2022 ANNUAL REPORT
CORPORATE PROFILE
Psychemedics is the pioneer and global leader of testing for drugs of abuse using hair analysis. With
over 30 years of continuous innovation, Psychemedics is the only company to develop and patent a
process that releases virtually 100% of ingested drugs from the inside of the hair. We believe
Psychemedics’ superior science delivers the most sensitive FDA 510 K cleared tests in the world
resulting in unmatched detection rates.
Psychemedics’ results, science, and people are trusted by the world’s most safety sensitive industries,
the largest law enforcement agencies as well as by schools and elite institutions around the globe. The
most recognized companies in the Fortune 500 rely on Psychemedics to ensure they are building drug
free, safe, and productive workforces. We make businesses, our nation’s highways, and campuses safe.
Psychemedics quite literally invented the science that re-invented an industry. We are the standard
against which all others measure themselves for sensitivity, quality, and innovation to stay ahead of the
ever-changing illicit drug landscape.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13738
PSYCHEMEDICS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
58-1701987
(I.R.S. Employer Identification No.)
289 Great Road
Acton, Massachusetts
(Address of Principal Executive Offices)
01720
(Zip Code)
Registrant’s Telephone Number Including Area Code: (978) 206-8220
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common stock. $0.005 par value
Trading Symbol(s)
PMD
Name of each exchange on which registered
The Nasdaq Stock Market, LLC
Indicate by a check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Exchange Act of
Securities registered pursuant to Section 12(g) of the Act: None
1934). Yes ☐ No ☒
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934). Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “non-accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer ☐
Smaller Reporting Company ☒
Accelerated Filer ☐
Emerging Growth Company ☐
Non-Accelerated Filer ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report. ☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of
1934). Yes ☐ No ☒
As of June 30, 2022, there were 5,626,196 shares of Common Stock of the Registrant outstanding. The aggregate market value of the
Common Stock of the Registrant held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers,
directors and 5% shareholders are “affiliates” of the Registrant) as of June 30, 2022, was $26.9 million, computed based upon the closing
price of $6.34 per share on June 30, 2022.
As of March 15, 2023, there were 5,684,647 shares of Common Stock of the Registrant outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under “Business,” “Risk Factors,” “Legal Proceedings,” “Market for Registrant’s Common Stock and
Related Stockholder Matters” and “Management Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this Annual Report on Form 10-K (this “Form 10-K”) constitute forward-looking statements under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements made
with respect to future earnings, earnings per share, revenues, operating income, cash flows, competitive and strategic initiatives, potential
stock repurchases, liquidity needs, cash dividends, future business, growth opportunities, profitability, pricing, new accounts, customer
base, market share, test volume, sales volume, sales and marketing strategies, U.S. and foreign drug testing laws and regulations and the
enforcement of such laws and regulations, required investments in plant, equipment and people, new test development, and
contingencies, including litigation results. These statements involve known and unknown risks, uncertainties and other factors that may
cause results, levels of activity, growth, performance, earnings per share or achievements to be materially different from any future
results, levels of activity, growth, performance, earnings per share or achievements expressed or implied by such forward-looking
statements.
The forward-looking statements included in this Form 10-K and referred to elsewhere are related to future events or our strategies or
future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,”
“believe,” “anticipate,” “future,” “potential,” “estimate,” “encourage,” “opportunity,” “growth,” “leader,” “could”, “expect,” “intend,”
“plan,” “expand,” “focus,” “through,” “strategy,” “provide,” “offer,” “allow,” “commitment,” “implement,” “result,” “increase,”
“establish,” “perform,” “make,” “continue,” “can,” “ongoing,” “include” or the negative of such terms or comparable terminology. All
forward-looking statements included in this Form 10-K are based on information available to us as of the filing date of this report, and
the Company assumes no obligation to update any such forward-looking statements. Our actual results could differ materially from the
forward-looking statements.
Factors that may cause such differences include but are not limited to: (1) intense competition in the drug testing industry,
particularly among companies that test utilizing hair samples; (2) risks associated with the development of markets for new products and
services offered; (3) pricing policies; (4) risks associated with capacity expansion; (5) risks associated with U.S. government regulations,
including, but not limited to, Food and Drug Administration (the “FDA”) regulations, (6) risks associated with denial, suspension, or
revocation of certifications or other licenses for any of our clinical laboratories; (7) Psychemedics' ability to maintain its reputation and
brand image; (8) the ability of Psychemedics to achieve its business plans, productivity improvements, cost controls, leveraging of its
global operating platform, and acceleration of the rate of innovation; (9) the direct and indirect impact of the COVID-19 pandemic on our
business and operations; (10) information technology system failures and data security breaches; (11) the uncertain global economy; (12)
our ability to attract, develop and retain executives and other qualified employees and independent contractors, including distributors;
(13) Psychemedics' ability to obtain and protect intellectual property rights; (14) litigation risks; and (15) changes in economic conditions
which affect demand for our products and services.
Additional important factors that could cause actual results to differ materially from expectations reflected in our forward-looking
statements include those described in Item 1A, “Risk Factors.”
i
PSYCHEMEDICS CORPORATION
FORM 10-K
ANNUAL REPORT
For the Year Ended December 31, 2022
TABLE OF CONTENTS
Page
Item 1.
1
Business ............................................................................................................................................................................
Item 1A. Risk Factors .......................................................................................................................................................................
6
Item 1B. Unresolved Staff Comments ............................................................................................................................................. 10
Properties .......................................................................................................................................................................... 10
Item 2.
Item 3.
Legal Proceedings ............................................................................................................................................................. 10
Item 4. Mine Safety Disclosures .................................................................................................................................................... 10
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ......... 11
Reserved ............................................................................................................................................................................ 12
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations............................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................................................................... 13
Item 8.
Financial Statements and Supplementary Data ................................................................................................................. 17
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........................................... 40
Item 9.
Item 9A. Controls and Procedures .................................................................................................................................................... 40
Item 9B. Other Information .............................................................................................................................................................. 41
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ............................................................................... 41
PART III
Item 10. Directors, Executive Officers and Corporate Governance................................................................................................. 41
Item 11. Executive Compensation ................................................................................................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......................... 52
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................................................... 54
Item 14. Principal Accountant Fees and Services ............................................................................................................................ 54
PART IV
Item 15. Exhibits and Financial Statement Schedules ..................................................................................................................... 54
Item 16. Form 10-K Summary ........................................................................................................................................................ 54
Signatures .......................................................................................................................................................................... 55
Power of Attorney .............................................................................................................................................................
ii
PART I
Available Information
Psychemedics Corporation (together with its wholly-owned subsidiaries, the “Company” or “Psychemedics”) maintains its principal
executive office at 289 Great Road, Acton, MA 01720. Our telephone number is (978) 206-8220 and internet address is
www.psychemedics.com. Our stock is traded on the NASDAQ Stock Market under the symbol “PMD”. The Company makes available,
free of charge, on the Investor Information section of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K from time to time, and all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with the Securities and Exchange Commission (the “SEC”). Copies are also available, without charge,
from Psychemedics Corporation, Attn: Investor Relations, 289 Great Road, Acton, MA 01720. Alternatively, reports filed with the SEC
may be viewed or obtained at the SEC Public Reference Room in Washington, D.C., or from the SEC on its website at www.sec.gov. We
do not intend for information contained in our website to be part of this Annual Report on Form 10-K.
Item 1. Business
General
Psychemedics Corporation is a Delaware corporation organized on September 24, 1986. The consolidated financial statements of the
Company include the accounts and results of operations of Psychemedics Corporation and its wholly-owned subsidiary, Psychemedics
International, LLC and their jointly-owned subsidiary, Psychemedics Laboratórios Ltd. All significant inter-company balances and
transactions have been eliminated in consolidation. All the Company’s physical assets are located within the United States. The Company
provides testing services for the detection of drugs of abuse through the analysis of hair samples. The Company’s testing methods utilize
a patented technology that digests the hair and releases drugs trapped in the hair without destroying the drugs. This is fundamental to the
entire process because the patented method gets virtually 100% of the drug out of the hair, and if you cannot get the drug out of the hair,
you cannot measure it. The Company then performs a proprietary custom-designed patented (US 10,539,580) enzyme immunoassay
(“EIA”) on the liquid supernatant, with confirmation testing by mass spectrometry.
The Company’s primary application of its patented technology is as a testing service that analyzes hair samples for the presence of
certain drugs of abuse. The Company’s customized proprietary EIA procedures to drug test hair samples differ from the more commonly
used immunoassay procedures employed by other hair testing companies. The Company’s testing results provide quantitative information
that can indicate the approximate amount of drug ingested as well as historical data, which can show a pattern of individual drug use over
a longer period of time, thereby providing superior detection compared to other types of drug testing. This information is useful to
employers for both applicant and employee testing, as well as treatment professionals, law enforcement agencies, school administrators,
and parents concerned about their children’s drug use. The Company provides screening and confirmation by mass spectrometry using
industry-accepted practices for cocaine, marijuana, PCP, amphetamines (including ecstasy, eve and Adderall®), opiates (including heroin,
hydrocodone, hydromorphone, oxycodone, oxymorphone and codeine), synthetic cannabinoids (including K2, Spice, Blaze),
benzodiazepines (Xanax®, Valium®, and Ativan®), nicotine, Fentanyl, and alcohol.
Hair drug testing services are currently performed at the Company’s Culver City, California campus located at 5832 Uplander Way
and 5750 Hannum Avenue.
Background on Drug Testing with Hair
When certain chemical substances enter the bloodstream, the blood carries these substances to the hair where they become
“entrapped” in the protein matrix in amounts approximately proportional to the amount ingested. The Company utilizes a patented drug
extraction method followed by a unique patented EIA procedure to identify drugs in the hair. The patented drug extraction method
effectively releases drugs from the hair without destroying the drugs, getting virtually 100% of the drug out of the hair. The patented
method can be used with a broad range of immunoassay screen techniques and mass spectrometry methods.
The immunoassays used by the Company have been patented under the name “Solid Phase Multi-Analyte Assay.” The
immunoassays produced by the Psychemedics R&D team were uniquely designed specifically to meet and even exceed the standards of
radioimmunoassay (“RIAH”), the original testing method created and utilized by the Company prior to 2013. Because Psychemedics is
the only hair testing laboratory that manufactures its own screening assays, it has full control over all aspects of its technology, and that
powerful advantage facilitated the Company's creation of its EIA assays with equivalence to its own previously FDA-cleared
radioimmunoassays.
The EIA screened positive results are then confirmed by mass spectrometry. Depending upon the length of hair, the Company is able
to provide historical information on drug use by the person from whom the sample was obtained. Because head hair grows approximately
1.3 centimeters per month, a 3.9-centimeter head hair sample can reflect drug ingestion over the approximate three months prior to the
collection of the sample. Another option is sectional analysis of the head hair sample, in which the hair is sectioned into lengths which
approximately correspond to certain time periods, thereby providing information on patterns of drug use.
1
Validation of the Company’s Proprietary Testing Methods
The process of analyzing human hair for the presence of drugs has been the subject of numerous peer-reviewed, scientific field
studies. Many of the studies have been funded by the National Institute of Justice or the National Institute on Drug Abuse (“NIDA”).
Several hundred research articles written by independent researchers have been published supporting the general validity and usefulness
of hair analysis.
Some of the Company’s customers have also completed their own testing to validate the Company’s hair test results compared to
other companies’ urine test results. These studies consistently confirmed the Company’s superior detection rate compared to urinalysis
testing. When results from the Company’s hair testing methods were compared to urine results in side-by-side evaluations, 5 to 10 times
as many drug abusers were accurately identified by the Company’s proprietary methods.
In 1998, the National Institute of Justice, utilizing Psychemedics’ previously utilized RIAH hair testing assay, completed a
Pennsylvania Prison study where hair analysis revealed an average prison drug use level of approximately 7.9% in 1996. Comparatively,
urinalysis revealed virtually no positives. After measures to curtail drug use were instituted (drug-sniffing dogs, searches and scanners),
the usage level fell to approximately 2% according to the results of hair analysis in 1998. Again, the urine tests showed virtually no
positives. The study illustrates the usefulness of hair analysis to monitor populations and the weakness of urinalysis.
The Company has received 510k clearance from the FDA on nine EIA assays used to test head and body hair for drugs of abuse.
The Company’s decontamination wash protocol and the effects in eliminating surface contamination were analyzed in a study
conducted by scientists at the Laboratory of the Federal Bureau of Investigation (the “FBI”) and published in August 2014 in the Journal
of Analytical Toxicology. The FBI concluded that the use of an extended wash protocol of the type used by the Company will exclude
false positive results from environmental contact with cocaine. In the study, the FBI cited Psychemedics’ studies published in 1993,
2002, 2004, and 2005, and named our Vice President of Laboratory Operations, and our laboratory, in its acknowledgments. The FBI
study also supported the use of metabolites known as hydroxycocaines as evidence of ingestion. These metabolites were first identified in
hair by Psychemedics.
Advantages of Using the Company’s Patented Method
The Company asserts that hair testing using its patented method confers substantive advantages over detection through urinalysis.
Although urinalysis testing can provide accurate drug use information, the scope of the information is short-term and is generally limited
to the type of drug ingested within a few days of the test. Studies published in many scientific publications have indicated that most drugs
disappear from urine within a few days.
In contrast to urinalysis testing, hair testing using the Company’s patented method can provide long-term historical drug use
information resulting in a significantly wider window of detection. This window may be several months or longer depending on the
length of the hair sample. The Company’s standard test offering, however, uses a 3.9-centimeter length head hair sample cut close to the
scalp, which measures use for approximately three months prior to collection of the sample.
