See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The interim condensed consolidated financial statements of Psychemedics Corporation (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022, included in the Company's 2022 Annual Report on Form 10-K (“10-K”), as filed with the SEC.
The accompanying condensed consolidated financial statements are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2022, has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all the information and footnotes required for complete annual financial statements. The Company’s comprehensive (loss)/income is equal to its net (loss)/income for all periods presented.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 31, 2023, may not be indicative of the results that may be expected for the year ending December 31, 2023, or any other period.
Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to Psychemedics Corporation and its wholly-owned consolidated subsidiaries.
Liquidity and Management’s Plans
At March 31, 2023, the Company’s principal sources of liquidity included approximately $4.4 million of cash. Management currently believes that such funds, together with future operating profits, should be adequate to fund anticipated working capital requirements, including equipment financing 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, 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.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. | Financial Information (continued) |
Accounts Receivable
The Company believes its allowance for credit losses related to its accounts receivable remained adequate as of March 31, 2023, due to the essential nature of its customers business, as well as the diversity of its large customer base. While the Company anticipates there could be an increase in the aging of its accounts receivable, the Company does not anticipate a significant increase in default risk.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 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 has adopted ASU 2016-13 in the first quarter of 2023 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 does not have a material impact on the consolidated financial statements.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. | Stock-Based Compensation |
The Company’s 2006 Incentive Plan (“the Plan”) provides for cash-based awards or the grant or issuance of stock-based awards. As of March 31, 2023, 321 thousand shares remained available for future grant under the Plan.
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The compensation cost charged against income is included in cost of revenues and operating expenses as follows (in thousands):
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
Stock-based compensation related to: | | | | | | | | |
Stock option grants | | $ | 20 | | | $ | 53 | |
Stock unit awards | | | 157 | | | | 126 | |
Total stock-based compensation | | $ | 177 | | | $ | 179 | |
There was no income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation arrangements for the three ended March 31, 2023, and 2022.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. | Stock-Based Compensation (continued) |
A summary of the Company’s stock option activity for the three months ended March 31, 2023, is as follows (in thousands except per share amounts and years):
| | | | | | | | | | Weighted Average | | | | | |
| | | | | | Weighted Average | | | Remaining | | | Aggregate | |
| | Number of | | | Exercise Price | | | Contractual Life | | | Intrinsic | |
| | Shares | | | Per Share | | | (years) | | | Value(1) | |
Outstanding, December 31, 2022 | | | 508 | | | $ | 14.19 | | | | 5.1 | | | $ | 25 | |
Canceled | | | ( 64 | ) | | $ | 14.70 | | | | | | | | | |
Outstanding, March 31, 2023 | | | 444 | | | $ | 14.09 | | | | 4.8 | | | $ | 33 | |
| | | | | | | | | | | | | | | | |
Exercisable, March 31, 2023 | | | 402 | | | $ | 14.67 | | | | 4.6 | | | $ | 17 | |
| (1) | Intrinsic value is calculated based on the amount by which the closing market value of the Company’s stock exceeded the exercise price of the underlying options, multiplied by the number of shares. |
A summary of the Company’s stock unit award (“SUA”) activity for the three months ended March 31, 2023, is as follows (in thousands except per share amounts):
| | Number of Shares | | | Weighted Average Grant-Date Fair Value Per Share | |
| | | | | | | | |
Outstanding & Unvested, December 31, 2022 | | | 238 | | | $ | 6.10 | |
Converted to common stock | | | (5 | ) | | $ | 6.36 | |
Cancelled | | | (2 | ) | | $ | 6.19 | |
Forfeited | | | (9 | ) | | $ | 5.90 | |
Outstanding & Unvested, March 31, 2023 | | | 222 | | | $ | 6.10 | |
As of March 31, 2023, 912 thousand shares of common stock were reserved for issuance under the Plan. As of March 31, 2023, the unamortized fair value of awards relating to outstanding SUAs and options was $941 thousand, which is expected to be amortized over a weighted average period of 2.2 years.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. |
Basic and Diluted Net (Loss)/Income Per Share |
Basic net (loss)/income per share is computed by dividing net (loss)/income by the weighted average number of common shares outstanding during the period. Diluted net (loss)/income per share is computed by dividing net (loss)/income by the weighted average number of common and dilutive common equivalent shares outstanding during the period when the effect is dilutive. The number of dilutive common equivalent shares outstanding during the period was determined in accordance with the treasury-stock method. Common equivalent shares consisted of common stock issuable upon the exercise of outstanding options and common stock issuable upon the vesting of outstanding, unvested SUAs. Basic and diluted weighted average common shares outstanding for the three months ended March 31, 2023, and 2022 were as follows (in thousands):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
Weighted average common shares outstanding, basic |
|
|
5,685 |
|
|
|
5,590 |
|
Dilutive common equivalent shares |
|
|
- |
|
|
|
56 |
|
Weighted average common shares outstanding, diluted |
|
|
5,685 |
|
|
|
5,646 |
|
The computation of diluted earnings per share for the three months ended March 31, 2023, and 2022 excludes the effect of the potential exercise of stock awards, including stock options, when the effect is anti-dilutive. For the three months ended March 31, 2023, and 2022, the number of antidilutive stock awards excluded from diluted earnings per share were 620 thousand and 545 thousand, respectively.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. | Commitments and Contingencies |
From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. Although it is difficult to predict the ultimate outcome of these cases, management believes, that any ultimate liability would not have a material adverse effect on the consolidated statements of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on the statements of operations or cash flows in the period in which it is recorded. Developments in legal proceedings and other matters that could cause changes in the amounts previously accrued are evaluated each reporting period.
