PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,279,905
|
|
|
$
|
2,689,464
|
|
Accounts receivable, net of allowance for doubtful accounts of $41,373 in 2016 and $58,684 in 2015
|
|
|
5,460,101
|
|
|
|
3,538,765
|
|
Prepaid expenses and other current assets
|
|
|
1,241,588
|
|
|
|
1,060,587
|
|
Income tax receivable
|
|
|
-
|
|
|
|
840,122
|
|
Deferred tax assets
|
|
|
488,759
|
|
|
|
327,442
|
|
Total Current Assets
|
|
|
9,470,353
|
|
|
|
8,456,380
|
|
Fixed Assets, net of accumulated amortization and depreciation of $7,695,144 in 2016 and $6,642,501 in 2015
|
|
|
13,259,268
|
|
|
|
13,132,114
|
|
Other assets
|
|
|
813,028
|
|
|
|
774,474
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
23,542,649
|
|
|
$
|
22,362,968
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
988,507
|
|
|
$
|
747,291
|
|
Accrued expenses
|
|
|
1,461,183
|
|
|
|
1,197,632
|
|
Accrued income taxes
|
|
|
535,287
|
|
|
|
-
|
|
Current portion of long-term debt
|
|
|
1,741,602
|
|
|
|
1,619,633
|
|
Total Current Liabilities
|
|
|
4,726,579
|
|
|
|
3,564,556
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,919,703
|
|
|
|
4,272,137
|
|
Deferred tax liabilities, long-term
|
|
|
3,042,122
|
|
|
|
2,852,745
|
|
Total Liabilities
|
|
|
11,688,404
|
|
|
|
10,689,438
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred-stock, $0.005 par value, 872,521 shares authorized, no shares issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.005 par value; 50,000,000 shares authorized 6,127,850 shares issued in 2016 and 6,090,671 shares issued in 2015
|
|
|
30,639
|
|
|
|
30,453
|
|
Additional paid-in capital
|
|
|
30,280,467
|
|
|
|
30,021,604
|
|
Accumulated deficit
|
|
|
(8,375,072
|
)
|
|
|
(8,296,738
|
)
|
Less - Treasury stock, at cost, 668,130 shares
|
|
|
(10,081,789
|
)
|
|
|
(10,081,789
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
11,854,245
|
|
|
|
11,673,530
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
23,542,649
|
|
|
$
|
22,362,968
|
|
See accompanying notes to condensed financial
statements
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,700,052
|
|
|
$
|
7,001,409
|
|
|
$
|
16,367,116
|
|
|
$
|
13,757,150
|
|
Cost of revenues
|
|
|
4,490,907
|
|
|
|
3,731,667
|
|
|
|
8,419,529
|
|
|
|
7,148,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,209,145
|
|
|
|
3,269,742
|
|
|
|
7,947,587
|
|
|
|
6,608,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative
|
|
|
1,185,775
|
|
|
|
1,154,489
|
|
|
|
2,437,850
|
|
|
|
2,298,579
|
|
Marketing & selling
|
|
|
1,302,034
|
|
|
|
1,322,117
|
|
|
|
2,429,688
|
|
|
|
2,610,598
|
|
Research & development
|
|
|
350,205
|
|
|
|
437,090
|
|
|
|
710,663
|
|
|
|
892,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,838,014
|
|
|
|
2,913,696
|
|
|
|
5,578,201
|
|
|
|
5,802,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,371,131
|
|
|
|
356,046
|
|
|
|
2,369,386
|
|
|
|
806,561
|
|
Interest expense, net
|
|
|
(35,492
|
)
|
|
|
(30,877
|
)
|
|
|
(70,133
|
)
|
|
|
(64,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
2,335,639
|
|
|
|
325,169
|
|
|
|
2,299,253
|
|
|
|
742,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
701,884
|
|
|
|
72,840
|
|
|
|
688,942
|
|
|
|
212,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,633,755
|
|
|
$
|
252,329
|
|
|
$
|
1,610,311
|
|
|
$
|
529,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
$
|
0.30
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
5,443,150
|
|
|
|
5,399,270
|
|
|
|
5,432,902
|
|
|
|
5,387,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
5,454,167
|
|
|
|
5,408,372
|
|
|
|
5,440,376
|
|
|
|
5,396,740
|
|
See accompanying notes to condensed financial