This wider window enhances the detection efficiency of hair analysis, making it particularly useful in pre-employment and random
testing. Hair testing not only identifies more drug users, but it may also uncover patterns and severity of drug use (information most
helpful in determining the scope of an individual’s involvement with drugs), while serving as a deterrent against drug use. Hair testing
employing the Company’s patented method greatly reduces the incidence of “false negatives” associated with evasive measures typically
encountered with urinalysis testing. For example, urinalysis test results are adversely impacted by excessive fluid intake prior to testing
and by adulteration or substitution of the urine sample. Moreover, a drug user who abstains from use for a few days prior to urinalysis
testing can usually escape detection. Hair testing is effectively free of these problems, as it cannot be thwarted by evasive measures
typically encountered with urinalysis testing. Hair testing is also attractive to customers since sample collection is typically performed
under close supervision yet is less intrusive and less embarrassing for test subjects.
Hair testing using the Company’s patented method, along with mass spectrometry confirmation, further reduces the prospects of error
in conducting drug detection tests. Urinalysis testing is more susceptible to problems such as “evidentiary false positives” resulting from
passive drug exposure or poppy seeds. To combat this problem, in federally mandated testing, the opiate cutoff levels for urine testing
were raised 667% (from 300 to 2,000 ng/ml) on December 1, 1998, and testing for the presence of a heroin metabolite, 6-MAM, was
required. These requirements, however, effectively reduced the detection time frame for confirmed heroin use, such that 6-MAM in urine
can typically only be detected for several hours post drug use. In contrast, the metabolite 6-MAM is stable in hair and can be detected for
months.
In the event a positive urinalysis test result is challenged, a test on a newly collected urine sample is not a viable remedy. Unless the
forewarned individual continues to use drugs prior to the date of the newly collected sample, a re-test may yield a negative result when
using urinalysis testing because of temporary abstinence. In contrast, when the Company’s hair testing method is offered on a repeat hair
sample, the individual suspected of drug use cannot as easily affect the results because historical drug use data remains locked in the hair
fiber.
When compared to other hair testing methods, not only are the Company’s assays cleared by the FDA for head and body hair, the
assays also employ a unique patented method of digesting hair that the Company believes allows for the most efficient release of drugs
2
from the hair without destroying the drugs. The Company’s method of releasing drugs from hair is a key advantage and results in
superior detection rates.
Disadvantages of Hair Testing
There are some disadvantages of hair testing as compared to drug detection through urinalysis. Because hair starts growing below the
skin surface, drug ingestion evidence does not appear in hair above the scalp until approximately five to seven days after use. Thus, hair
testing is not suitable for determining drug presence in “for cause” testing as is done in connection with an accident investigation. It does,
however, provide a drug history which can complement urinalysis information in “for cause” testing.
The Company’s prices for its tests are generally slightly higher than prices for tests using urinalysis, but the Company believes that
its superior detection rates provide more value to the customer. This higher pricing policy could, however, adversely impact the growth
of the Company’s current base business and failure to obtain new business customers.
Hair Alcohol Testing
In 2013, the Company launched a test for alcohol using hair. This test measures average alcohol consumption over a period of
approximately three months, indicates the approximate level of alcohol use during that time period, and can provide a behavioral
indication of excessive use. The test measures the amount of ethyl glucuronide (EtG) in the hair – a trace metabolite of ethanol and a
direct alcohol biomarker.
Intellectual Property
Certain aspects of the hair analysis method currently used by the Company are covered by US and foreign patents owned by the
Company. The Company has been granted a total of twelve US patents, including a patent issued to the Company in 2011 that focuses on
digesting hair and releasing drugs trapped in the hair without destroying the drugs. This patent can be used with a broad range of
immunoassay screen techniques, mass spectrometry methods, and chromatographic procedures. In 2012, the Company received an
additional US patent that extended the range of the patent received in 2011. Two US patents related to integrity testing of hair samples
issued in 2015 and 2016, and a US patent application directed to detection of multiple analytes was allowed. Additional patent
applications are currently pending in the U.S. and internationally. In 2019, US Patent 10,539,580 was issued covering our Solid Phase
Multi-Analyte Assay used in all our cleared EIA FDA submissions.
The Company also relies on trade secrets to protect certain aspects of its proprietary technology. The Company’s ability to protect the
confidentiality of its trade secrets is dependent upon the Company’s internal safeguards and upon the laws protecting trade secrets and
unfair competition.
In the event that patent protection or protection under the laws of trade secrets is not sufficient and the Company’s competitors
succeed in duplicating the Company’s products, the Company’s business could be materially adversely affected.
Target Markets
Workplace
The Company focuses its primary marketing efforts on the domestic private sector, with particular emphasis on job applicants and
employee testing.
Most businesses use drug testing to screen job applicants and employees. The Hazeldon Foundation survey from 2007 indicated that
85% of Human Resource (“HR”) professionals believe that drug testing is an effective way to identify substance abuse. The prevalence
of drug screening programs reflects a concern that drug use contributes to employee health problems and costs. As the same study found
that 62% of HR professionals believe that absenteeism is the most significant problem caused by substance abuse and addiction, followed
at 49% by reduced productivity, a lack of trustworthiness at 39%, a negative impact on the company’s external image at 32%t, missed
deadlines at 31%, and in certain industries, safety hazards. It has been estimated that substance abuse costs to American businesses is
more than $100 billion annually.
The principal criticism of employee drug testing programs centers on the effectiveness of the testing program. Most private sector
testing programs use urinalysis. Such programs are susceptible to evasive maneuvers and the inability to obtain confirmation through
repeat samples in the event of a challenged result. An industry has developed over the Internet, and through direct mail, marketing a wide
variety of adulterants, dilutants, clean urine and devices to assist drug users in falsifying urine test results.
Moreover, scheduled tests such as pre-employment testing and some random testing programs provide an opportunity for many drug
users to simply abstain for a few days in order to escape detection by urinalysis.
The Company presents its patented hair analysis method to potential clients as a better technology well suited to employer needs.
Field studies and actual client results support the accuracy and superior effectiveness of the Company’s patented technology and its
ability to detect varying levels of drug use.
3
The Company performs a confirmation test of all screened positive results through mass spectrometry. The use of mass spectrometry
is an industry accepted practice used to confirm a positive test result from the screening process. The Company offers its clients an
expanded drug screen with mass spectrometry confirmation of cocaine, PCP, marijuana, amphetamines, alcohol, opiates, synthetic
cannabinoids and benzodiazepines.
Schools
The Company currently serves hundreds of schools throughout the United States and in several foreign countries. The Company
offers its school clients the same five-drug screen with mass spectrometry confirmation that is used with the Company’s workplace
testing service.
Parents
The Company also offers a personal drug testing service, known as “PDT-90”®, for parents concerned about drug use by their
children. It allows parents to collect a small sample of hair from their child in the privacy of the home, send it directly to the Company’s
laboratory and have it tested for drugs of abuse by the Company. The PDT-90 testing service uses the same patented method that is used
with the Company’s workplace testing services.
Research
The Company is involved in the following ongoing studies involving use of drugs of abuse in various populations: In 2017, the
Company partnered with an NIH-funded study titled “Adolescent Brain Cognitive Development” (“ABCD”) which expects to enroll
12,000 youths age 9-10 over a 2-2.5 year recruitment period. The objective of the ABCD consortium is to establish a national, multisite,
longitudinal cohort and database by studying youth prospectively in order to examine brain and cognitive development in children and
adolescents through a period (10 years) when significant development of intellectual and emotional functions occurs. Psychemedics’ role
in this study is to test hair to detect use of drugs over the time period. The Company is also partnering with Olin Neuropsychiatry
Research Center Institute of Living Hartford Hospital in a research study entitled, “Neurochemical and Functional Correlates of Memory
in Emerging Adult Marijuana Users.” The study is aiming to better characterize the impact of heavy marijuana use on memory and is
funded by a grant from NIDA.
Geographic Scope
Revenues outside the United States were 3%, 5%, and 9% of consolidated revenues for years ended, 2022, 2021 and 2020,
respectively.
Distribution
The Company markets its corporate drug testing services through its own sales force, distributors and webinars. The Company
markets its home drug testing service, PDT-90®, through the Internet.
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.
The Company maintains its cash in a bank account at one of the largest financial institutions in the U.S. The individual balance, at
times, may exceed federally insured limits. These deposits may be redeemed upon demand, and the Company believes that the financial
institution that holds the Company’s cash is financially sound and, accordingly, minimal credit risk exists with respect to cash.
Competition
The Company competes directly with numerous commercial laboratories that test for drugs primarily through urinalysis testing. Most
of these laboratories, such as Quest Diagnostics, have substantially greater financial resources, market identity, drug testing market share,
marketing organizations, facilities, and more personnel than the Company. Psychemedics has developed a strong base of corporate
customers and believes that future success with new business customers is dependent on the Company’s ability to communicate the
advantages of implementing a drug program utilizing the Company’s patented hair analysis method.
The Company’s ability to compete is also a function of pricing. The Company’s prices for its tests are generally slightly higher than
prices for tests using urinalysis. However, the Company believes that its superior detection rates, coupled with the customer’s ability to
test less frequently due to hair testing’s wider window of detection (three months versus approximately three days with urinalysis),
provide more value to the customer. This pricing policy could, however, lead to slower volume growth for the Company.
The Company also competes with other hair testing laboratories. The Company distinguishes itself from hair testing competitors by
emphasizing the superior results the Company obtains through use of its unique patented extraction method in combination with the
Company’s FDA cleared immunoassay screen.
4
Government Regulation
The Company is licensed as a clinical laboratory by the State of California as well as certain other states. All tests are performed
according to the laboratory standards established by the Department of Health and Human Services, through the Clinical Laboratories
Improvement Amendments, and various state licensing statutes.
A substantial number of states regulate drug testing. The scope and nature of such regulations varies greatly from state to state and is
subject to change from time to time. The Company addresses state law issues on an ongoing basis.
The Federal Food, Drug and Cosmetic Act, as amended, requires companies engaged in the business of testing for drugs of abuse
using a test (screening assay) not previously recognized by the FDA to submit their assay to the FDA for recognition prior to marketing.
In addition, the laboratory performing the tests is required to be certified by a recognized agency. In 2002, the Company received 510k
clearance to market all five of its assays utilizing RIAH technology.
In 2008, the Company received the first College of American Pathologists certification specifically including hair testing.
In 2011, the Company received ISO/IEC 17025 International Accreditation for a broad spectrum of laboratory testing including
drugs of abuse and forensics in hair and urine specimens. ISO/IEC 17025 accreditation provides formal recognition to laboratories that
demonstrate technical competency and maintains this recognition through periodic evaluations to ensure continued compliance.
In 2012, the Company received 510k clearance from the FDA to market five of its assays utilizing the Company’s custom developed
EIA technology.
In 2013, the Company received 510k clearance from the FDA to market two additional assays utilizing the Company’s custom
developed EIA technology.
In 2016, the Company received accreditation from the Standards Council of Canada as an accredited testing laboratory.
In 2017, the Company received 510k clearance from the FDA to market one additional assay utilizing the Company’s custom
developed EIA technology.
In 2019, the Company received 510k clearance from the FDA to market one additional assay utilizing the Company’s custom
developed EIA technology.
Research and Development
The Company is continuously engaged in research and development activities. During the years ended December 31, 2022, 2021 and
2020, $1.3 million, $1.1 million and $1.3 million, respectively, were expended for research and development. The Company continues to
perform research activities to develop new products and services and to improve existing products and services utilizing the Company’s
proprietary technology. The Company also continues to evaluate methodologies to enhance its drug screening capabilities. Additional
research using the Company’s proprietary technology is being conducted by outside research organizations through government-funded
studies.
Employees
As of December 31, 2022, the Company employed 133 employees, 3 of whom were in R&D. None of the Company’s employees are
subject to a collective bargaining agreement and the Company believes that overall relations with employees are good.
5
Item 1A. Risk Factors
In addition to other information contained in this Form 10-K, the following risk factors should be carefully considered in evaluating
Psychemedics Corporation and its business because such factors could have a significant impact on our business, operating results, and
financial condition. Additional risks not presently known to the Company, or that it presently deems immaterial, may also negatively
impact the Company. These risk factors could cause actual results to materially differ from those projected in any forward-looking
statements.
Risks Related to Our Business and Operations
The ongoing COVID-19 pandemic may continue to adversely affect our business, results of operation and financial condition.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. Fluctuations in the number
of COVID-19 cases may have a negative effect on the Company's business and financial performance. Given the continued
unpredictability pertaining to the COVID-19 pandemic, the impact on the Company's business continues to be uncertain and depends on
a number of evolving factors that the Company may not be able to predict or effectively respond to. These factors include: the timing,
extent, trajectory, and duration of any pandemic; increases in COVID-19 infection rates and the geographic location of such increases;
the development, availability, distribution and effectiveness of vaccines and treatments; the imposition of protective public safety
measures; and the impact of any pandemic on supply chain and the global economy. To the extent the COVID-19 pandemic or any future
pandemic adversely affects our business, results of operations and financial condition, it may also have the effect of heightening other
risks.
The Company incurred additional costs to implement operational changes in response to this pandemic. The COVID-19 pandemic
disrupted, and along with other economic factors, a resurgence in COVID-19 could continue to disrupt, the Company’s supply chain,
including its ability to secure test collection and testing supplies and equipment and personal protective equipment for its employees.
Companies may develop products that compete with our products and some of these companies may be larger and better capitalized
than we are.
Many of our competitors and potential competitors are larger and have greater financial resources than we do and offer a range of
products broader than our products. Some of the companies with which we now compete or may compete in the future may develop more
extensive research and marketing capabilities and greater technical and personnel resources than we do and may become better positioned
to compete in an evolving industry. Inability to compete successfully could harm our business and prospects.