Settlements
As previously reported in the 10-K, on December 6, 2021, the Company entered into a binding Memorandum of Understanding to settle a purported class action lawsuit 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.
The Company has accrued $1.2 million as of March 31, 2023 related to the California Lawsuit, which is included in accrued expenses on the accompanying consolidated balance sheets.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has five operating leases for office and laboratory space used to conduct business. The exercise of lease renewal options is at our discretion. There is one lease which contains renewal options to extend the lease terms included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the lease commencement date in determining the net present value (NPV) of the lease payments.
As of March 31, 2023, the Company recognized a Right-Of-Use (“ROU”) asset of $2.5 million and an operating lease liability of $2.8 million based on the present value of the minimum rental payments. The weighted average discount rate used for leases as of March 31, 2023, is 3.9%. The weighted average lease term as of March 31, 2023, is 2.9 years. The operating lease expense for the three months ended March 31, 2023, was $262 thousand.
Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of March 31, 2023, is as follows (in thousands):
April 1, 2023, through December 31, 2023 | | $ | 876 | |
2024 | | | 1,106 | |
2025 | | | 564 | |
2026 | | | 460 | |
Total lease payments | | | 3,006 | |
Less: interest | | | (209 | ) |
Present value of lease liabilities | | $ | 2,797 | |
| | | | |
Current operating lease liabilities | | $ | 1,076 | |
Long-term operating lease liabilities | | | 1,721 | |
| | $ | 2,797 | |
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. | Debt and Other Financing Arrangements |
On March 20, 2014, the Company entered into an equipment financing arrangement (“Loan Agreement”) with Banc of America Leasing & Capital, which it amended on August 8, 2014, September 15, 2015, October 30, 2017, and December 2, 2019. The terms of the arrangement are detailed in the 10-K.
The weighted average interest rate on outstanding debt under the Loan Agreement was 3.8% for the three months ended March 31, 2023. The interest expense was $5 thousand for the three months ended March 31, 2023. As of March 31, 2023, the weighted average interest rate was 3.8% and there was $526 thousand of outstanding debt related under the Loan Agreement. The Company was in compliance with all loan covenants under the Loan Agreement as of March 31, 2023.
The annual principal repayment requirements for debt obligations as of March 31, 2023, were as follows (in thousands):
April 1, 2023, through December 31, 2023 | | $ | 222 | |
2024 | | | 305 | |
Long-term debt from equipment financing | | | 527 | |
Less: current portion of long-term debt from equipment financing | | | (297 | ) |
Long-term debt from equipment financing, net of current portion | | $ | 230 | |
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below disaggregates our external revenue by major source (in thousands):
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
Testing | | $ | 4,938 | | | $ | 5,724 | |
Shipping/Collection (hair) | | | 898 | | | | 750 | |
Other | | | 23 | | | | 34 | |
Total Revenue | | $ | 5,859 | | | $ | 6,508 | |
The Company had no customers that represented over 10% of revenue during either of the three-month periods ended March 31, 2023, or 2022. The Company had one customer that represented 16% and 17% of the total accounts receivable balance as of March 31, 2023, and 2022, respectively.
On May 9, 2023, the Company declared a cash dividend of $0.07 per share, which will be paid on June 8, 2023, to shareholders of record on May 25, 2023.
Item 2.