PSYCHEMEDICS CORP - Quarter Report: 2021 June (Form 10-Q)

PSYCHEMEDICS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021

INDEX

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(in thousands, except per share amounts)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The interim condensed consolidated financial statements of Psychemedics Corporation (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020, included in the Company's 2020 Annual Report on Form 10-K (“10-K”), as filed with the SEC.

The condensed consolidated balance sheet as of June 30, 2021, the condensed consolidated statements of operations and comprehensive income/(loss) for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of shareholders’ equity for the six months ended June 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 are unaudited but, in the opinion of management, include all adjustments necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2020, has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes required for complete annual financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three and six months ended June 30, 2021, may not be indicative of the results that may be expected for the year ending December 31, 2021, or any other period.

Unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to Psychemedics Corporation and its wholly-owned consolidated subsidiaries.

2. COVID-19 Pandemic

The outbreak of coronavirus (“COVID-19”) which was declared by the World Health Organization to be a pandemic, has impacted, and is expected to continue to impact worldwide economic activity. While our domestic business was deemed an essential business and we have been able to continue to provide services to our customers, COVID-19 has had a significant impact on our entire operations. COVID-19’s effect on the overall economy has had an adverse impact on hiring; which has had a negative impact on both our domestic and international volume.

The Coronavirus Aid, Relieve and Economic Security Act (“CARES”) Act, enacted on March 27, 2020, and the Families First Coronavirus Response Act (“FFCRA”), in each case

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. COVID-19 Pandemic (continued)

modified by the Consolidated Appropriations Act (“CAA”) enacted in December 2020, was an emergency economic stimulus package 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”) described below. 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 (“TCJA”). The Company recognized a benefit of $0.8 million and $1.6 million for the three and six months ended June 30, 2021, 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.  See Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

Liquidity and Management’s Plans

At June 30, 2021, the Company’s principal sources of liquidity included approximately $2.7 million of cash. Management currently believes that such funds, together with future operating profits, which are expected to be positively impacted by employee retention credit provisions of the CAA, and the effect of the full forgiveness of the PPP loan (the “PPP Loan” – see Note 12 – “Subsequent Events”), should be adequate to fund anticipated working capital requirements, including equipment financing obligations, and capital expenditures for at least the next 12 months. Furthermore, depending upon the Company’s results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could include but are not limited to, issuance of common stock, debt financing, lines of credit, or equipment leasing, although there is no assurance that such financings will be available to the Company on terms it deems acceptable, if at all.

Accounts Receivable

The Company believes its allowance for credit losses related to its accounts receivable remained adequate as of June 30, 2021, due to the essential nature of its customers business, as well as the diversity of its large customer base. While the Company anticipates there could be an increase in the aging of its accounts receivable, the Company does not anticipate a significant increase in default risk.

Risk and Uncertainties

The duration and severity of COVID-19-related potential disruptions involve risks and uncertainties, and it is not possible at this time to estimate the full impact on the Company’s business and could adversely affect our estimates, results of operations and financial condition.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. Stock-Based Compensation

The Company’s 2006 Incentive Plan (“the Plan”) provides for cash-based awards or the grant or issuance of stock-based awards. As of December 31, 2020, 45 thousand shares were then available for future grant under the Plan. At the 2021 Annual Meeting, an additional 350 thousand shares were approved for future grant under the Plan. As of June 30, 2022, 276 thousand shares remained available for future grant under the Plan.

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant). The compensation cost charged against income is included in cost of revenues and operating expenses as follows (in thousands):

There was no income tax benefit recognized in the condensed consolidated statements of operations and comprehensive income/(loss) for stock-based compensation arrangements for the three and six months ended June 30, 2021, and 2020.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. Stock-Based Compensation (continued)

A summary of the Company’s stock option activity for the six months ended June 30, 2021, is as follows (in thousands except per share amounts):

A summary of the Company’s stock unit award (“SUA”) activity for the six months ended June 30, 2021, is as follows (in thousands except per share amounts):

As of June 30, 2021, 901 thousand shares of common stock were reserved for issuance under the Plan. As of June 30, 2021, the unamortized fair value of awards relating to outstanding SUAs and options was $1.6 million, which is expected to be amortized over a weighted average period of 3.3 years.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4. Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (or loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (or loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period when the effect is dilutive. The number of dilutive common equivalent shares outstanding during the period was determined in accordance with the treasury-stock method. Common equivalent shares consisted of common stock issuable upon the exercise of outstanding options and common stock issuable upon the vesting of outstanding, unvested SUAs. Basic and diluted weighted average common shares outstanding for the three and six months ended June 30, 2021, and 2020 were as follows (in thousands):

The computation of diluted earnings (loss) per share for the three and six months ended June 30, 2021, and 2020 excludes the effect of the potential exercise of stock awards, including stock options, when the effect is anti-dilutive. For the three and six months ended June 30, 2021, the number of antidilutive stock awards excluded from diluted earnings per share was 550 thousand.