Increased competition, including price competition, could have a material impact on the Company’s net revenues and profitability.
Our business is intensely competitive, both in terms of price and service. Pricing of drug testing services is a significant factor often
considered by customers in selecting a drug testing laboratory. Larger clinical laboratory providers can increase cost efficiencies afforded
by large-scale automated testing. This results in greater price competition. The Company may be unable to increase cost efficiencies
sufficiently, if at all, and as a result, its net earnings and operating cash flows could be negatively impacted by such price competition.
The Company may also face increased competition from companies that do not comply with existing laws or regulations or otherwise
disregard compliance standards in the industry. Additional competition, including price competition, could have a material adverse
impact on the Company’s net revenues and profitability.
Inflationary pressures on the costs of direct materials, supplies, and personnel expenses could have a material impact on the
Company’s gross profit and profitability.
Inflationary pressures have resulted in increases in the costs of shipping charges, supplies, and other services that we purchase from
vendors, suppliers, and others. Inflationary pressures, along with the competition for labor, have also resulted in an increase of our labor
costs, which include the costs of compensation, benefits, and other employee-related expenses. Continuation of the current inflationary
environment may adversely impact the Company.
Our results of operations are subject in part to variation in our customers’ hiring practices and other factors beyond our control.
Our results of operations have been and may continue to be subject to variation in our customers’ hiring practices and job creation,
which in turn is dependent, to a large extent, on the general condition of the economy, especially within our major market segments.
Results for a particular quarter may vary due to several factors, including but not limited to:
•
•
•
•
economic conditions in our markets in general;
economic conditions affecting our customers and their particular industries;
the introduction of new products and product enhancements by us or our competitors; and
pricing and other competitive conditions.
6
A failure to obtain and retain new customers, or a loss of existing customers, or a reduction in tests ordered, could impact the
Company’s ability to successfully grow its business.
The Company needs to obtain and retain new customers. In addition, a reduction in tests ordered, without offsetting growth in its
customer base, could impact the Company’s ability to successfully grow its business and could have a material adverse impact on the
Company’s net revenues and profitability. We compete primarily based on the quality of testing, timeliness of results, reputation in the
industry, the pricing of services and ability to employ qualified personnel. The Company’s failure to successfully compete on any of
these factors could result in the loss of customers and a reduction in the Company’s ability to expand its customer base.
Our business could be harmed if we are unable to protect our technology.
We rely primarily on a combination of trade secrets, patents and trademark laws and confidentiality procedures to protect our
technology. Despite these precautions, unauthorized third parties may infringe or copy portions of our technology. In addition, because
patent applications in the United States are not publicly disclosed until either: (1) 18 months after the application filing date or (2) the
publication date of an issued patent wherein applicant(s) seek only US patent protection, applications not yet disclosed may have been
filed which relate to our technology. Moreover, there is a risk that foreign intellectual property laws will not protect our intellectual
property rights to the same extent as United States intellectual property laws. In the absence of the foregoing protections, we may be
vulnerable to competitors who attempt to copy our products, processes or technology.
Our business could be affected by IT system failures or Cybersecurity breaches.
A computer or IT system failure could affect our ability to perform tests, report test results or properly bill customers for services
performed. Failures could occur as a result of the standardization of our IT systems and other system conversions, telecommunications
failures, malicious human acts (such as electronic break-ins or computer viruses) or natural disasters. Sustained system failures or
interruption of the Company’s systems in one or more of its operations could disrupt the Company’s ability to process and provide test
results in a timely manner and/or bill the appropriate party. Failure of the Company’s information systems could adversely affect the
Company’s business, profitability and financial condition.
Our technologies, systems and networks may be subject to cybersecurity breaches. Although we have experienced occasional, actual
or attempted breaches of our cybersecurity, none of these breaches has had a material effect on our business, operations or reputation. If
our systems for protecting against cybersecurity risks prove to be insufficient, we could be adversely affected by having our business
systems compromised, our proprietary information altered, lost or stolen, or our business operations disrupted. As cyber-attacks continue
to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to
investigate and remediate any information systems and related infrastructure security vulnerabilities.
In addition, certain third parties to whom we outsource our services and functions, or with whom we interface, store our confidential
patient data or other confidential information as also subject to the same IT risks. A breach or attack affecting these outsourced third
parties could negatively impact our business.
Failure to maintain confidential information could result in a significant financial impact.
The Company maintains confidential information regarding the results of drug tests and other information including credit card and
payment information from our customers. The failure to protect this information could result in lawsuits, fines or penalties. Any loss of
data or breach of confidentiality, such as through a computer security breach, could expose the Company to a financial liability.
Adverse results in material litigation could have an adverse financial impact and an adverse impact on our client base and reputation.
We are or may in the future become subject to a variety of litigation and legal proceedings relating to, among other things: corporate
matters; commercial matters; financial and securities regulations; and employment matters. These proceedings may result in substantial
monetary damages. Results of legal and regulatory proceedings cannot be predicted with certainty and for some matters, such as class
actions, no insurance is cost-effectively available. Regardless of merit, legal and regulatory proceedings may be both time-consuming
and disruptive to our operations and could divert the attention of our management and key personnel from our business operations. We
estimate loss contingencies and establish accruals as required by generally accepted accounting principles, based on our assessment of
contingencies where liability is deemed probable and reasonably estimable, in light of the facts and circumstances known to us at a
particular point in time.
We are subject to, and could be further subject to, governmental investigations or actions by other third parties.
We are subject to various federal and state laws, including employment laws and regulations, violations of which can involve civil or
criminal sanctions. Responding to governmental investigations or other actions may be both time-consuming and disruptive to our
operations and could divert the attention of our management and key personnel from our business operations.
Our future success will depend on the continued service of our key employees.
Our people are a critical resource. The loss of any of our key personnel, including our Chief Executive Officer, executive team and
other highly skilled employees, could harm our business and prospects. We may not be able to attract and retain personnel necessary for
7
the development of our business. We do not have key personnel under contract other than 3 officers who have agreements providing for
severance and non-compete covenants in the event of termination of employment following a change of control. Further, we do not have
any key man life insurance for any of our officers or other key personnel.
There is a risk that our insurance will not be sufficient to protect us from errors and omissions liability or other claims, or that in the
future errors and omissions insurance will not be available to us at a reasonable cost, if at all.
Our business involves the risk of claims of errors and omissions and other claims inherent to our business. We maintain errors and
omissions and general liability insurance subject to deductibles and exclusions. There is a risk that our insurance will not be sufficient to
protect us from all such possible claims. An under-insured or uninsured claim could harm our operating results or financial condition.
Our research and development capabilities may not produce viable new services or products.
In order to remain competitive, we need to continually improve our products, develop new technologies to replace older technologies
that have either become obsolete or for which patent protection is has expired. It is uncertain whether we will continually be able to
develop services that are more efficient, effective or that are suitable for our customers. Our ability to create viable products or services
depends on many factors, including the implementation of appropriate technologies, the development of effective new research tools, the
complexity of the chemistry and biology, the lack of predictability in the scientific process and the performance and decision-making
capabilities of our scientists. There is no guarantee that our research and development teams will be successful in developing
improvements to our technology.
Improved testing technologies, or the Company’s customers using new technologies to perform their own tests, could adversely affect
the Company’s business.
Advances in technology may lead to the development of more cost-effective technologies that can be operated by third parties or
customers themselves in their own offices, without requiring the services of a freestanding laboratory. Development of such technology
and its use by the Company’s customers could reduce the demand for its testing services and negatively impact our revenues.
We may not be able to recruit and retain the experienced scientists and management we need to compete in our industry.
Our future success depends upon our ability to attract, retain and motivate highly skilled scientists and management. Our ability to
achieve our business strategies depends on our ability to hire and retain high caliber scientists and other qualified experts. We compete
with other testing companies, research companies and academic and research institutions to recruit personnel and face significant
competition for qualified personnel. We may incur greater costs than anticipated, or may not be successful, in attracting new scientists or
management or in retaining or motivating our existing personnel.
Our future success also depends on the personal efforts and abilities of the principal members of our senior management and
scientific staff to provide strategic direction, to manage our operations and maintain a cohesive and stable environment.
Our facilities and practices may fail to comply with government regulations.
Our testing facilities and processes must be operated in conformity with current government regulations. These requirements include,
among other things, quality control, quality assurance and the maintenance of records and documentation. If we fail to comply with these
requirements, we may not be able to continue our services to certain customers, or we could be subject to fines and penalties, suspension
of production, or withdrawal of our certifications. We operate a facility that we believe conforms to all applicable requirements. This
facility and our testing practices are subject to periodic regulatory inspections to ensure compliance.
Our business could be harmed from the loss or suspension of any licenses.
The forensic laboratory testing industry is subject to significant regulation and many of these statutes and regulations are subject to
change. The Company cannot assure that applicable statutes and regulations will not be interpreted or applied by a regulatory authority in
a manner that would adversely affect its business. Potential sanctions for violation of these regulations could include the suspension or
loss of various licenses, certificates and authorizations, which could have a material adverse effect on the Company’s business. In
addition, potential delays in renewals of licenses could also harm the Company.
If our use of chemical and hazardous materials violates applicable laws or regulations or causes personal injury, we may be liable for
damages.
Our drug testing activities, including the analysis and synthesis of chemicals, involve the controlled use of chemicals, including
flammable, combustible, and toxic materials that are potentially hazardous. Our use, storage, handling and disposal of these materials is
subject to federal, state and local laws and regulations, including the Resource Conservation and Recovery Act, the Occupational Safety
and Health Act and local fire codes, and regulations promulgated by the Department of Transportation, the Drug Enforcement Agency,
the Department of Energy, and the California Department of Public Health and Environment. We may incur significant costs to comply
with these laws and regulations in the future. In addition, we cannot completely eliminate the risk of accidental contamination or injury
from these materials, which could result in material unanticipated expenses, such as substantial fines or penalties, remediation costs or
8
damages, or the loss of a permit or other authorization to operate or engage in our business. Those expenses could exceed our net worth
and limit our ability to raise additional capital.
Our operations could be interrupted by damage to our laboratory facilities.
Our operations are dependent upon the continued use of our laboratories and equipment in Culver City, California. Catastrophic
events, including earthquakes, fires or explosions, could damage our laboratories, equipment, scientific data, work in progress or
inventories of chemicals and may materially interrupt our business. We employ safety precautions in our laboratory activities in order to
reduce the likelihood of the occurrence of certain catastrophic events; however, we cannot eliminate the chance that such events will
occur. Rebuilding our facilities could be time consuming and result in substantial delays in fulfilling our agreements with our customers.
We maintain business interruption insurance to cover continuing expenses and lost revenue caused by such occurrences. However, this
insurance does not compensate us for the loss of opportunity and potential harm to customer relations that our inability to meet our
customers’ needs in a timely manner could create.
Agreements we have with our employees, consultants and customers may not afford adequate protection for our trade secrets,
confidential information and other proprietary information.
In addition to patent protection, we also rely on copyright and trademark protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and
proprietary information, we require our employees, consultants and advisors to execute confidentiality and proprietary information
agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential
information and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, we may from time to
time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct.
In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third
parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our
employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or
we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally,
others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade
secrets. Our failure or inability to protect our proprietary information and techniques may inhibit or limit our ability to compete
effectively or exclude certain competitors from the market.
International trade policies may impact demand for our products and our competitive position.
Government policies on international trade and investment such as import quotas, capital controls or tariffs, whether adopted by
individual governments or addressed by regional trade blocs, can affect the demand for our services, impact the competitive position of
our products or prevent us from being able to sell products in certain countries. The implementation of more restrictive trade policies,
such as more detailed inspections, higher tariffs or new barriers to entry, could negatively impact our business, results of operations and
financial condition. For example, a government’s adoption of “buy national” policies or retaliation by another government against such
policies could have a negative impact on our results of operations.
Global operations are subject to extensive trade and anti-corruption laws and regulations.
The U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws generally prohibit companies and their
intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for
the purpose of obtaining or retaining business or obtaining an unfair advantage. Recent years have seen a substantial increase in the
global enforcement of anti-corruption laws. Our operations outside the United States could increase the risk of such violations. Violations
of anti-corruption laws or regulations by our employees or by intermediaries acting on our behalf may result in severe criminal or civil
sanctions, could disrupt our business, and result in an adverse effect on our business and results of operations or financial condition.
Our approach to environmental, social, and governance (ESG) matters may not satisfy all our stakeholders.
We assess opportunities and risks related to environmental, social and governance (ESG) matters. As part of this process, we may
make decisions related to ESG matters and may set goals and targets related to ESG matters. We have a broad range of stakeholders,
including our stockholders, employees, schools, and communities we serve, some of whom increasingly focus on ESG matters. Certain
stakeholders may not be satisfied with our decisions related to ESG matters, the goals we set regarding ESG matters, our progress
towards these goals or the resulting outcomes. This could lead to negative perceptions of, or loss of support for our business, difficulty
recruiting or attracting new employees and our stock price being negatively impacted.
Risks Related to Our Stock
Our quarterly operating results could fluctuate significantly, which could cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. Our results are impacted by the
extent to which we are able to gain new customers, competitive pricing, and on the hiring practices of our existing customers, including
seasonality. Demand for drug testing can be impacted by changes in government requirements regarding testing for drugs of abuse,
delays in implementation of such requirements, as well as general economic conditions. Entering into new customer contracts can
9
involve a long lead time. Accordingly, negotiation can be lengthy and is subject to a number of significant risks, including customers’
budgetary constraints and internal reviews. Due to these and other market factors, our operating results could fluctuate significantly from
quarter to quarter. In addition, we may experience significant fluctuations in quarterly operating results due to factors such as general and
industry-specific economic conditions that may affect the budgets and the hiring practices of our customers.
Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily a good indication of our future performance. Our operating results in some quarters may not meet the
expectations of stock market analysts and investors. If we do not meet analysts’ or investors’ expectations, our stock price could decline.
Payment of a cash dividend could decline or cease.
With some interruptions during the COVID pandemic, the Company has historically paid cash dividends. Any cessation of our
program or reduction in our cash dividend could affect our stock price. If we cease this practice or reduce the amount of the regular cash
dividend, due to operating or economic conditions, our stock price could suffer. Further, if the Company ceases its future cash dividends,
a return on investment in our common stock would depend entirely upon future appreciation. There is no guarantee that our common
stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
Our stock price could experience substantial volatility.
The market price of our common stock has historically experienced and may continue to experience extensive volatility. Our
quarterly operating results, the success or failure of future development efforts, changes in general conditions in the economy or the
financial markets and other developments affecting our customers, our distributors, our competitors or us could cause the market price of
our common stock to fluctuate substantially. This volatility may adversely affect the price of our common stock. In the past, securities
class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities
class action suit against us could result in potential liabilities, substantial costs and the diversion of management’s attention and
resources, regardless of whether we win or lose.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The Company maintains its corporate office at 289 Great Road, Acton, Massachusetts, 01720; the office consists of six thousand
square feet and is leased through February 2024.
The Company leases two facilities for laboratory testing purposes in Culver City, California. The first is fourteen thousand square
feet of space with an additional ten thousand square feet of storage space. This facility is leased through December 2024. The second
facility of sixteen thousand square feet is leased through March 2025.
Item 3. Legal Proceedings
Information pertaining to legal proceedings can be found in Item 8. Financial Statements and Supplementary Data Note 9 -
“Commitments and Contingencies” to the Consolidated Financial Statements included in this Annual Report.
Item 4. Mine Safety Disclosures
Not applicable.
10
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the NASDAQ Stock Market under the symbol “PMD”. As of March 15, 2023, there were
157 record holders of the Company’s common stock. The number of record owners was determined from the Company’s stockholder
records maintained by the Company’s transfer agent and does not include beneficial owners of the Company’s common stock whose
shares are held in the names of various security holders, dealers and clearing agencies. The Company believes that the number of
beneficial owners of the Company’s common stock held by others as or in nominee names exceeds 3,100.
The following table sets forth for the periods indicated the range of prices for the Company’s common stock as reported by the
NASDAQ Stock Market and cash dividends declared by the Company.
Fiscal 2022:
First Quarter ............................................................................................. $
Second Quarter ........................................................................................
Third Quarter ...........................................................................................
Fourth Quarter .........................................................................................
Fiscal 2021:
First Quarter ............................................................................................. $
Second Quarter ........................................................................................
Third Quarter ...........................................................................................
Fourth Quarter .........................................................................................
High
Low
Dividends
7.77 $
7.21
6.94
6.70
7.90 $
8.36
8.60
8.90
6.25 $
6.01
6.05
4.85
4.95 $
6.20
8.05
6.76
-
0.07
0.07
0.07
-
-
-
0.05
The Company most recently declared a cash dividend of $0.07 per share on March 21, 2023, which will be paid on April 10, 2023.
Issuer Purchases of Equity Securities
During 2022, the Company did not repurchase any common shares for treasury.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of common stock of the Company during 2022.
11
Performance Graph
Calculated by the Company using www.yahoo.com/finance historical prices.
PMD .................... PSYCHEMEDICS CORPORATION
Russell 2000 ........ RUSSELL 2000 INDEX
NASDAQ ............ NASDAQ COMPOSITE INDEX
2018
2017
2022
100.00 80.54 51.36 32.49 42.12 32.83
100.00 87.82 108.66 128.61 146.23 114.70
100.00 96.12 129.97 186.69 226.63 151.61
2019
2020
2021
(1) The above graph assumes a $100 investment on December 31, 2017, through the end of the 5-year period ended December 31, 2022,
in the Company’s Common Stock, the Russell 2000 Index and the NASDAQ Composite Index. The prices all assume the
reinvestment of cash dividends.
(2) The Russell 2000 Index is composed of the smallest 2,000 companies in the Russell 3,000 Index. The Company has been unable to
identify a peer group of companies that engage in testing of drugs of abuse, except for large pharmaceutical companies where such
business is insignificant to such companies’ other lines of businesses. The Company therefore uses in its proxy statements a peer
index based on market capitalization.
(3) The NASDAQ Composite Index includes companies whose shares are traded on the NASDAQ Stock Market.
Item 6. Reserved
12
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 ...................................................................................................
Cost of revenues .......................................................................................
Gross profit ...............................................................................................
Operating Expenses:
General & administrative ......................................................................
Marketing & selling ..............................................................................
Research & development ......................................................................
Total Operating Expenses .........................................................................
Operating (loss) income ............................................................................
Other Income (Expense):
Gain on forgiveness of PPP Loan .............................................................
Settlements ...............................................................................................
Other income (expense) ............................................................................
Total Other Income (Expense) ..................................................................
Net loss before provision for (benefit from) income taxes ........................
Provision for (benefit from) income taxes ................................................
Net loss .....................................................................................................
100.0 %
63.2 %
36.8 %
23.2 %
12.6 %
5.3 %
41.1 %
-4.3 %
0.0 %
0.0 %
0.2 %
0.2 %
-4.1 %
0.2 %
-4.3 %
100.0 %
58.8 %
41.2 %
24.6 %
11.3 %
4.5 %
40.4 %
0.8 %
8.8 %
-12.6 %
-0.2 %
-4.0 %
-3.2 %
-0.6 %
-2.6 %
100.0 %
77.1 %
22.9 %
28.5 %
16.7 %
6.0 %
51.2 %
-28.3 %
0.0 %
0.0 %
-0.7 %
-0.7 %
-29.0 %
-11.0 %
-18.0 %
13
Revenue by Geographic Region
2022
Year Ended December 31,
2021
2020
Consolidated Revenue:
United States ........................................................................................... $
International ............................................................................................
Total Revenue ......................................................................................... $
24,509 $
731
25,240 $
23,584 $
1,325
24,909 $
19,486
1,874
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 ............................................................................................... $
Cost of revenues ...................................................................................
Gross profit ...........................................................................................
Operating Expenses:
General & administrative ..................................................................
Marketing & selling ..........................................................................
Research & development ..................................................................
Total Operating Expenses .....................................................................
Operating (loss) income ........................................................................
25,240 $
15,949
9,291
24,909 $
14,645
10,264
331
1,304
( 973 )
5,857
3,191
1,326
10,374
( 1,083 )
6,126
2,799
1,130
10,055
209
( 269 )
392
196
319
( 1,292 )
Other Income (Expense):
Gain on forgiveness of PPP Loan .........................................................
Settlements ...........................................................................................
Other income (expense) ........................................................................
Total Other Income (Expense) ..............................................................
-
-
43
43
2,181
( 3,150 )
( 61 )
( 1,030 )
( 2,181 )
3,150
104
1,073
Net loss before provision for (benefit from) income taxes ....................
Provision for (benefit from) income taxes ............................................
Net loss ................................................................................................. $
( 1,040 )
44
( 1,084 ) $
( 821 )
( 156 )
( 665 ) $
( 219 )
200
( 419 )
1 %
9 %
-9 %
-4 %
14 %
17 %
3 %
-618 %
-100 %
-100 %
-170 %
-104 %
27 %
-128 %
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.
14
Results for the Year Ended December 31, 2021, Compared to Results for the Year Ended December 31, 2020 (in thousands)
2021
2020
Change
%
24,909 $
14,645
10,264
21,360 $
16,474
4,886
3,549
( 1,829 )
5,378
Revenues ...................................................................................... $
Cost of revenues ..........................................................................
Gross profit ..................................................................................
Operating Expenses:
General & administrative .........................................................
Marketing & selling .................................................................
Research & development .........................................................
Total Operating Expenses ............................................................
Operating income (loss) ...............................................................
Other (Expense) Income:
Gain on forgiveness of PPP Loan ................................................
Settlements ..................................................................................
Other expense ..............................................................................
Total Other (Expense) Income .....................................................
6,126
2,799
1,130
10,055
209
2,181
( 3,150 )
( 61 )
( 1,030 )
6,095
3,577
1,280
10,952
( 6,066 )
-
-
( 140 )
( 140 )
Net loss before benefit from income taxes ...................................
Benefit from income taxes ...........................................................
Net loss ........................................................................................ $
( 821 )
( 156 )
( 665 ) $
( 6,206 )
( 2,347 )
( 3,859 ) $
31
( 778 )
( 150 )
( 897 )
6,275
2,181
( 3,150 )
79
( 890 )
5,385
2,191
3,194
17 %
-11 %
110 %
1 %
-22 %
-12 %
-8 %
103 %
100 %
100 %
-56 %
636 %
-87 %
-93 %
-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.
15
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
16
Item 8. Financial Statements and Supplementary Data
(a) Financial Statements:
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Boston, Massachusetts; PCAOB ID# 243) ..........
Consolidated Balance Sheets as of December 31, 2022 and 2021 ..................................................................................................
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022, 2021 and 2020 .......
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 ................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 ...............................................
Notes to Consolidated Financial Statements ...................................................................................................................................
Page
18
19
20
21
22
23
17
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
18
PSYCHEMEDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Current Assets:
ASSETS
Cash
Accounts receivable, net of allowance for doubtful accounts of $87 and $89 at December
31, 2022 and 2021, respectively
Prepaid expenses and other current assets
Income tax receivable
Total Current Assets
Property and equipment:
Computer software
Office furniture and equipment
Laboratory equipment
Leasehold improvements
Accumulated depreciation and amortization
Other assets
Deferred tax assets
Operating lease right-of-use assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Current portion of operating lease liabilities
Total Current Liabilities
Long-term debt
Long-term portion of operating lease liabilities
Total Liabilities
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
Additional paid-in capital
Less - Treasury stock, at cost, 668 shares
Accumulated deficit
Accumulated other comprehensive loss
Total Shareholders' Equity
December 31,
December 31,
2022
2021
$
4,750 $
1,992
3,739
1,136
339
4,116
1,499
2,678
9,964
10,285
4,648
2,247
16,013
3,629
26,537
( 21,964 )
4,573
823
691
2,681
4,521
2,195
16,005
3,629
26,350
( 19,659 )
6,691
864
160
3,552
$
18,732 $
21,552
$
448 $
3,939
294
1,037
5,718
305
1,938
7,961
994
3,188
664
984
5,830
599
2,880
9,309
-
-
32
34,275
( 10,082 )
( 11,820 )
( 1,634 )
31
33,478
( 10,082 )
( 9,550 )
( 1,634 )
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.
19
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(in thousands, except per share amounts)
Year Ended December 31,
2022
2021
2020
Revenues .................................................................................................... $
Cost of revenues ........................................................................................
Gross profit ................................................................................................
25,240 $
15,949
9,291
24,909 $
14,645
10,264
Operating Expenses:
General & administrative .......................................................................
Marketing & selling ...............................................................................
Research & development .......................................................................
Total Operating Expenses ..........................................................................
Operating (loss) income .............................................................................
Other Income (Expense):
Gain on forgiveness of PPP Loan ..............................................................
Settlements ................................................................................................
Other income (expense) .............................................................................
Total Other Income (Expense) ...................................................................
5,857
3,191
1,326
10,374
( 1,083 )
-
-
43
43
Net loss before provision for (benefit from) income taxes .........................
Provision for (benefit from) income taxes .................................................
Net loss ...................................................................................................... $
( 1,040 )
44
(1,084 ) $
6,126
2,799
1,130
10,055
209
2,181
( 3,150 )
( 61 )
( 1,030 )
( 821 )
( 156 )
(665 ) $
Other Comprehensive Loss:
Foreign currency translation, net of taxes ..................................................
Total Comprehensive Loss ........................................................................ $
-
(1,084 ) $
-
(665 ) $
Basic net loss per share .............................................................................. $
(0.19 ) $
(0.12 ) $
Diluted net loss per share ........................................................................... $
(0.19 ) $
(0.12 ) $
Dividends declared per share ..................................................................... $
0.21 $
0.05 $
Weighted average common shares outstanding:
Basic ......................................................................................................
Diluted ...................................................................................................
5,626
5,626
5,549
5,549
The accompanying notes are an integral part of these Consolidated Financial Statements.
21,360
16,474
4,886
6,095
3,577
1,280
10,952
( 6,066 )
-
-
( 140 )
( 140 )
( 6,206 )
( 2,347 )
(3,859 )
( 10 )
(3,869 )
(0.70 )
(0.70 )
0.18
5,524
5,524
20
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
Common Stock
Treasury Stock
Accumulated
Other
Paid-In
Shares par Value Capital
$0.005
Shares
Cost
Deficit
Income (loss)
Total
Accumulated
Comprehensive
BALANCE, December
31, 2019 ..................... 6,185 $
20
31 $ 32,249
-
-
668 $
-
( 10,082 ) $
-
( 3,754 ) $
-
( 1,624 ) $ 16,820
-
Stock compensation
expense ......................
-
-
563
-
-
-
( 9 )
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
( 993 )
( 3,859 )
-
( 9 )
-
563
-
-
( 993 )
( 3,859 )
Shares issued – vested ...
Tax withholding related
to vested shares from
employee stock plans
Cash dividends declared
($0.18 per share) .......
Net loss ..........................
Foreign currency
translation, net of
taxes ...........................
BALANCE, December
-
-
-
-
-
-
( 10 )
( 10 )
31
-
32,803
-
668
-
( 10,082 )
-
( 8,606 )
-
( 1,634 )
-
12,512
-
31, 2020 ..................... 6,205
51
Shares issued – vested ...