statements
PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,610,311
|
|
|
$
|
529,851
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,070,847
|
|
|
|
707,303
|
|
Change in excess tax benefit related to stock
|
|
|
-
|
|
|
|
86,433
|
|
Stock-based compensation
|
|
|
348,193
|
|
|
|
342,992
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,921,336
|
)
|
|
|
(438,022
|
)
|
Prepaid expenses, other current assets, and income tax receivable
|
|
|
659,121
|
|
|
|
876,858
|
|
Accounts payable
|
|
|
241,216
|
|
|
|
(255,519
|
)
|
Accrued expenses and accrued income taxes
|
|
|
407,216
|
|
|
|
178,497
|
|
Deferred income taxes
|
|
|
28,060
|
|
|
|
(166,851
|
)
|
Net cash provided by operating activities
|
|
|
2,443,628
|
|
|
|
1,861,542
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of equipment and leasehold improvements
|
|
|
(709,338
|
)
|
|
|
(699,192
|
)
|
Cost of internally developed software
|
|
|
(78,837
|
)
|
|
|
(220,019
|
)
|
Other assets
|
|
|
(56,758
|
)
|
|
|
(149
|
)
|
Net cash used in investing activities
|
|
|
(844,933
|
)
|
|
|
(919,360
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock options
|
|
|
-
|
|
|
|
91,556
|
|
Proceeds from issuance of stock, net of tax withholding
|
|
|
(148,644
|
)
|
|
|
(226,610
|
)
|
Proceeds from equipment financing
|
|
|
609,844
|
|
|
|
-
|
|
Payments of equipment financing
|
|
|
(840,309
|
)
|
|
|
(699,963
|
)
|
Cash dividends paid
|
|
|
(1,629,145
|
)
|
|
|
(1,615,258
|
)
|
Net cash used in financing activities
|
|
|
(2,008,254
|
)
|
|
|
(2,450,275
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(409,559
|
)
|
|
|
(1,508,093
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
2,689,464
|
|
|
|
3,612,153
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,279,905
|
|
|
$
|
2,104,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
2,870
|
|
Cash paid for interest
|
|
$
|
70,559
|
|
|
$
|
64,679
|
|
Purchases of equipment through accrued liabilities
|
|
$
|
391,622
|
|
|
$
|
266,976
|
|
See accompanying notes to condensed financial
statements
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
Interim Financial Statements
|
The accompanying unaudited
interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly,
certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended
that these financial statements be read in conjunction with the financial statements and related notes of Psychemedics Corporation
(“the Company,” “our Company,” “our” or “we”) as reported in the Company’s
Annual Report on Form 10-K (“10-K”) for the year ended December 31, 2015, filed on February 26, 2016. In the opinion
of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial
position, results of operations, and cash flows at the dates and for the periods presented have been included. The results of operations
for the three and six months ended June 30, 2016 may not be indicative of the results that may be expected for the year ending
December 31, 2016, or any other period.
|
2.
|
Cash and Cash Equivalents
|
The Company considers
all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents consisted exclusively
of cash in the bank as of December 31, 2015 and June 30, 2016.
|
3.
|
Stock-Based Compensation
|
The Company’s
2006 Equity Incentive Plan (“the Plan”) provides for cash based awards or the grant or issuance of stock-based awards
including; options, restricted stock or stock unit awards (SUA’s). As of December 31, 2015, 70,232 shares remained available
for future grant under the 2006 Plan. At the 2016 annual meeting, an additional 350,000 shares were approved for grant. There were
no other changes to the plan as described in the 10-K.