5. Commitments and Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of individual legal claims is inherently unpredictable, we believe that the final resolution of any pending actions will not have a material adverse effect on our results of operations, financial position, liquidity, or capital resources.

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. 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. There is one lease which contains renewal options to extend the lease terms included in our Right-Of-Use (“ROU”) assets and lease liabilities as they are reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the lease commencement date in determining the net present value (NPV) of the lease payments.

As of June 30, 2021, the Company recognized a Right-Of-Use (“ROU”) asset of $4.0 million and an operating lease liability of $4.5 million based on the present value of the minimum rental payments as a result of adoption of ASC Topic 842. The weighted average discount rate used for leases as of June 30, 2021, is 3.9%. The weighted average lease term as of June 30, 2021, is 4.5 years. The operating lease expense for the three and six months ended June 30, 2021, was $269 thousand and $538 thousand, respectively.

Maturities and balance sheet presentation of the Company’s lease liabilities for all operating leases as of June 30, 2021, is as follows (in thousands):

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. Debt and Other Financing Arrangements

On March 20, 2014, the Company entered into an equipment financing arrangement (“Loan Agreement”) with Banc of America Leasing & Capital, which it amended on August 8, 2014, September 15, 2015, October 30, 2017, and December 2, 2019. The terms of the arrangement are detailed in the 10-K.

The weighted average interest rate on outstanding debt under the Loan Agreement was 3.4% and 3.4% for the three and six months ended June 30, 2021. The interest expense was $13 thousand and $27 thousand for the three and six months ended June 30, 2021, respectively. As of June 30, 2021, the weighted average interest rate was 3.1% and there was $1.6 million of outstanding debt related under the loan agreement. The Company was in compliance with all loan covenants as of June 30, 2021.

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 principal amount of the loan was $2,181,157, 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 (see Note 12 – “Subsequent Events” and the Company’s Current Report on Form 8-K filed on July 20, 2021).

The annual principal repayment requirements for debt obligations as of June 30, 2021, were as follows (in thousands):

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8. Revenue

The table below disaggregates our external revenue by major source (in thousands).  For additional revenue detail relating to geographic breakdown of sales, see Note 9 – “Business Segment Reporting”.

9. 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 of the financial information related to the Company’s principal operating segment. All Brazil sales are through one independent distributor. The Company’s revenues by geographic region are as follows (in thousands):

PSYCHEMEDICS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. Significant Customers

The Company had no customers that represented over 10% of revenue during the six months ended June 30, 2021. The Company had one customer that represented 11% of revenue for the six months ended June 30, 2020. The Company had one customer that represented 12% of the total accounts receivable balance as of June 30, 2021. The Company had no customers that represented greater than 10% of the total accounts receivable balance as of December 31, 2020.

11. Recently Adopted Accounting Pronouncements

December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in ASU Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASU Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for interim and annual periods for the Company beginning after December 15, 2020, with early adoption permitted. The Standard may be adopted using the prospective or retrospective transition approach and could be applied to a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year adoption. The Company adopted ASU 2019-12 as of January 1, 2021, with no material impact to the Company’s consolidated financial statements.

12. Subsequent Events

In July 2021, the outstanding principal and accrued interest for the PPP Loan was forgiven in full by the SBA.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company or statements made by its employees may contain forward-looking information that involves risks and uncertainties. In particular, statements contained in this report that are not historical facts (including but not limited to statements concerning earnings, earnings per share, revenues, cash flows, dividends, future business, growth opportunities, profitability, pricing, new accounts, customer base, market share, test volume, sales and marketing strategies, market demand for drug testing services in Brazil, U.S. and foreign drug testing laws and regulations, including, without limitation, Brazilian professional driver drug testing requirements, required investments in plant, equipment and people and new test development, the effect of the COVID- 19 pandemic on our business, including its effects on our business and profitability, and on the well-being and availability of our employees, and the continued operation of our testing facilities) may be “forward looking” statements. Actual results may differ from those stated in any forward-looking statements. Factors that may cause such differences include but are not limited to risks associated with the severity of the COVID-19 pandemic, and its impact on the Company’s markets, including its impact on the Company’s customers, suppliers and employees, as well as its risk on the United States and worldwide economies, the timing, scope and effectiveness of further governmental, regulatory, fiscal monetary and public health responses to the COVID-19 pandemic, changes in U.S. and foreign government regulations, including but not limited to FDA regulations, changes in Brazilian laws and regulations and proposed laws and regulations and the implementation of such laws and regulations, currency risks, R&D spending, competition (including, without limitation, competition from other companies pursuing the same growth opportunities), the Company’s ability to maintain its reputation and brand image, the ability of the Company to achieve its business plans, cost controls, leveraging of its global operating platform, risks of information technology system failures and data security breaches, the uncertain global economy, the Company’s ability to attract, develop and retain executives and other qualified employees and independent contractors, including distributors, the Company’s ability to obtain and protect intellectual property rights, litigation risks, general economic conditions With respect to the continued payment of cash dividends, factors include, but are not limited to, all of the factors listed above with respect to the impact of the COVID-19 pandemic on the our business generally, plus cash flows, available surplus, capital expenditure reserves required, debt service obligations, regulatory requirements and other factors that the Board of Directors of the Company may take into account.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent the Company’s estimates and assumptions only as of the filing date of this Report. The Company expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the filing date of this Report, in order to reflect changes in circumstances or expectations, or the occurrence of unanticipated events, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of the 10-K, as well as the risks and uncertainties discussed elsewhere in this Report. The Company qualifies all of its forward-looking statements by these cautionary statements. The Company cautions you that these risks are not exhaustive. The Company operates in a continually changing business environment and new risks emerge from time to time.