Exercise of stock
options .......................
1
-
4
-
-
Tax withholding related
to vested shares from
employee stock plans
Stock compensation
-
-
( 72 )
-
expense ......................
-
-
743
-
Cash dividends declared
($0.05 per share) .......
Net loss ..........................
BALANCE, December
-
-
-
-
-
-
-
-
-
-
-
-
31, 2021 ..................... 6,257
91
Shares issued – vested ...
Exercise of stock
options .......................
1
31
1
33,478
( 1 )
668
-
( 10,082 )
-
-
4
-
-
Tax withholding related
to vested shares from
employee stock plans
Stock compensation
-
-
( 78 )
-
expense ......................
-
-
872
-
Cash dividends declared
($0.21 per share) .......
Net loss ..........................
BALANCE, December
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
( 279 )
( 665 )
( 9,550 )
-
-
-
-
( 1,186 )
( 1,084 )
-
4
-
( 72 )
-
743
-
-
( 279 )
( 665 )
( 1,634 )
-
12,243
-
-
4
-
( 78 )
-
872
-
-
( 1,186 )
( 1,084 )
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.
21
PSYCHEMEDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2021
2020
2022
(1,084 ) $
(665 ) $
(3,859 )
Cash flows from operating activities:
Net loss ................................................................................................................................ $
Adjustments to reconcile net loss to net cash provided by operating activities:
Forgiveness of PPP loan ..............................................................................................
Depreciation and amortization .....................................................................................
ROU asset amortization ...............................................................................................
Deferred income taxes .................................................................................................
Loss on sale of fixed assets ..........................................................................................
Stock compensation expense .......................................................................................
Changes in operating assets and liabilities:
Accounts receivable .....................................................................................................
Prepaid expenses and other current assets ....................................................................
Income tax receivable ..................................................................................................
Accounts payable .........................................................................................................
Operating lease liabilities .............................................................................................
Accrued expenses ........................................................................................................
Net cash provided by (used in) operating activities .............................................................
-
2,367
949
( 531 )
-
872
377
363
2,339
( 546 )
( 967 )
751
4,890
( 2,181 )
2,784
906
( 371 )
-
743
( 760 )
( 585 )
( 183 )
417
( 1,078 )
1,387
414
Cash flows from investing activities:
Proceeds from sale of fixed assets ...................................................................................
Other assets ......................................................................................................................
Purchases of property and equipment and capitalized software development costs .........
Net cash used in investing activities ....................................................................................
-
( 21 )
( 187 )
( 208 )
-
( 38 )
( 182 )
( 220 )
Cash flows from financing activities:
Cash dividends paid .........................................................................................................
Proceeds from stock options and tax withholding related to vested shares from
employee stock plans ...................................................................................................
Proceeds from PPP Loan .................................................................................................
Payments of equipment financing ....................................................................................
Net cash (used in) provided by financing activities .............................................................
( 1,186 )
( 279 )
( 993 )
( 74 )
-
( 664 )
( 1,924 )
( 68 )
-
( 688 )
( 1,035 )
Effect of exchange rate changes on cash ..............................................................................
Net increase (decrease) in cash ............................................................................................
Cash, beginning of year .......................................................................................................
Cash, end of year ................................................................................................................. $
-
2,758
1,992
4,750 $
-
( 841 )
2,833
1,992 $
Supplemental disclosures of cash flow information:
Cash paid for income taxes .................................................................................................. $
Cash paid for interest ........................................................................................................... $
Cash paid for operating leases ............................................................................................. $
Right-of-use assets acquired through operating leases ......................................................... $
Non-cash investing and financing activities: .......................................................................
Purchases of equipment through accounts payable and accrued liabilities .......................... $
- $
33 $
1,044 $
78 $
405 $
50 $
1,151 $
172 $
- $
- $
241
-
2,691
935
( 339 )
94
563
424
392
( 2,013 )
( 281 )
( 914 )
( 1,776 )
( 4,083 )
140
( 7 )
( 991 )
( 858 )
( 9 )
2,181
( 678 )
501
( 10 )
( 4,450 )
7,283
2,833
249
75
1,038
2,346
The accompanying notes are an integral part of these Consolidated Financial Statements.
22
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:
23
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.
24
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 ................................................................................................... $
Shipping / Collection (hair) ...................................................................
Other ......................................................................................................
Total Revenue ............................................................................................ $
21,608 $
3,476
156
25,240 $
21,894 $
2,847
168
24,909 $
19,068
2,174
118
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.
25
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 ......................................................... $
General & administrative ............................................
Marketing & selling ....................................................
Research & development ............................................
Total stock compensation ....................................... $
63 $
626
113
70
872 $
63 $
503
114
63
743 $
50
380
74
59
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.
26
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):
Weighted average common shares outstanding, basic ....
Dilutive common equivalent shares ................................
Weighted average common shares outstanding,
assuming dilution ........................................................
2022
5,626
-
2021
5,549
-
5,626
5,549
2020
5,524
-
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.
27
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):
Balance, beginning of period ................................................................................ $
Provision for doubtful accounts ........................................................................
Write-offs..........................................................................................................
Balance, end of period .......................................................................................... $
4. Accrued Expenses
Accrued expenses consist of the following (in thousands):
Accrued compensation and employee benefits ...................................................... $
Accrued vacation expense .....................................................................................
Accrued taxes ........................................................................................................
Accrued shipping expense .....................................................................................
Accrued legal settlement ........................................................................................
Other accrued expenses .........................................................................................
Total Accrued Expenses ........................................................................................ $
As of December 31,
2022
89 $
9
( 11 )
87 $
As of December 31,
2022
442 $
409
771
338
1,150
829
3,939 $
2021
37
55
( 3 )
89
2021
507
373
200
488
1,150
470
3,188
28
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
5. Income Taxes
The income tax provision consists of the following (in thousands):
2022
Year Ended December 31,
2021
2020
Current
Federal......................................................................... $
State ............................................................................
Total Current .......................................................................
Federal.........................................................................
State ............................................................................
Total Deferred .............................................................
Income Tax Provision ..................................................... $
552 $
23
575
( 959)
428
( 531)
44 $
131 $
84
215
( 704)
333
( 371)
( 156) $
A reconciliation of the effective rate with the federal statutory rate is as follows:
2022
Year Ended December 31,
2021
2020
Federal statutory rate ..........................................................
State income taxes, net of federal benefit ...........................
Permanent differences ........................................................
Stock based compensation .................................................
Federal R&D Credits .........................................................
Foreign taxes, net of federal benefit ...................................
Difference in tax rate for carryback claim ..........................
Increase/(decrease) in valuation reserve .............................
Effective tax rate ................................................................
21.0%
12.0%
(0.4%)
0.5%
8.9%
0.0%
0.0%
(46.2%)
-4.2%
21.0%
10.4%
47.6%
1.4%
0.0%
(10.9%)
0.0%
(50.5%)
19.0%
( 2,006 )
( 2 )
( 2,008 )
( 13 )
( 326 )
( 339 )
( 2,347 )
21.0%
4.4%
0.0%
(0.4%)
1.6%
(2.2%)
13.4%
0.0%
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%.
29
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
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 ............................................................................. $
Accrued expenses .....................................................................................................
Stock-based compensation .......................................................................................
R&D tax credits .......................................................................................................
Operating lease .........................................................................................................
Capitalized research expenses ..................................................................................
NOL carryforward ....................................................................................................
Gross Deferred Tax Assets ...........................................................................................
Valuation Allowance ....................................................................................................
Deferred Tax Assets After Valuation Allowance .........................................................
Deferred Tax Liabilities
Excess of tax over book depreciation and amortization ...........................................
Prepaid expenses ......................................................................................................
Operating lease .........................................................................................................
Gross Deferred Tax Liabilities .....................................................................................
21 $
414
381
1,086
701
404
72
3,079
( 895)
2,184
( 783)
( 78)
( 632)
( 1,493)
Net Deferred Tax Assets ............................................................................................ $
691 $
21
129
325
1,083
944
-
219
2,721
( 414)
2,307
( 1,249)
( 61)
( 837)
( 2,147)
160
30
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.
31
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
August 12, 2022 .....................................................................
May 20, 2022 .........................................................................
April 4, 2022 ..........................................................................
May 13, 2021 .........................................................................
March 16, 2021 ......................................................................
January 25, 2021 ....................................................................
December 16, 2020 ................................................................
November 11, 2020 ...............................................................
November 11, 2020 ...............................................................
Type
SUA
SUA
SUA
SUA
SUA
SUA
SUA
Options
SUA
Shares
18 $
126 $
2 $
116 $
2 $
2 $
5 $
40 $
190 $
Fair Value
Per Share (1)
6.65
6.51
7.04
6.55
7.04
5.54
4.71
1.13
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):
Weighted
Average
Remaining
Contractual Life
6.1 years
Aggregate
Intrinsic Value (2)
$
100
Number of
Shares
Weighted Average
Exercise Price Per
Share
Outstanding, December 31, 2021 ................
Granted ...................................................
Exercised ................................................
Forfeited .................................................
Canceled .................................................
Outstanding, December 31, 2022 ................
574 $
- $
(1 ) $
(1 ) $
(64 ) $
508 $
14.23
-
4.07
4.07
15.03
14.19
Exercisable, December 31, 2022.................
467 $
14.70
4.9 years
5.1 years
$
$
25
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.
32
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 .........................................................
Granted ................................................................................................................
Converted to common stock ................................................................................
Cancelled .............................................................................................................
Forfeited ..............................................................................................................
Outstanding & Unvested, December 31, 2022 .........................................................
224 $
146 $
( 90 ) $
( 12 ) $
( 30 ) $
238 $
5.48
6.53
6.33
6.29
6.26
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,
33
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
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.
34
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 $
2024
2025
2026
Total lease payments
Less: interest
Present value of lease liabilities $
Current operating lease liabilities $
Long-term operating lease liabilities
Total $
1,134
1,061
553
460
3,208
( 233)
2,975
1,037
1,938
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.
35
PSYCHEMEDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The annual principal repayment requirements for debt obligations as of December 31, 2022, are as follows (in thousands):
2023 ....................................................................................................................................................................... $
2024 .......................................................................................................................................................................
Long-term debt from equipment financing ............................................................................................................
Less current portion of long-term debt from equipment financing .........................................................................
Long-term debt from equipment financing, net of current portion ......................................................................... $
294
305
599
(294)
305
36
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):
Consolidated Revenue:
United States ................................................................... $
International ....................................................................
Total Revenue ..................................................................... $
24,509 $
731
25,240 $
23,584 $
1,325
24,909 $
19,486
1,874
21,360
2022
Year Ended December 31,
2021
2020
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.
37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation as of December 31, 2022, under the supervision and with the participation of our management,
including our Chief Executive Officer and Controller as well as a third-party internal control firm, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act.
Based upon that evaluation, our Chief Executive Officer and Controller have concluded that our disclosure controls and procedures were
effective as of December 31, 2022, to ensure that information required to be disclosed in the reports that the Company files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive
Officer and Controller, as appropriate to allow timely decisions regarding required disclosure.
b) Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). The Company’s internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance, as opposed to absolute assurance, of achieving their
internal control objectives.
Management, including our Chief Executive Officer and Controller, conducted an assessment of the Company’s internal control over
financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concluded
that, as of December 31, 2022, the Company’s internal control over financial reporting is effective.
c) Changes in Internal Control over Financial Reporting
There was no change the Company's internal control over financial reporting during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
38
Item 9B. Other Information
On March 21, 2023, the Board established August 17, 2023, as the scheduled date of the Company’s 2023 annual meeting of
stockholders (the “2023 Annual Meeting”). The Company will publish additional details regarding the 2023 Annual Meeting, including
its record date and the exact time, location and matters to be voted on at the 2023 Annual Meeting, in the Company’s proxy statement for
the 2023 Annual Meeting when it is filed, which the Company currently expects will be in late June 2023.
On March 21, 2023, the Company entered into new change in control severance agreements with Raymond C. Kubacki, Chairman,
Chief Executive and President, and Charles Doucot, Executive Vice President. The agreements each run until May 2, 2024. They
provide that if, during the term, the Company terminates the employee’s employment for any reason other than for Cause (as defined in
the agreement), death or disability (as defined in the agreement) or if the employee terminates his employment for Good Reason (as
defined below), in either case, within twelve months following a Change in Control (as defined in the agreement), he will be entitled to
receive a continuation of base salary for a period of up to twelve months from the date of such termination, except that for Mr. Kubacki
only, Good Reason termination solely on account of a change in location would give rise to a continuation of base salary for a period of
up to six months rather than twelve months. Good Reason includes a change in title, a reduction in base salary then in effect, a material
decrease in duties or responsibilities, or, in the case of Mr. Kubacki, a change of location. The agreement also prohibits the employee
from working for a competitor of the Company or from soliciting employees of the Company during the period he is eligible to receive
salary continuation under the agreement. Mr. Kubacki’s agreements was in replacement of an agreement executed in 2018, which had a
five-year term and expired in February 2023. Mr. Doucot’s agreement was in replacement of his agreement executed in 2018, which had
a five-year term and was due to expire in May 2023.
The foregoing summary of the change in control severance agreements with Messrs. Kubacki and Doucot does not purport to be
complete and is qualified in its entirety by reference to the change in control severance agreements with such executives which are
attached hereto as Exhibits and are incorporated by reference into this report.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Following is a list that sets forth the names, ages and positions within the Company of all of the Executive Officers of the Company
and the Directors of the Company, as well as Directors nominated or chosen to become directors, in each case, as of March 24, 2023.