On May 12, 2016, the
Company granted SUAs covering 16,600 shares of common stock and options to acquire up to 120,500 shares of common stock. The SUAs
vest over a period of two years for non-employee board members and four years for employees and are convertible into an equivalent
number of shares of the Company’s common stock provided that the director or employee receiving the award remains employed
throughout the vesting period. The stock options become exercisable over two years for non-employee board members and four years
for employees and have a term of 10 years. The options have a fair value of $2.34 per share based on the $13.82 grant price and
assuming a 6.25 year estimated term, 33% volatility, 1.75% interest rate and a 5.6% dividend yield rate using a Black-Scholes model.
The Company records compensation expense related to the SUAs and options on a straight-line basis over the vesting term. Employees
are issued shares upon vesting, in the case of SUA’s or upon exercise of options, net of tax withholdings, unless the employee
chooses to receive all shares and pay for the associated employment taxes. No other types of equity-based awards have been granted
or issued under the 2006 Incentive Plan.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
3.
|
Stock-Based Compensation (continued)
|
Activity for SUAs under the Plan for the six months
ended June 30, 2016 is as follows:
|
|
Number of
Shares
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
|
|
|
|
|
(000s)
|
|
Unvested, December 31, 2015
|
|
|
111,464
|
|
|
|
|
|
Granted
|
|
|
16,600
|
|
|
|
|
|
Forfeited/expired
|
|
|
(16,760
|
)
|
|
|
|
|
Converted to common stock
|
|
|
(37,179
|
)
|
|
|
|
|
Unvested, June 30, 2016
|
|
|
74,125
|
|
|
$
|
1,018
|
|
|
1)
|
The aggregate intrinsic value on these tables was calculated based on the closing market value
of the Company’s stock on June 30, 2016 ($13.74).
|
Activity for options under the Plan for the six
months ended June 30, 2016 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
(000s)
|
|
Outstanding, December 31, 2015
|
|
|
47,000
|
|
|
$
|
10.21
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
120,500
|
|
|
$
|
13.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Terminated/Expired
|
|
|
(7,500
|
)
|
|
$
|
13.82
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
160,000
|
|
|
$
|
12.76
|
|
|
|
9.7 years
|
|
|
$
|
166
|
|
Exercisable, June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(2)
|
The aggregate intrinsic value on this table was calculated based on the amount, if any, by which
the closing market value of the Company’s stock on the June 30, 2016 ($13.74) exceeded the exercise price of the underlying
options, multiplied by the number of shares subject to each option.
|
As of June 30, 2016, a total of 541,517 shares of common
stock were reserved for issuance under the 2006 Incentive Plan. As of June 30, 2016, the unamortized fair value of awards relating
to outstanding SUAs and options was $1.3 million, which is expected to be amortized over a weighted average period of 3.0 years.
The total number of shares available for grant as of June 30, 2016 was 307,392.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
4.
|
Basic and Diluted Net Income Per Share
|
Basic net income per share is computed
by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share
is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during
the period. The number of dilutive common equivalent shares outstanding during the period is determined in accordance with the
treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options and common
stock issuable upon the vesting of outstanding, unvested SUAs. Basic and diluted weighted average common shares outstanding for
the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares outstanding, basic
|
|
|
5,443
|
|
|
|
5,399
|
|
|
|
5,433
|
|
|
|
5,387
|
|
Dilutive common equivalent shares
|
|
|
11
|
|
|
|
9
|
|
|
|
7
|
|
|
|
10
|
|
Weighted average common shares outstanding, diluted
|
|
|
5,454
|
|
|
|
5,408
|
|
|
|
5,440
|
|
|
|
5,397
|
|
|
5.
|
Fair Value Measurements
|
The Company has financial
instruments, such as accounts receivable, accounts payable, and accrued expenses, which are stated at carrying amounts that approximate
fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates
fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the company.