OVERVIEW

Revenue for the second quarter of 2021 was $6.1 million compared to $3.3 million in 2020, an increase of 85%. The Company reported net income of $0.1 million, or $0.02 per diluted share for the three months ended June 30, 2021, versus a net loss of $2.1 million, or ($0.37) per diluted share for the same period in 2020. Revenue and earnings increase for the quarter was attributed primarily to an increase of both domestic and international sales volume and a refundable employee retention tax credit. The refundable employee retention tax credit for the three and six months ended June 30, 2021, was $0.8 million and $1.6 million, respectively. Revenue for the six months ended June 30, 2021, and 2020 was $11.8 million and $10.9 million, respectively, an increase of 8%. The Company had net income for the six months ended June 30, 2021, of $0.2 million versus net loss for the six months ended June 30, 2020, of $2.2 million. The Company did not pay any cash dividends to its shareholders in the six months ended June 30, 2021. This is compared to cash dividends paid of $0.18 per share during the six-month period ended June 30, 2020.

RESULTS OF OPERATIONS

Revenue increased 84% for the three months ended June 30, 2021, compared to the same period in 2020, primarily due to a 95% increase in total volume, as 2020 results were adversely impacted by the COVID-19 outbreak, offset by a 11% decrease in average revenue per sample resulting from a greater mix of international volumes. For the same period, domestic revenues increased $2.5 million (80%) and international revenues increased $0.3 million (153%). For the six months ended June 2021, revenue increased 9%, primarily due to an increase in domestic volume. For the same period, domestic revenues increased $1.5 million (16%) and international revenues decreased $0.6 million (42%). The Company’s domestic revenues increase was impacted by overall stronger job creation and people returning to the workforce. The international revenue decline was primarily from lower Brazil testing volume.

Gross profit (loss): The Company had a $2.4 million gross profit for the three months ended June 30, 2021, compared to a ($252) thousand gross loss for the same period in 2020. Cost of revenues increased by $0.1 million or 2% for the three months ended June 30, 2021, compared to the same period in 2020. The gross margin was beneficially impacted by higher sales volume and the refundable employee retention tax credit as noted above. Gross profit for the six months ended June 30, 2021, was $5.0 million, an increase of $2.5 million from the comparable period in 2020. Cost of revenues decreased by $1.6 million or 19% for the six months ended June 30, 2021, when compared to the same period in 2020. The gross profit margin for the six-month period ended June 30, 2021, was 42% compared to 23% for the comparable period in 2020.  The gross margin was positively impacted by higher sales volume and the refundable employee retention tax credit noted above.    

General and administrative (“G&A”) expenses decreased 31% or $0.6 million to $1.3 million for the three months ended June 30, 2021, compared to $1.9 million for the same period in 2020. As a percentage of revenue, G&A expenses were 21% and 56% for the three months ended June 30, 2021, and 2020, respectively. The decrease in G&A expenses was primarily driven by the absence of certain non-recurring legal fees incurred in 2020 and in addition salary reductions in 2021. G&A expenses were $2.8 million and $3.4 million for the six months ended June 30, 2021, and 2020, respectively. As a percentage of revenue, G&A expenses were 24% and 31% for the six months ended June 30, 2021, and 2020, respectively.

Marketing and selling expenses decreased 23% or $0.2 million to $0.7 million for the three months ended June 30, 2021, compared to $0.9 million for the same period in 2020. Total marketing and selling expenses represented 11% and 26% of revenue for the three months ended June 30, 2021, and 2020, respectively. Expenses were primarily reduced from personnel and related costs (including less travel). Marketing and selling expenses were $1.3 million and $2.0 million for the six months ended June 30, 2021, and 2020, respectively. As a percentage of revenue, marketing and selling expenses were 11% and 18% for the six months ended June 30, 2021, and 2020, respectively.