Name
Age
Position
Raymond C. Kubacki ............................... 78
Charles M. Doucot ................................... 57
William B. Norris .................................... 34
Michael I. Schaffer, Ph.D. ....................... 78
Peter H. Kamin ........................................ 61
Chairman, Chief Executive Officer, President, Director
Executive Vice President
Controller
Vice President, Laboratory Operations
Director, Compensation Committee Member, Nominating and Corporate
Governance Committee Member
Darius G. Nevin ....................................... 65
Robyn C. Davis ........................................ 61
Director, Audit Committee Member, Compensation Committee Member
Director, Audit Committee Member, Compensation Committee Member,
Nominating and Corporate Governance Committee Member
Fred J. Weinert ........................................ 75
Director, Audit Committee Member, Compensation Committee Member,
Andrew M. Reynolds ............................... 55
Director, Audit Committee Member, Compensation Committee Member,
Nominating and Corporate Governance Committee Member
Nominating and Corporate Governance Committee Member, Lead Independent
Director
All Directors hold office until the next annual meeting of stockholders or until their successors are elected. Officers serve at the
discretion of the Board of Directors.
39
Raymond C. Kubacki has been the Company’s President and Chief Executive Officer since 1991. He has also served as Chairman
of the Board of the Company since 2003. He is also a trustee of the Center for Excellence in Education based in Washington, D.C. and
holds an Executive Masters Professional Director Certification from the American College of Corporate Directors, an organization that
provides educational and other services to public and private company directors. Mr. Kubacki received an M.B.A. from Harvard Business
School and an A.B. from Harvard University. Mr. Kubacki has been a director of the Company since 1991.
Charles M. Doucot has served as Executive Vice President since January 2019. From May 2018 until January 2019, he served as
Vice President Sales & Marketing. Prior to joining the Company, he served as Vice President Sales & GM of Burning Glass
Technologies, a data analytics company, from January 2016 to December 2017. From April 2014 to January 2016, he served as Sr. VP
and GM at Lumesse, an HR technology company, responsible for the Americas Business and starting a new business unit. From August
2009 to February 2014, he served as VP WW Sales and Marketing for Kalido, a big data and analytics company. Mr. Doucot began his
career spending over 15 years at Hewlett-Packard Company with increasing levels of global responsibility. Mr. Doucot received a B.S. in
Electrical Engineering from Northeastern University.
William B. Norris has served as Controller since December 2022. Most recently, he served as Assistant Controller for the
Company since August 2022 and as Accounting Manager for the Company from April 2021 until August 2022. From February 2020
until April 2021, he served as a Senior Accountant at Vicinity Energy, a clean energy company that owns and operates a portfolio of
district energy systems. From 2016 to 2019, he served as an external auditor at Warren Averett, a public accounting firm. Mr. Norris
received a B.S. in Accounting from Birmingham-Southern College, his M.B.A. from Boston University, and is a Certified Public
Accountant.
Michael I. Schaffer has served as Vice President of Laboratory Operations since 1999. From December 2016 – December 2020,
Dr. Schaffer served as a member of the Drug Testing Advisory Board (DTAB) which advises the administrator of Substance Abuse and
Mental Health Services Administration (SAMHSA) on drug testing activities and laboratory certification. From 1990 to 1999, Dr.
Schaffer served as Director of Toxicology, Technical Manager and Responsible Person for the Leesburg, Florida laboratory of
SmithKline Beecham Clinical Laboratories. From 1990 to 1999, Dr. Schaffer was also a member of the Board of Directors of the
American Board of Forensic Toxicologists. He has been Board certified since 1977. Dr. Schaffer has also served as an inspector for the
College of American Pathologists since 1990. Dr. Schaffer received a Ph. D from the University of Chicago in Pharmacology and
Toxicology, a B.S. in Zoology from the University of Illinois Urbana-Champaign, a B.S. and M.S. in Pharmacy and Pharmacognosy
from the University of Illinois, College of Pharmacy. He has served as Chairman of the Society of Forensic Toxicologists as well as the
Toxicology section of the American Academy of Forensic Sciences. He was awarded the Alexander O. Gettler Award for outstanding
contribution to the field of Forensic Toxicology.
Peter H. Kamin is the founder and Managing Partner of 3K Limited Partnership. Prior to the formation of 3K, Mr. Kamin was a
founding member and Managing Partner of ValueAct Capital. Mr. Kamin has served on the Board of Directors of Tile Shop Holdings,
Inc. (NASDAQ: TTSH) (“Tile Shop Holdings”), a specialty retailer of natural stone and man-made tiles, setting and maintenance
materials, and related accessories, since 2012, and as Chairman since July 2018. Mr. Kamin previously served on the boards of directors
of MAM Software Group, Inc. (formerly NASDAQ: MAM), a leading provider of cloud-based business and on-premise management
solutions for the auto parts, tires and vertical distribution industries, from 2012 to October 2019, and IAA, Inc. (NYSE: IAA), a publicly
traded multi-channel vehicle marketplace and former subsidiary of KAR Auction Services, Inc from June, 2019 until it was sold in
March, 2023. Mr. Kamin holds a BA from Tufts University and an MBA from Harvard’s Graduate School of Business. Mr. Kamin has
served as a member of our Board since August 2022.
40
Darius G. Nevin has served as a member of our Board since August 2022. Mr. Nevin has been a member of G3 Capital Partners
LLC, an adviser to private equity firms in the fields of security, telecommunications, and recurring services, and of G3 Investment
Holdings LLC, an affiliated investment holding company, since 2010. Mr. Nevin has served on the boards of directors of Alarm.com
Holdings, Inc. (NASDAQ: ALRM), a provider of interactive security solutions for home and business owners, since 2016, and of
Cohealo, Inc., a venture-backed technology and services company that develops products for health systems, also since 2016. Prior to co-
founding G3 Capital Partners, LLC, Mr. Nevin served as chief financial officer of Protection One, Inc., a then publicly traded company,
from 2001 until June 2010. He served as a director and chairman of the audit committee of WCI Communities, Inc., a then publicly
traded community developer and luxury homebuilder, from July 2013 through its acquisition in February 2017. Mr. Nevin earned an
A.B. from Harvard College and an M.B.A. from the University of Chicago Booth School of Business.
Robyn C. Davis has been managing director of Angel Healthcare Investors, LLC, an early-stage investment group focused on
medical devices, life sciences and specialty pharmaceutical companies since 2000. Additionally, Ms. Davis is a global Executive Coach
at The Leadership Consortium. Prior to Angel Healthcare, Ms. Davis was a director of the merchant banking services practices for
Barents Group, LLC, a strategy consultant at Bain & Company and a consultant at Computer Sciences Corporation. She currently serves
as a director of Azenta Life Sciences (AZTA:Nasdaq-GS), a provider of life sciences sample management solutions, and Akston
Biosciences, an early-stage company developing a novel fusion-protein platform for multiple conditions. Ms. Davis holds a B.A. in
International Relations from Tufts University and an M.B.A from Harvard Business School. She holds an Executive Masters Professional
Director Certification from the American College of Corporate Directors. Ms. Davis has served as a member of our Board since March
2021.
Fred J. Weinert is an entrepreneur who currently serves as President of Barrington Services Group, an international business
consulting company as well as the Managing Member of a commercial real estate development group. From 1989 to 1995, Mr. Weinert
was President of MW Partners LP, a private partnership, focused on retail product and services sector in the UK and USA, and was also
an early-stage equity investor in Psychemedics. From 1973 to 1989 Mr. Weinert had an expansive career with Waste Management
(NYSE: WM) that included 6 years as President of Waste Management International with responsibility for business development,
partner relations, and operations in Argentina, Saudi Arabia, Australia, New Zealand, Hong Kong and Europe. During his career at WM,
Mr. Weinert held other positions including Vice President, Mobilization Director, Regional Controller and Financial Analyst for
acquisitions and government tenders. Prior to his WM career, Mr. Weinert was an Accounting Manager and Controller for a private
company, and a public auditor for Arthur Andersen & Co. Mr. Weinert received a B.S. in Accounting from the University of Dayton
(UD) in 1969. Mr. Weinert served as a member of the UD School of Business Advisory Council for 22 years, and in 2002 Mr. Weinert
was awarded the UD Alumni Lifetime Achievement Award, and in 1999 he was recognized as the Department of Accounting Alumnus
of the year. Mr. Weinert has been a director of the Company since 1991.
41
Andrew M. Reynolds serves as an independent director for AddSecure, Idle Smart, and Linxup. From June 2011 until December
2017, Mr. Reynolds served as Senior Vice President of Global Business Development at Fleetmatics, PLC, of Dublin, Ireland (FLTX).
From July 2007 until January 2011, Mr. Reynolds served as Senior Vice President of Corporate Development at Art Technology Group
(ARTG). From September 2002 until June 2007, Mr. Reynolds served as Vice President of Corporate Development for Hyperion
Solutions (HYSL). Mr. Reynolds received an M.B.A. from Cornell University and an A.B. from Dartmouth College. Mr. Reynolds has
served as a member of our Board since April 2022.
Our Common Stock is listed on the NASDAQ Stock Market LLC, or Nasdaq, and Nasdaq’s listing standards relating to director
independence apply to us. The Board of Directors has determined that the following current directors are independent under applicable
Nasdaq listing standards: Messrs. Weinert, Kamin, Nevin and Reynolds, as well as Ms. Davis.
The Company strives to have the members of its Board of Directors possess a diverse set of skills and background so as to best
provide guidance to the management team and oversight to the Company. While the Nominating Committee does not have a formal
policy in this regard, the Nominating Committee views diversity broadly to include a diversity of experience, skills and viewpoint, as
well as diversity of gender and race. The Nominating Committee does not assign specific weights to particular criteria and no particular
criterion is necessarily applicable to all prospective nominees. Skills sought include financial, capital markets, executive leadership, sales
and marketing, domestic and international business development and strategic planning.
The Company recognizes that different board leadership structures may be appropriate for companies in different situations and
believe that no one structure is suitable for all companies. We believe our current board leadership structure is optimal for us because it
demonstrates to our employees, suppliers, customers, and other stakeholders that we are under strong leadership, with a single person
setting the tone and having primary responsibility for managing our operations. A single leader for both the Company and the Board of
Directors eliminates the potential for confusion or duplication of efforts and provides us with clear leadership.
Because the positions of Chairman of the Board and Chief Executive Officer are held by the same person, the Board also believes
it is appropriate for the independent directors to elect one independent director to serve as a Lead Independent Director. In addition to
presiding at executive sessions of independent directors, the Lead Independent Director has the responsibility to: (1) coordinate with the
Chairman of the Board and Chief Executive Officer in establishing the agenda and topic items for Board meetings; (2) retain independent
advisors on behalf of the Board as the Board may determine is necessary or appropriate; and (3) perform such other functions as the
independent directors may designate from time to time. Mr. Weinert currently serves as the Lead Independent Director, a position he has
held since March 2021.
Our overall leadership structure consists of a single individual serving as Chief Executive Officer and Chairman of the Board,
with independent and experienced directors making up the majority of our Board. Having a single leader for both the Company and the
Board eliminates the potential for confusion or duplication of efforts. We believe that this structure is beneficial to us and our
stockholders.
The Company has a code of ethics that applies to all employees and non-employee directors. This code satisfies the requirements
set forth in Item 406 of Regulation S-K and applies to all relevant persons set forth therein. The Company will mail to interested parties a
copy of the Code of Ethics upon written request and without charge. Such request shall be made to our General Counsel, 289 Great Road,
Acton, Massachusetts 01720.
The Audit Committee, whose members are Ms. Davis and Messrs. Nevin, Reynolds and Weinert, reviews the appropriateness,
quality and acceptability of the Company’s accounting policies and the integrity of financial statements reported to the public, and
compliance with legal and regulatory requirements. The Board has determined that each member of the Audit Committee is an
“independent director” under the rules of the Nasdaq Stock Market governing the qualifications of the members of audit committees, and
each member of the Audit Committee satisfies the requirements of the Nasdaq Stock Market regarding competency in financial matters.
In addition, the Board of Directors has determined that Mr. Weinert, the Chairman of the Audit Committee, qualifies as an “Audit
Committee Financial Expert” as defined by the Securities and Exchange Commission rules.
42
Item 11. Executive Compensation
Director Compensation
Mr. Kubacki receives no additional compensation for serving on the Company’s Board of Directors. Each of the Company’s
outside (non-employee) directors received cash compensation of $12,500 per quarter served in 2022. Both Messrs. Kamin and Nevin
received pro-rated cash compensation for the third quarter of 2022 since they were elected on August 12, 2022. In addition, Mr. Weinert
received additional cash compensation of $15,000 in 2022 for serving as Chairman of the Audit Committee, and $40,300 for serving as
Lead Independent Director and as the Board’s corporate governance representative overseeing the Corporation’s activities in Brazil. Each
of the outside directors has also been granted from time-to-time equity awards under the Company’s equity compensation plans, most
recently in August 2022. In each case the directors were granted stock unit awards or non-qualified stock options with an equivalent fair
value, that in each case vest with respect to 50% of the number of shares covered thereunder on approximately the first anniversary of the
date of grant, and with respect to the balance of 50% of the shares on approximately the second anniversary of the date of grant. Any
unvested stock unit awards or options generally terminate upon the cessation of a recipient’s service as a member of the Board of
Directors, subject to partial or full vesting in the case of termination on account of death or permanent disability. In the event of a change
in control of the Company (as defined in the stock unit award or option agreement evidencing the award) the stock unit awards or options
become fully vested immediately prior to the effective date of such change in control.
The following table shows, for the fiscal year ended December 31, 2022, the compensation paid by the Company or accrued for
such year, to the Company’s non-employee directors. The compensation paid to Mr. Kubacki for his service as Chairman, Chief
Executive Officer and President, is reported in the Summary Compensation Table under the caption “Executive Compensation” below.