On July 26, 2016, the
Company declared a quarterly dividend of $0.15 per share for a total of $819 thousand, which will be paid on August 15, 2016 to
shareholders of record on August 5, 2016.
|
7.
|
Commitments and Contingencies
|
The Company is subject
to legal proceedings and claims which arise in the ordinary course of its business. The Company believes that based upon information
available to the Company at this time, the expected outcome of these matters would not have a material impact on the Company’s
results of operations or financial condition.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
8.
|
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,
LLC, which it amended on September 15, 2015. The terms of this arrangement are detailed in the 10-K.
On March 23, 2016,
under the Loan Arrangement, the Company executed a note in the amount of $609 thousand, for total borrowings of $8.7 million. The
weighted average interest rate for all notes related to the Loan Agreement for the quarter ended June 30, 2016 was 2.44%, and represented
$35,492 of interest expense as compared to a rate of 2.18% and interest expense of $31,478 for the comparable period in 2015. As
of June 30, 2016, the interest rate was 2.44% and there was $5.7 million of outstanding debt related to the loan. As of June 30,
2016, the Company had $0.1 million of debt financing available under the Loan Agreement. The Company was in compliance with all
loan covenants as of June 30, 2016.
The annual principal
repayment requirements for debt obligations as of June 30, 2016 were as follows (in 000’s):
2016
|
|
$
|
870
|
|
2017
|
|
|
1,742
|
|
2018
|
|
|
1,742
|
|
2019
|
|
|
990
|
|
2020
|
|
|
287
|
|
2021
|
|
|
30
|
|
Total long-term debt
|
|
|
5,661
|
|
Less current portion of long-term debt
|
|
|
(1,742
|
)
|
Total long-term debt, net of current portion
|
|
$
|
3,919
|
|
The Company had one
customer that exceeded 10% of revenue for the quarter ended June 30, 2016. There were no customers that exceeded 10% of revenue
for the same period in 2015. The Company had one customer that accounted for 22% and 11% of the total accounts receivable balance
as of June 30, 2016 and December 31, 2015, respectively.
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
10.
|
Recent Accounting Pronouncements
|
In February 2016,
the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those
leases classified as operating leases under previous guidance. The new standard establishes a right-of-use ("ROU") model
that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12 months. The new standard will become effective for fiscal years beginning after December 15, 2018 and interim periods within
those fiscal years, with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting
guidance will have on its financial statements.
In
March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), 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. The new standard will become effective beginning with the first quarter of 2017, with early adoption permitted.
The Company elected early adoption of ASU 2016-09 in the second quarter of 2016 which was applied using a modified retrospective
approach.
The adoption of ASU 2016-09 did not materially impact
the Company’s financial position, results of operations, equity or cash flows. As a result of our adoption of ASU 2016-09,
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. Additionally, we recognize
the cash flow impact of such excess tax benefits in operating activities in our condensed statements of cash flows. The cumulative
impact upon adoption was a $41 thousand benefit from income taxes and a $60 thousand cumulative adjustment to retained earnings.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided
by the Company or statements made by its employees may contain "forward-looking" information which involves risks and
uncertainties. In particular, statements contained in this report which are not historical facts (including, but not limited to,
the Company's expectations regarding earnings, earnings per share, revenues, operating cash flows, dividends, future business,
growth opportunities, new accounts, customer base, test volume, sales and marketing strategy, business strategy, general and administrative
expenses, marketing and selling expenses, research and development expenses, anticipated operating results, foreign drug testing
laws and regulations, including effective dates of such laws and regulations, required investments in plant, property and equipment,
strategies with respect to governmental agencies and regulations, cost savings, capital expenditures, liquidity of investments
and anticipated cash requirements) may be "forward-looking" statements. The Company's actual results may differ from
those stated in any "forward-looking" statements. Factors that may cause such differences include, but are not limited
to, risks associated with employee hiring practices of the Company’s principal customers, development of markets for new
products and services offered by the Company, costs associated with capacity expansion, government regulation (including, but not
limited to, Food and Drug Administration regulations and foreign government regulation including Brazilian commercial drivers license
drug test regulations), risks associated with the delay in the implementation of new regulations, competition and general economic
conditions. With respect to the continued payment of cash dividends, factors include, but are not limited to, available surplus,
cash flow, capital expenditure reserves required, debt service obligations, and other factors that the Board of Directors of the
Company may take into account.
