with Bank of America N.A. under the PPP administered by the United States Small Business Administration (“SBA”) under the CARES Act (the “PPP Loan”). The principal amount of the PPP Loan was $2.1 million, which was evidenced by a promissory note with a maturity date of May 4, 2022. The note bore interest on the unpaid balance at the rate of one percent (1%) per annum.
In July 2021, the PPP Loan was 100% forgiven by the SBA and recorded as a gain on forgiveness of the PPP Loan in the 2021 consolidated statement of operations and comprehensive loss.
The annual principal repayment requirements for debt obligations as of December 31, 2022, are as follows (in thousands):
2023 | | $ | 294 | |
2024 | | | 305 | |
Long-term debt from equipment financing | | | 599 | |
Less current portion of long-term debt from equipment financing | | | (294 | ) |
Long-term debt from equipment financing, net of current portion | | $ | 305 | |
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
12. Other Income/(Expense)
Interest expense for the year ended December 31, 2022, 2021, and 2020 was $32 thousand, $49 thousand, and $75 thousand, respectively. There was no interest income for the years ended December 31, 2022, 2021, and 2020. Interest expense is included as a component of other income (expense) on the accompanying consolidated statements of operations and comprehensive loss.
13. Business Segment Reporting
The Company manages its operations as one segment, drug testing services. As a result, the financial information disclosed herein materially represents all the financial information related to the Company’s principal operating segment. The Company’s revenues by geographic region, based on the location of the customer, were as follows (in thousands):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Consolidated Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
24,509 |
|
|
$ |
23,584 |
|
|
$ |
19,486 |
|
International |
|
|
731 |
|
|
|
1,325 |
|
|
|
1,874 |
|
Total Revenue |
|
$ |
25,240 |
|
|
$ |
24,909 |
|
|
$ |
21,360 |
|
14. Subsequent Event
On March 21, 2023, the Company declared a quarterly cash dividend of $0.07 per share, payable on April 10, 2023 to shareholders of record on March 31, 2023.