Director Compensation for Fiscal Year Ended December 31, 2022
(a)
(b)
Fees Earned or Paid
(c)
(d)
Name
Robyn C. Davis
Harry F. Connick*
Peter H. Kamin
Darius G. Nevin
Andrew M. Reynolds
Walter S. Tomenson, Jr.**
Fred J. Weinert
in Cash Stock Awards (1) Option Awards (1)
$ - (3)
$ - (3)
$ - (3)
$ - (3)
$ - (3)
$ - (3)
$ - (3)
$ 78,120 (2)
$ - (2)
$ 59,850 (2)
$ 59,850 (2)
$ 78,120 (2)
$ 78,120 (2)
$ 78,120 (2)
$ 50,000
$ 12,500
$ 18,750
$ 18,750
$ 37,500
$ 31,250
$ 105,300
(e)
All other
Compensation (4) (4)
$ -
$ -
$ -
$ -
$ -
$ -
$ -
(f)
Total
$ 128,120
$ 12,500
$ 78,600
$ 78,600
$ 115,620
$ 109,370
$ 183,420
* Director Harry F. Connick retired from the Board of Directors on April 4, 2022.
** Director Walter S. Tomenson, Jr. retired from the Board of Directors on August 12, 2022.
(1) The amounts in columns (c) and (d) reflect the grant date fair values of awards and options to the named individuals in 2022.
(2) As of December 31, 2022, the number of shares underlying unvested stock unit awards held by the non-employee directors was
as follows: Mr. Connick: 5,500, which vest on April 30, 2023; Mr. Kamin: 9,000, of which 4,500 vest on August 12, 2023, and
the balance vest on August 12, 2024; Mr. Nevin: 9,000, of which 4,500 vest on August 12, 2023, and the balance vest on
August 12, 2024; Mr. Reynolds: 14,000, of which 1,000 vest on April 4, 2023, 6,000 vest on April 30, 2023, 1,000 vest on
April 4, 2024 and 6,000 vest on April 30, 2024; Mr. Weinert: 17,500, of which 11,500 vest on April 30, 2023, and the balance
vest on April 30, 2024; and Ms. Davis: 18,500, of which 1,000 shares vested on March 16, 2023, 11,500 vest on April 30, 2023,
and the balance vest on April 30, 2024; Mr. Tomenson: 0.
43
(3) As of December 31, 2022, the number of shares underlying non-qualified stock options held by the non-employee directors was
as follows: Mr. Connick: 2,000; and Mr. Weinert: 81,500.
(4) Any perquisites or other personal benefits received from the Company by the named director were less than the reporting
thresholds established by the Securities and Exchange Commission ($10,000).
Overview of Compensation Program
EXECUTIVE COMPENSATION
The Compensation Committee of the Board has responsibility for establishing, implementing and continually monitoring
adherence to the Company’s compensation philosophy. The Compensation Committee ensures that the total compensation paid to the
executive officers is fair, reasonable and competitive.
Throughout this annual report the individual who served as the Company’s Chief Executive Officer during fiscal 2022, as well as
those individuals who were the Company’s two most highly compensated executive officers other than the Chief Executive Officer are
included in the Summary Compensation Table below and are referred to as the “named executive officers”.
Compensation Philosophy and Objectives
The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward
the achievement of specific annual performance goals by the Company, and which aligns executives’ interests with those of the
stockholders by rewarding performance with the ultimate objective of improving stockholder value. The Compensation Committee
evaluates both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in
key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly
situated executives of similarly sized public companies. To that end, the Compensation Committee believes executive compensation
packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based
compensation and that its executives’ performance should be rewarded as measured against established goals.
Role of Executive Officers in Compensation Decisions
The Compensation Committee makes all compensation decisions for the Chief Executive Officer but takes into account his
recommendations when making compensation decisions with respect to the other executive officers.
The Chief Executive Officer annually reviews the performance of each other executive officer. The conclusions reached and
recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the
Compensation Committee. The Compensation Committee can exercise its discretion in modifying any recommended adjustments or
awards to executives.
Setting Executive Compensation
Based on the foregoing objectives, the Compensation Committee has structured the Company’s annual and long-term incentive-
based cash and non-cash executive compensation to motivate executives to achieve the business goals set by the Company and reward
the executives for achieving such goals.
In making compensation decisions, the Compensation Committee compares each element of total compensation against what the
Compensation Committee believes to be the average amount paid to similarly situated executives at comparably sized publicly-traded
and privately-held companies.
A significant percentage of total compensation is allocated to incentives as a result of the philosophy mentioned above. The
Compensation Committee determines the appropriate level and mix of incentive compensation. Income from such incentive
compensation is realized as a result of the performance of the Company or the individual, depending on the type of award, compared to
established goals. A significant portion of its total compensation payable to executive officers is in the form of cash bonus awards tied to
achievement of performance goals and to the award of restricted stock units or stock options that would become vested over a period of
time.
44
2022 Executive Compensation Components
For the fiscal year ended December 31, 2022, the principal components of compensation for named executive officers were:
●
●
●
base salary
performance-based cash incentive compensation; and
long-term equity incentive compensation
Base Salary
Base salary ranges for named executive officers are determined by the Compensation Committee for each executive based on his
or her position and responsibility, a market competitive assessment of similar roles at other companies and a comparison of salaries paid
to peers within the Company. Salary levels are typically considered annually as part of the Company’s performance review process as
well as upon a promotion or other change in job responsibility. Merit based increases to salaries of executive officers are based on the
Compensation Committee’s assessment of the individual’s performance.
In the third quarter of 2020, at the request of the Chief Executive Officer, each of the named executive officers took a 10% base
salary reduction to curtail costs. During the first quarter of 2021, again at the request of the Chief Executive Officer, each of the named
executive officers took an additional salary cut of 10% of his or her current base salary to curtail costs. The additional cuts from 2021
remained in place throughout the remainder of 2021 until the first quarter ended 2022 and are reflected in the Summary Compensation
Table below. The initial 10% base salary reduction made during the third quarter of 2020 for executive officers remains in place.
Incentive Cash Bonus Compensation
The Company typically provides its named executive officers with the opportunity to earn cash incentive bonuses. For most years,
bonuses are determined based on a combination of qualitative and quantitative, company and individual measures, the details of which
are established annually in the form of business objectives. The business objectives may vary for each executive based upon his or her
responsibilities and may include financial and/or strategic measures. The Compensation Committee typically retains the discretion to
amend the bonus program including the ability to increase or decrease any bonus payment and make changes to any financial and/or
strategic measures. In 2022, the named executive officers’ bonuses were computed as follows: (i) up to seven and one-half percent
(7.5%) of base salary would be payable if the Company achieved pre-determined revenue targets; (ii) up to an additional seven and one-
half percent (7.5%) of base salary would be payable if the Company achieved pre-determined earnings per share targets; and (iii) up to an
additional ten percent (10%) of base salary would be payable based on achievement of individual written performance objectives for the
fiscal year, as determined by Mr. Kubacki (for named executive officers other than himself) and as determined by the Compensation
Committee (with respect to achievement by Mr. Kubacki of his performance objectives). The Compensation Committee retained sole
discretion over all matters relating to the annual bonus payments, including, without limitation, the decision to pay any bonuses, the
amount of each bonus, if any, the ability to increase or decrease any bonus payment and make changes to any financial and/or strategic
measures.
Long-Term Equity Incentive Compensation
It is the philosophy of the Company to provide executives with incentives to receive equity in the Company and, thus, align their
financial interests with those of the Company’s shareholders. The Company’s 2006 Incentive Plan provides long-term rewards and
incentives to the Company’s named executive officers, as well as other participants.
Stock Unit Awards.
Stock unit awards (“Awards”) represent a right to receive shares of the Company’s Common Stock in varying amounts subject to
satisfaction of certain time-based vesting requirements. The amount of stock unit awards granted to the named executive officers
typically varies based upon their levels of responsibility, their individual performance and the Company’s performance for the year
preceding the year of grant. Each of the units provides for vesting over the four-year period following the date of grant and are
convertible into shares of Common Stock of the Company upon vesting.
Stock Options.
Stock options (“Option Awards”) represent a right to acquire shares of the Company’s Common Stock in varying amounts at a
strike price equal to the closing price on the date of grant, subject to satisfaction of certain time-based vesting requirements. The number
of Option Awards granted to the executive officers typically varies based upon their levels of responsibility and their individual
performance. Each of the Option Awards provides for vesting over the four-year period following the date of grant.
45
Retirement and Other Benefits
The Company maintains a 401(k) plan for the benefit of all employees who have satisfied minimum age requirements. Employees
have the opportunity to contribute to the plan on a before tax basis, subject to limits prescribed under the Internal Revenue Code. All
employee contributions are 100% vested on the date of contribution. The Company does not maintain any separate non-qualified
retirement plans.
Perquisites and Other Personal Benefits
Any perquisites or other personal benefits that the Company offers to its executive officers are below the threshold limit ($10,000
per executive, per annum) for reporting under Securities and Exchange Commission rules.
The Company has entered into Change of Control Severance Agreements with Messrs. Kubacki and Doucot. The Change of
Control Severance Agreements are designed to promote stability and continuity of senior management. Information regarding applicable
payments under such agreements for Messrs. Kubacki and Doucot is provided under the heading “Potential Payments upon Termination
and Change in Control” below.
Tax and Accounting Implications
As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under
Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000
per year to named executive officers except, in the case of equity awards granted prior to 2018, to the extent they constituted
performance-based compensation. Depending on future stock prices, it is possible that a portion of the payments that might be payable to
Mr. Kubacki under the agreement with him described under the heading “Potential Payments upon Termination and Change in Control”
below may not be fully deductible. Subject to the foregoing, the Company believes that all compensation paid to its executive officers is,
or will be when paid, fully deductible for federal income tax purposes.
Summary of Cash and Certain Other Compensation
The following tables show, the total compensation earned by the named executive officers during the years ended December 31,
2022 and 2021, and outstanding equity awards held by the named executive officers as of December 31, 2022.
46
Summary Compensation Table
(f)
(e)
(a)
(c)
(b)
(d)
(g)
Year
(h)
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Name and Position
Earnings
Raymond C. Kubacki 2022 $ 470,138 $ - $ 130,200 $ - $ - $ -
Chairman, CEO, &
President
Charles M. Doucot
Executive Vice
President
Michael I. Schaffer
Vice President,
Labortory Operations
2022 $ 258,456 $ 2,700 $ 32,550 $ - $ - $ -
2021 $ 430,702 $ 42,500 $ 150,650 $ - $ - $ -
2022 $ 282,896 $ 15,000 $ 71,610 $ - $ - $ -
2021 $ 236,024 $ 12,000 $ 29,475 $ - $ - $ -
2021 $ 238,750 $ 24,000 $ 78,600 $ - $ - $ -
Non-Equity
Incentive Plan
Compensation
Salary Bonus (1)
Stock
Awards
Option
Awards
(i)
(j)
All Other
Compensation (2)
Total
$ - $ 600,338
$ - $ 623,852
$ - $ 369,506
$ - $ 341,350
$ - $ 293,706
$ - $ 277,499
(1) The amounts in column (d) reflect cash bonus awards made to the named executive officers based on achievement of certain
financial and individual objectives, as described in more detail below under the heading “Incentive Cash Bonus Compensation”.
(2) The amounts shown in column (i) reflect for each named executive officer matching contributions allocated by the Company to
each of the named executive officers during the applicable year pursuant to the Company’s 401(k) Plan (which is more fully
described below under the heading “Retirement and Other Benefits”); the amount of perquisites attributable to each named
executive officer did not exceed $10,000 in either 2021 or 2022.
47
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Stock Awards
(a)
(b)
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(c)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(d)
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(e)
Option
Exercise
Price
(f)
Option
Expiration
Date
(g)
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(h)
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested (1)
(i)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
(j)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
Name
Raymond C.
Kubacki
Charles M.
Doucot
Michael I.
Schaffer
22,000
42,000
40,000
28,000
45,000
7,500
-
-
18,000
22,500
3,500
-
-
7,500
8,000
5,000
7,500
1,000
-
-
-
-
-
-
15,000
7,500
-
-
-
7,500
3,500
-
-
-
-
-
2,500
1,000
-
-
$10.20
$13.82
$18.87
$21.04
$10.60
$4.07
-
-
$21.04
$10.60
$4.07
-
-
$13.82
$18.87
$21.04
$10.60
$4.07
-
-
9/15/2025
5/12/2026
5/4/2027
5/3/2028
5/3/2029
11/11/2030
-
-
5/3/2028
5/3/2029
11/11/2030
-
-
5/12/2026
5/4/2027
5/3/2028
5/3/2029
11/11/2030
-
-
17,500 $85,750
17,250 $84,525
20,000 $98,000
9,000 $44,100
9,000 $44,100
11,000 $53,900
3,500 $17,150
3,375 $16,538
5,000 $24,500
(1) Based on closing price of $4.90 per share on December 31, 2022 on the Nasdaq Stock Market.
Potential Payments upon Termination and Change in Control
The Company has change-in-control severance agreements in place with each of Messrs. Kubacki and Doucot providing for severance
benefits for a period of up to 12 months in the event of termination within 12 months following a change in control (as defined in the
agreements). The agreements provide for severance benefits only if (1) the Company undergoes a change in control (as defined in the
agreement) and (2) within 12 months thereafter either (a) the Company (or its successor) terminates the employee (other than termination
for “cause”), or (b) the employee terminates his employment for “good reason” (as defined in his agreement). The agreements do not
provide for severance benefits in the event of an employee’s death or disability, or in the event of his voluntary termination without good
reason. The agreements provide that the employee shall not compete with the Company during the period in which he is entitled to
receive severance payments. Except for such change-in-control severance agreements, and except for the separate employment severance
agreement with Mr. Doucot described below, none of the named executive officers has an employment agreement with the Company.