Given these uncertainties, you should not
place undue reliance on these forward-looking statements. Forward-looking statements represent the Company’s estimates and
assumptions only as of the date of this Report. The Company expressly disclaim any duty to provide updates to forward-looking statements,
and the estimates and assumptions associated with them, after the date of this Report, in order to reflect changes in circumstances
or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of
the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk
Factors” set forth in Part I Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31,
2015, as well as the risks and uncertainties discussed elsewhere in this Report. The Company qualifies all of its forward-looking
statements by these cautionary statements. The Company cautions you that these risks are not exhaustive. The Company operates in
a continually changing business environment and new risks emerge from time to time.
OVERVIEW
Revenues for the second
quarter of 2016 were $9.7 million, an increase of 39% from second quarter 2015 revenue of $7.0 million. The Company reported net
income of $1.6 million, or $0.30 per diluted share for the three months ended June 30, 2016 versus $252 thousand, or $0.05 per
diluted share for the same period in 2015, an increase of 547%. The increase in revenue and earnings was primarily the result of
higher testing volume from Brazil. The Brazil opportunity derived from the implementation of a recently passed Brazilian law requiring
a hair drug test for all professional drivers in the country that began to take effect in March 2016. The Company distributed $1.6
million or $0.30 per share of cash dividends to its shareholders in the six months ended June 30, 2016. The Company has paid 79
consecutive quarterly cash dividends.
RESULTS OF OPERATIONS
Revenues
were $9.7 million for three
months ended June 30, 2016 compared to revenues of $7.0 million for the three months ended June 30, 2015, representing an increase
of 39%. The increase was attributable to testing volume from Brazil. Revenues for the six months ended June 30, 2016 were $16.4
million, representing an increase of 19% from the comparable period of 2015 of $13.8 million. This increase was primarily driven
from testing volume from Brazil.
Gross profit
increased $1.9 million
to $5.2 million for the three months ended June 30, 2016, compared to $3.3 million for the same period in 2015. Direct costs increased
by $759 thousand or 20% for the three months ended June 30, 2016 compared to the same period in 2015. The gross profit margin was
54% for the three months ended June 30, 2016 and 47% for the comparable period of 2015. The increase in margin was attributable
to higher sales. Gross profit for the six months ended June 30, 2016 increased $1.3 million to $7.9 million compared to $6.6 million
for the comparable period in 2015. Direct costs increased by $1.3 million or 18% for the six months ended June 30, 2016 when compared
to the same period in 2015. The gross profit margin for the six month period ended June 30, 2016 was 49% compared to 48% for the
comparable period in 2015.
General and administrative (“G&A”)
expenses
were $1.2 million for the three months ended June 30, 2016 and 2015. As a percentage of revenue, G&A expenses
were 12% for the three months ended June 30, 2016 and 16% for the same period in 2015. General and administrative expenses were
$2.4 million for the six months ended June 30, 2016 compared to $2.3 million for the same period in 2015. As a percentage of revenue,
G&A expenses were 15% and 17% for the six months ended June 30, 2016 and 2015, respectively.
Marketing and selling expenses
were
$1.3 million for the three months ended June 30, 2016 and 2015. Total marketing and selling expenses represented 13% of revenue
for the three months ended June 30, 2016, compared to 19% for the comparable period of 2015. Marketing and selling expenses were
$2.4 million for the six months ended June 30, 2016, compared to $2.6 million for the same period in 2015. Total marketing and
selling expenses represented 15% of revenue for the six months ended June 30, 2016, compared to 19% for the comparable period of
2015.