Research and development (“R&D”) expenses for the three months ended June 30, 2021, and 2020 were $0.3 million and $0.3 million, respectively. R&D expenses represented 5% and 10% of revenue for the three months ended June 30, 2021, and 2020, respectively. R&D expenses were $0.6 million and $0.7 million for the six months ended June 30, 2021, and 2020, respectively. R&D expenses represented 5% and 6% of revenue for the six months ended June 30, 2021, and 2020, respectively.

Provision for income taxes: Our provision for income taxes consisted primarily of federal and state income taxes in the United States. We estimate income taxes in each of the jurisdictions in which we operate. During the three months ended June 30, 2021, the Company recorded a tax provision of $73 thousand (effective tax rate of 35%) and a tax benefit of $1.3 million (effective tax rate of 39%) for the comparative period in 2020. During the six months ended June 30, 2021, the Company recorded a tax provision of $93 thousand (effective tax rate of 30%) and a tax benefit of $1.5 million (effective tax rate of 40%) or the comparative period in 2020.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2021, the Company had approximately $2.7 million of cash and $7.1 million of working capital. The Company's operating activities provided $0.2 million of cash for the six months ended June 30, 2021. Investing activities used $0.1 million of cash while financing activities used $0.3 million of cash during the first six months of 2021.

Cash provided by operating activities of $0.2 million reflected net income of $0.2 million adjusted for depreciation and amortization of $1.4 million, ROU asset amortization of $0.4 million and stock-based compensation of $0.4 million. This was also affected by an increase in current assets of $2.3 million and an increase in accounts payable and accrued expenses of $0.1 million.

Cash used in investing activities of $0.1 million consisted primarily of costs related to internally developed software. We anticipate spending less than $0.8 million in additional capital purchases for the remainder of 2021.

Cash used in financing activities of $0.3 million consisted entirely of payments on equipment financing.

Contractual obligations and other commercial commitments as of June 30, 2021, included operating lease commitments and outstanding debt, described in Notes 6 and 7, respectively of the Notes to Condensed Consolidated Financial Statements.

On May 4, 2020, the Company borrowed approximately $2.2 million from Bank of America, N.A., pursuant to the PPP, established under the CARES Act. In July 2021, the SBA approved the forgiveness of the full amount of the PPP Loan, which included principal and interest of $2.2 million.

While management currently believes that its existing funds and quarterly cash flow from operations should be adequate to fund the Company’s business for at least the next 12 months, economic conditions related to COVID-19 are expected to continue to adversely affect the Company’s operating results and cash flows. 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.

Item 4. Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”) the Company’s management under the supervision and with the participation of the Company’s Chief Executive Officer and Vice President, Controller, performed an evaluation 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, the Chief Executive Officer and Vice President, Controller concluded as of the evaluation date, that the Company’s disclosure controls and procedures were effective for ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that its disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

There has been no significant change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1A. Risk Factors

Item 1A. of the 10-K includes a discussion of our risk factors, which included a risk related to the PPP Loan. In July 2021, the PPP Loan was 100% forgiven by the SBA (see Note 7 – “Debt and Other Financing Arrangements” and Note 12 – “Subsequent Events” of the Notes to Condensed Consolidated Financial Statements). Except as provided in the preceding sentence, there have been no material changes in the risk factors described in the 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no purchases of treasury stock in the first six months of 2021.

Item 5. Other Information

On August 10, 2021, the Company entered into a change in control severance agreement with Andrew Limbek, Vice President, Controller of the Company. Mr. Limbek’s agreement is for a five year term commencing on September 1, 2021. It provides that if, during the five-year term, the Company terminates Mr. Limbek’s employment for any reason other than for Cause (as defined in the agreement), death or disability (as defined in the agreement) or if Mr. Limbek 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 Termination Pay (as defined below) for a period of twelve months from the date of such termination. Termination Pay includes average monthly base salary and cash bonus compensation paid or accrued during the twelve month period preceding such termination. Good Reason includes a reduction in Mr. Limbek’s base salary then in effect, or a material decrease in his duties or responsibilities. The agreement also prohibits Mr. Limbek from working for a competitor of the Company or from soliciting employees of the Company during the period he is eligible to receive Termination Pay under the agreement.

The foregoing summary of the change in control severance agreement with Mr. Limbek does not purport to be complete and is qualified in its entirety by reference to his change in control severance agreement which will be filed as an exhibit to the Company’s third quarter report on Form 10-Q.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements 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.