Psychemedics(PMD) - 2020 Q4 - Annual Report

Part I Business Psychemedics Corporation provides patented hair analysis for drug abuse testing, offering a longer detection window primarily for workplace screening, while facing competition from larger laboratories - The company's core business is drug detection through hair analysis using a patented method involving hair digestion, enzyme immunoassay (EIA), and mass spectrometry confirmation[19] - The company's testing offers a three-month detection window, a significant advantage over urinalysis's few-day window[31] - Primary markets include workplace drug testing for applicants and employees, with additional services for schools, parents, and professional drivers, notably in Brazil[42][48][49] International Revenue as a Percentage of Consolidated Revenue | Year | Percentage of Revenue from outside the U.S. | | :--- | :--- | | 2020 | 9% | | 2019 | 27% | | 2018 | 32% | - Customer concentration significantly decreased in 2020, with no single customer representing 10% or more of revenue, compared to 26% in 2019 and 31% in 2018 from one customer[56] Research and Development Expenses (2018-2020) | Year | R&D Expense (in millions) | | :--- | :--- | | 2020 | $1.3 | | 2019 | $1.6 | | 2018 | $1.6 | Risk Factors The company faces significant risks from the COVID-19 pandemic, intense competition, international operations (especially Brazil), intellectual property protection, cybersecurity, and stock price volatility due to dividend suspension - The COVID-19 pandemic continues to adversely affect business operations and financial conditions by disrupting normal operations and impacting customer demand[72][74] - The company obtained a $2.2 million Paycheck Protection Program (PPP) loan, which is subject to U.S. Treasury audit and may not be fully forgiven, potentially limiting available funds[75][76][77] - Intense price and service competition from larger, better-capitalized laboratories could negatively impact net revenues and profitability[78][79] - A significant portion of business from Brazil exposes the company to risks including political instability, currency fluctuations, and reliance on a single distributor[99][104] - The Board of Directors suspended its quarterly dividend after Q1 2020 due to the COVID-19 pandemic, with no assurance of resumption, potentially affecting stock price[111] Unresolved Staff Comments Not applicable Properties The company leases its corporate offices in Acton, MA, and two laboratory facilities in Culver City, CA, with varying lease expiration dates - Corporate offices are leased in Acton, MA (6,000 sq. ft.)[114] - Two laboratory facilities are leased in Culver City, CA, totaling 30,000 sq. ft. plus storage space[115] Legal Proceedings The company is involved in various legal matters in the ordinary course of business but does not expect their disposition to have a material adverse effect on its operations or financial condition Mine Safety Disclosures Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "PMD", with quarterly dividends suspended after Q1 2020 due to COVID-19, and no share repurchases in 2020 Quarterly Stock Price and Dividends (2019-2020) | Period | High | Low | Dividends per Share | | :--- | :--- | :--- | :--- | | Fiscal 2020 | | | | | First Quarter | $10.69 | $4.54 | $0.18 | | Second Quarter | $6.79 | $4.89 | - | | Third Quarter | $6.35 | $4.33 | - | | Fourth Quarter | $5.44 | $3.58 | - | | Fiscal 2019 | | | | | First Quarter | $19.64 | $13.68 | $0.18 | | Second Quarter | $14.67 | $9.25 | $0.18 | | Third Quarter | $10.36 | $7.12 | $0.18 | | Fourth Quarter | $9.80 | $8.30 | $0.18 | - The quarterly dividend was suspended after the first quarter of 2020 due to the COVID-19 outbreak[122] - The company did not repurchase any common shares for treasury during 2020[123] Selected Financial Data The company experienced a significant financial decline from 2018 to 2020, with revenue falling to $21.4 million and a net loss of $3.9 million in 2020, reversing prior year profits Selected Financial Data (2016-2020, in thousands, except per share data) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $21,360 | $37,678 | $42,674 | $39,701 | $38,980 | | Gross profit | $4,886 | $16,444 | $20,618 | $19,822 | $21,450 | | (Loss) income from operations | $(6,066) | $2,998 | $7,610 | $8,157 | $10,110 | | Net (loss) income | $(3,859) | $1,542 | $4,584 | $6,121 | $6,678 | | Total assets | $24,003 | $27,531 | $24,974 | $26,508 | $25,032 | | Shareholders' equity | $12,512 | $16,820 | $18,747 | $18,620 | $15,607 | | Diluted net (loss) income per share | $(0.70) | $0.28 | $0.83 | $1.10 | $1.22 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant 2020 financial decline to COVID-19, resulting in $21.4 million revenue (43% decrease) and a $3.9 million net loss, with liquidity supported by cash and a PPP loan Results of Operations In 2020, revenue decreased 43% to $21.4 million due to a 56% volume drop, leading to a 70% decline in gross profit and a $6.1 million operating loss, exacerbated by an 82% fall in international revenue Revenue by Geographic Region (in thousands) | Region | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | United States | $19,486 | $27,329 | $29,189 | | Brazil | $1,344 | $9,819 | $13,046 | | Other | $530 | $530 | $439 | | Total Revenue | $21,360 | $37,678 | $42,674 | Year-over-Year Comparison: 2020 vs. 2019 (in thousands) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $21,360 | $37,678 | $(16,318) | -43% | | Gross profit | $4,886 | $16,444 | $(11,558) | -70% | | Operating (loss) income | $(6,066) | $2,998 | $(9,064) | -302% | | Net (loss) income | $(3,859) | $1,542 | $(5,401) | -350% | - The 43% revenue decline in 2020 was driven by a 56% decrease in volume, with international revenue falling 82% and domestic revenue 29%, primarily due to the COVID-19 pandemic[137] Liquidity and Capital Resources Cash and cash equivalents decreased to $2.8 million by year-end 2020, with operating activities using $4.1 million in cash, while financing activities provided $0.5 million, largely from a $2.2 million PPP loan Summary of Cash Flows (in millions) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(4.1) | $4.3 | $7.9 | | Net Cash (Used in) Provided by Investing Activities | $(0.9) | $2.1 | $(5.4) | | Net Cash Provided by (Used in) Financing Activities | $0.5 | $(3.0) | $(5.6) | - On May 4, 2020, the company borrowed approximately $2.2 million under the Paycheck Protection Program (PPP), with a forgiveness application submitted on November 6, 2020[155][156] - The Board of Directors suspended the quarterly dividend payment after Q1 2020 to prioritize liquidity and strengthen the balance sheet[153] Critical Accounting Policies Management identifies critical accounting policies including Revenue Recognition (at point of service), Estimates (bad debts, asset lives), Capitalized Development Costs (internal-use software), Allowance for Doubtful Accounts, and Income Taxes - Revenue from drug testing services is recognized at a point in time when the test is performed and results are reported to the customer[158] - The company capitalizes costs for internal-use software application development, amortizing them over 5 years, with $213 thousand capitalized in 2020[162] Quantitative and Qualitative Disclosures About Market Risk Not required Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018-2020, including the unqualified auditor's report from BDO USA, LLP, noting the adoption of ASC 842 for leases in 2019 - The independent auditor, BDO USA, LLP, issued an unqualified opinion, affirming the fair presentation of the company's financial position in all material respects[173] - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, recognizing right-of-use assets and lease liabilities on the balance sheet[174][230] Disaggregated Revenue by Source (in thousands) | Revenue Source | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Testing | $19,068 | $34,555 | $39,174 | | Shipping / Collection (hair) | $2,174 | $2,876 | $3,159 | | Other | $118 | $247 | $341 | | Total Revenue | $21,360 | $37,678 | $42,674 | Selected Quarterly Financial Data - 2020 (in thousands) | Quarter Ended - 2020 | Revenues | Gross profit | Net loss | Diluted net loss per share | | :--- | :--- | :--- | :--- | :--- | | MAR 31 | $7,537 | $2,728 | $(159) | $(0.03) | | JUN 30 | $3,314 | $(252) | $(2,050) | $(0.37) | | SEP 30 | $5,174 | $1,133 | $(1,107) | $(0.20) | | DEC 31 | $5,335 | $1,277 | $(543) | $(0.10) | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None Controls and Procedures As of December 31, 2020, management concluded that both disclosure controls and internal control over financial reporting were effective, with no material changes during the recent fiscal quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[275] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[278] Other Information None Part III This section covers directors, executive officers, corporate governance, compensation, security ownership, and accountant fees, with most details incorporated by reference from the 2021 proxy statement Directors, Executive Officers and Corporate Governance This item lists executive officers and directors as of March 26, 2021, including Raymond C. Kubacki as Chairman, CEO, and President, along with their biographies and the company's code of ethics Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | Raymond C. Kubacki | 76 | Chairman, Chief Executive Officer, President, Director | | Charles Doucot | 55 | Executive Vice President | | Andrew Limbek | 35 | Vice President, Controller | | Michael I. Schaffer, Ph.D. | 76 | Vice President, Laboratory Operations | | Harry Connick | 95 | Director | | Walter S. Tomenson, Jr. | 74 | Director | | Robyn C. Davis | 59 | Director | | Fred J. Weinert | 73 | Director, Lead Independent Director | Executive Compensation The information required by this item is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders Principal Accountant Fees and Services The information required by this item is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders Part IV Exhibits, Financial Statement Schedules This section refers to financial statements in Part II, Item 8, and directs to the Exhibit Index for a list of all filed exhibits Form 10-K Summary None