Research and development (“R&D”)
expenses
for the three months ended June 30, 2016 were $350 thousand compared to $437 thousand for the comparable period
of 2015. R&D expenses represented 4% and 6% of revenue for the three months ended June 30, 2016 and 2015, respectively. Research
and development expenses for the six months ended June 30, 2016 were $711 thousand compared to $893 thousand in the prior year.
R&D expenses represented 4% and 6% of revenue for the six months ended 2016 and 2015, respectively.
Provision for income taxes
During
the three months ended June 30, 2016 and 2015, the Company recorded tax provisions of $702 thousand and $73 thousand, respectively.
These provisions represented effective tax rates of 30% for the three months ended June 30, 2016 and 22% for the comparable period
of 2015. During the six months ended June 30, 2016 and June 30, 2015, the Company recorded tax provisions of $689 thousand and
$213 thousand, respectively. These provisions represented effective tax rates of 30% for the six month period ended June 30, 2016
and 29% for the comparative period last year. The effective rate for the three months ended June 30, 2016 had an impact of 1.7%
due to adoption of ASU 2016-09, excess tax benefits for employee stock based compensation. The Company expects the year-end tax
rate to be to be between 31% and 33%.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2016,
the Company had approximately $2.3 million of cash. The Company's operating activities generated net cash of $2.4 million for the
six months ended June 30, 2016. Investing activities used $845 thousand of cash while financing activities used $2.0 million of
cash during the first six months of 2016.
Cash provided by operating
activities of $2.4 million reflected net income of $1.6 million adjusted for depreciation and amortization of $1.1 million and
stock-based compensation of $348 thousand. This was affected by the following changes in assets and liabilities: an increase in
accounts receivable of $1.9 million, a decrease in prepaid expenses, other current assets and income tax receivable of $659 thousand,
an increase in accounts payable of $241 thousand, an increase in accrued expenses of $407 thousand and an increase for deferred
income taxes of $28 thousand.
Cash used in investing
activities primarily included equipment and leasehold improvements of $709 thousand which were purchased during the first six months
of 2016. We anticipate spending $0.5 million to $1.0 million in additional capital purchases for the remainder of 2016.
Cash used by financing
activities of $2.1 million primarily included cash dividends to shareholders of $1.6 million and $840 thousand from payments on
long term debt, offset by $610 thousand of additional equipment financing. On July 26, 2016, the Company declared a quarterly
dividend of $0.15 per share for an estimated total of $819 thousand, which will be paid on August 15, 2016 to shareholders of
record on August 5, 2016.
Contractual obligations
and other commercial commitments as of June 30, 2016 were as follows (in thousands):
|
|
Less Than
One Year
|
|
|
1-3
Years
|
|
|
4-5
Years
|
|
|
After 5
Years
|
|
|
Total
|
|
Debt principal
|
|
$
|
1,742
|
|
|
$
|
3,398
|
|
|
$
|
521
|
|
|
$
|
-
|
|
|
$
|
5,661
|
|
Operating leases
|
|
|
798
|
|
|
|
919
|
|
|
|
554
|
|
|
|
-
|
|
|
|
2,271
|
|
Total
|
|
$
|
2,540
|
|
|
$
|
4,317
|
|
|
$
|
1,075
|
|
|
$
|
-
|
|
|
$
|
7,932
|
|
At June 30, 2016,
the Company's principal sources of liquidity included an aggregate of approximately $2.3 million of cash and $92 thousand under
the equipment financing arrangement available for future equipment purchases. The Company had $4.7 million and $5.0 million
of working capital as of June 30, 2016 and 2015, respectively. Management currently believes that such funds, together with cash
generated from operations, should be adequate to fund anticipated working capital requirements and capital equipment expenditures
for the next 12 months. Depending upon the Company's results of operations and capital needs, the Company may use various
financing sources to raise additional funds.