48
Each of the stock unit award and option agreements with Messrs. Kubacki, Doucot and Schaffer described in the Summary
Compensation Table above provides that the vesting would accelerate upon a change in control. In the event the Company had incurred a
change in control on December 31, 2022, and terminated the employment of Messrs. Kubacki, Doucot and Schaffer on such date, the
amounts paid out to such named executive officers: (i) the Change in Control agreements with Messrs. Kubacki and Doucot in effect on
the date of filing this Report and (ii) the existing equity award agreements with Messrs. Kubacki, Doucot and Schaffer would have been
as follows:
Payments and Benefits Upon Termination and Change in Control
(a)
(b)
(c)
Accrued
Salary (1)
Vacation (2) Health Benefits (3)
(d)
(e)
(f)
Acceleration of
Equity Awards (4)
Total
Name
Raymond C. Kubacki (5)
12 Month
6 Month (change of location only)
Charles Doucot (6)
12 Month
Michael I. Schaffer
12 Month
$ 486,500
$ 243,250
$ 18,718
$ 18,718
$ 33,325
$ 16,663
$ 268,275
$ 268,275
$ 806,818
$ 546,906
$ 355,000
$ 11,489
$ 29,136
$ 142,100
$ 537,725
$ -
$ 11,764
$ -
$ 58,188
$ 69,952
(1) The amounts in column (b) reflect current base salary in effect on December 31, 2022 for Mr. Kubacki and on August 1, 2020 for
Mr. Doucot.
(2) Accrued vacation is payable upon separation of service whether or not in connection with a change in control.
(3) The amounts in column (d) represent the amount payable by the Company during the applicable period for continuation of health
benefits.
(4) The amounts in column (e) reflect: (i) the acceleration of the vesting under stock unit awards granted under the Company’s 2006
Incentive Plan triggered by a change in control, as provided in each executive officer’s respective stock unit award agreement with
the Company, the valuation of which is determined by multiplying the number of stock unit awards that would have become vested
on December 31, 2022, pursuant to such acceleration provision, times the closing price of the Company stock on such date ($4.90 per
share); plus (ii) the acceleration of the vesting under in-the-money unvested stock options granted under the Company’s 2006
Incentive Plan triggered by a change in control, as provided in each executive officer’s respective stock option agreement with the
Company, the valuation of which is determined by assuming a net exercise of all unvested stock options having an exercise price that
is less than the closing price of the Company stock on such date ($4.90 per share).
(5) Mr. Kubacki’s arrangement provides for up to 12 months of salary in the event of a termination by the Company without cause (as
defined in his agreement) or a termination by him for good reason (as defined in his agreement) in either case, within a 12 month
period following a change in control of the Company (as such term is defined in the agreement), provided, however, that in the event
of termination by Mr. Kubacki for good reason solely on account of a change in his required place of employment, following a
change in control, then in lieu of 12 months of salary and bonus compensation, his benefits would be limited up to 6 months of salary
and bonus compensation.
(6) Mr. Doucot’s arrangement provides for 12 months of salary (at the rate that was in effect for the 12-month period preceding August
1, 2020, or any higher rate thereafter in effect) and bonus continuation, in the event of a termination by the Company without cause
(as defined in his agreement) or a termination by him for good reason (as defined in his agreement) in either case, within a 12 month
period following a change in control of the Company (as such term is defined in the agreement).
49
Employment Severance Agreement
In addition to a change-in-control severance agreement, the Company also entered into an employment severance agreement with
Mr. Doucot providing for severance benefits for a period of up to 6 months. The agreement provides for severance benefits if (a) the
Company (or its successor) terminates Mr. Doucot (other than termination for “cause”), or (b) Mr. Doucot terminates his employment for
“good reason” (as defined in his agreement). The agreement does not provide for severance benefits in the event of his death or disability,
or in the event of his voluntary termination without good reason. Any payments under the severance agreement are reduced by the
amount of any payments received by him under his change-in-control severance agreement.
Equity Compensation Plan Information
The following table provides information as of December 31, 2022, with respect to shares of the Company’s common stock that
were issuable under the Company’s 2006 Incentive Plan (the “2006 Incentive Plan”).
Plan Category
Equity compensation plans approved by security holders .......................
Equity compensation plans not approved by security holders .................
Total ........................................................................................................
Number of
Securities to Be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
745,375(1) $
-
745,375
$
14.19(2)
-
14.19
Number of
Securities that
Remained
Available for
Future Issuance
182,992
-
182,992
(1) This amount includes 508,500 shares subject to outstanding stock options with a weighted average remaining contractual term
of 4.9 years and 238,000 shares subject to outstanding stock unit awards.
The weighted-average exercise price information does not include any outstanding stock unit awards.
(2)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows, as of March 15, 2023, the number of shares beneficially owned (i) by those stockholders who are
known to the Company to own beneficially more than five percent of the outstanding Common Stock of the Company, (including their
addresses) (ii) by each director and nominee for director of the Company, (iii) by each named executive officer, and (iv) by all directors
and executive officers as a group.
50
Name
Peter H. Kamin .....................................................................................................
289 Great Road, Suite 200
Acton, MA 01720
Raymond C. Kubacki ............................................................................................
289 Great Road, Suite 200
Acton, MA 01720
Renaissance Technologies LLC ...........................................................................
800 Third Avenue
New York, NY 10022
Fred J. Weinert .....................................................................................................
Robyn C. Davis .....................................................................................................
Andrew M. Reynolds ............................................................................................
Darius G. Nevin ....................................................................................................
Michael I. Schaffer ...............................................................................................
Charles M. Doucot ................................................................................................
Amount and Nature of
Beneficial Ownership (1)
Percentage Owned (2)
624,737 (3)
11.0%
400,462 (4)(6)
6.8%
290,463 (5)
5.1%
260,064 (4)(6)(7)
19,000 (6)
7,000 (6)
25,181
57,951 (4)(6)
63,175 (4)(6)
4.5%
*
*
*
1.0%
1.1%
23.9%
All Executive Officers and Directors (9 persons) .................................................
1,123,296 (8)
* Denotes ownership of less than 1%.
(1) Shares are considered beneficially owned, for the purpose of this table only, if held by the person indicated as beneficial owner,
or if such person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or
shares the power to vote, to direct the voting of and/or to dispose of or to direct the disposition of such security, or if the person
has the right to acquire beneficial ownership within sixty (60) days, unless otherwise indicated in these footnotes.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of Common Stock which an individual or group has a
right to acquire within 60 days pursuant to the exercise of options or pursuant to the vesting of stock unit awards are deemed to
be outstanding for the purpose of computing the percentage ownership of such individual or group, but with respect to options
and stock unit awards, are not deemed outstanding for the purpose of computing the percentage ownership of any other person
shown in this table.
(3) Based on a Statement of Changes in Beneficial Ownership on Form 4 filed by Mr. Kamin on June 9, 2022. Includes 365,726
shares held by Mr. Kamin as trustee of certain trusts and 44,980 shares held by a limited partnership of which Mr. Kamin
serves as general partner.
(4) Includes the following number of shares of Common Stock which the individual had a right to acquire within 60 days pursuant
to the exercise of options: Mr. Kubacki – 199,500; Mr. Weinert – 81,500; Dr. Schaffer – 31,500; and Mr. Doucot – 51,500.
(5) Based on the statement on Schedule 13G/A filed on February 13, 2023, each of Renaissance Technologies, LLC, a registered
investment adviser, and Renaissance Technologies Holding Company has sole voting and dispositive power over 290,463
shares of Common Stock.
(6) Includes the following number of shares of Common Stock which the individual had the right to receive within 60 days
pursuant to the vesting of stock unit awards: Mr. Kubacki – 5,750; Mr. Weinert – 11,500; Mr. Reynolds – 7,000; Ms. Davis
– 12,500; Dr. Schaffer – 1,125; and Mr. Doucot – 3,000.
(7) Includes 108,381 shares held by Mr. Weinert as trustee of a trust and 1,600 shares held by Mr. Weinert’s spouse.
(8) Includes 364,000 shares which the executive officers and directors had the right to acquire within 60 days pursuant to the
exercise of options, and 34,875 shares which were issuable to the executive officers and directors within 60 days pursuant to
the vesting of stock unit awards.
51
Item 13. Certain Relationships and Related Transactions and Director Independence
Under the rules of the Nasdaq Stock Market, a majority of the directors and all of the members of the Audit Committee must
qualify as independent directors. The Board of Directors of the Company conducts an annual review of the independence of the members
of the Board and its committees. Five of our six directors are nonemployee directors (all except Mr. Kubacki). Although the Board has
not adopted categorical standards of materiality for independence purposes (other than those set forth in Securities and Exchange
Commission Regulations and the Nasdaq Stock Market listing standards), information provided by the directors and the Company did not
indicate any relationships (e.g., commercial, industrial, banking, consulting, legal, accounting, charitable, or familial), which would
impair the independence of any of the nonemployee directors.
The Board of Directors has adopted a policy whereby the Company’s Audit Committee is responsible for reviewing any proposed
related party transaction. The types of transactions covered by the policy include payments for products or services to or indebtedness to
or from, related parties, as defined in Item 404(b) of Regulation S-K under the federal securities laws. The Audit Committee has
determined that there were no related party transactions with any related party in fiscal 2022 that would require disclosure under Item
404(a) of Regulation S-K.
Item 14. Principal Accounting Fees and Services
The following table presents fees paid or payable to BDO USA, LLP for services attributable to fiscal years 2022 and 2021:
Audit Fees (1) .............................................................................................................................. $
Audit-Related Fees (2) .................................................................................................................
Tax Fees (3) .................................................................................................................................
Total ........................................................................................................................................... $
Fiscal Year
2022
2021
440,861 $
23,873
57,593
522,327 $
392,309
15,950
182,275
590,534
(1) Audit Fees – Fees for professional services rendered to the Company (or estimates of fees for services to be rendered) in
connection with auditing the Company’s annual financial statements and reviewing the interim financial information included
in the Company’s Quarterly Reports on Form 10-Q and consents and assistance with the review of documents filed with the
Securities and Exchange Commission.
(2) Audit-Related Fees – Fees billed to the Company or to the Company’s employee retirement plan for services related to the
audit of the Company’s financial statements that are not reported under Audit Fees, which include audit work performed on
certain of the Company’s benefit plans.
(3) Tax Fees – Fees billed to the Company related to tax compliance and consultation.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a) (1) Financial Statements required by Item 15 are included and indexed in Part II, Item 8.
(a) (2) Financial Statement Schedules included in Part IV of this report. Schedule II is omitted because information is included in
Notes to Financial Statements. All other schedules under the accounting regulations of the SEC are not required under the related
instructions and are inapplicable and, thus have been omitted.
(a) (3) See “Exhibit Index” included elsewhere in this Report.
Item 16. Form 10-K Summary
None.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 27, 2023
PSYCHEMEDICS CORPORATION
By: /s/ RAYMOND C. KUBACKI
Raymond C. Kubacki
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
/s/ RAYMOND C. KUBACKI
Raymond C. Kubacki
Chairman, President and Chief Executive
Officer, Director
(Principal Executive Officer)
March 27, 2023
/s/ WILLIAM B. NORRIS
William B. Norris
Controller
(Principal Financial and Accounting Officer)
March 27, 2023
PETER H. KAMIN*
Peter H. Kamin
DARIUS G. NEVIN*
Darius G. Nevin
ANDREW M. REYNOLDS*
Andrew M. Reynolds
FRED J. WEINERT*
Fred J. Weinert
ROBYN C. DAVIS*
Robyn C. Davis
Director
Director
Director
Director
Director
*By: /s/ RAYMOND C. KUBACKI
Raymond C. Kubacki
Attorney-in-Fact
March 27, 2023
53
MANAGEMENT AND CORPORATE INFORMATION
CORPORATE OFFICERS
Raymond C. Kubacki
Chairman, President and C.E.O.
Charles Doucot
Executive Vice President
Michael I. Schaffer, Ph.D.
Vice President, Laboratory Operations
CORPORATE INFORMATION
WEBSITE: www.psychemedics.com
Stock Exchange Symbol: PMD - NASDAQ
CORPORATE OFFICES
Corporate Headquarters:
289 Great Road, #200
Acton, Massachusetts 01720
Primary Laboratory Facility:
5832 Uplander Way
Culver City, California 90230
FORM 10-K
A copy of the Company’s Form 10-K, as filed with the
Securities and Exchange Commission, may be obtained
by any stockholder at our website or by writing to:
Investor Relations
Psychemedics Corporation
289 Great Road, #200
Acton, MA 01720
BOARD OF DIRECTORS
Raymond C. Kubacki
Chairman, President and C.E.O.
Andrew M. Reynolds
Independent Director
Robyn C. Davis
Independent Director
Fred J. Weinert
Independent Director
Peter H. Kamin
Independent Director
Darius G. Nevin
Independent Director
COUNSEL
Lynch Fink Harrington & Gray LLP
Boston, Massachusetts
AUDITORS
BDO USA, LLP
Boston, Massachusetts
TRANSFER AGENT
Computershare
P.O. BOX 505000
Louisville, KY 40233-5000
Overnight correspondence should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
1-877-373-6374 (781-575-3120)
Internet Address: www.computershare.com
ANNUAL MEETING
The 2023 Annual Meeting of Stockholders
will be held on August 17, 2023
10:00 A.M. at:
Hyatt Regency, Boston Harbor
101 Harborside Drive
Boston, MA 02128
289 GREAT ROAD, ACTON, MA 01720
WWW.PSYCHEMEDICS.COM