Saia Inc: Form 10-Q for the period ended Sep 30, 2023

This Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our 2022 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

Cautionary Note Regarding Forward-Looking Statements

The Securities and Exchange Commission (the SEC) encourages companies to disclose forward-looking information so that investors can better understand the future prospects of a company and make informed investment decisions. This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains these types of statements, which are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “plan,” “predict,” “believe,” “should” and similar words or expressions are intended to identify forward-looking statements. Investors should not place undue reliance on forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, except as otherwise required by applicable law. All forward-looking statements reflect the present expectation of future events of our management as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors, risks, uncertainties and assumptions that could cause actual results to differ materially from those described in any forward-looking statements. These factors, risks, uncertainties and assumptions include, but are not limited to, the following:

• general economic conditions including downturns or inflationary periods in the business cycle;
• operation within a highly competitive industry and the adverse impact from downward pricing pressures, including in connection with fuel surcharges, and other factors;
• industry-wide external factors largely out of our control;
• cost and availability of qualified drivers, dock workers, mechanics and other employees, purchased transportation and fuel;
• inflationary increases in operating expenses and corresponding reductions of profitability;
• cost and availability of diesel fuel and fuel surcharges;
• cost and availability of insurance coverage and claims expenses and other expense volatility, including for personal injury, cargo loss and damage, workers’ compensation, employment and group health plan claims;
• failure to successfully execute the strategy to expand our service geography;
• costs and liabilities from the disruption in or failure of our technology or equipment essential to our operations, including as a result of cyber incidents, security breaches, malware or ransomware attacks;
• failure to keep pace with technological developments;
• labor relations, including the adverse impact should a portion of our workforce become unionized;
• cost, availability and resale value of real property and revenue equipment;
• supply chain disruption and delays on new equipment delivery;
• capacity and highway infrastructure constraints;
• risks arising from international business operations and relationships;
• seasonal factors, harsh weather and disasters caused by climate change;
• economic declines in the geographic regions or industries in which our customers operate;
• the creditworthiness of our customers and their ability to pay for services;
• our need for capital and uncertainty of the credit markets;
• the possibility of defaults under our debt agreements, including violation of financial covenants;
• inaccuracies and changes to estimates and assumptions used in preparing our financial statements;
• failure to operate and grow acquired businesses in a manner that support the value allocated to acquired businesses;
• dependence on key employees;
• employee turnover from changes to compensation and benefits or market factors;
• increased costs of healthcare benefits;
• damage to our reputation from adverse publicity, including from the use of or impact from social media;
• failure to make future acquisitions or to achieve acquisition synergies;
• the effect of litigation and class action lawsuits arising from the operation of our business, including the possibility of claims or judgments in excess of our insurance coverages or that result in increases in the cost of insurance coverage or that preclude us from obtaining adequate insurance coverage in the future;
• the potential of higher corporate taxes and new regulations, including with respect to climate change, employment and labor law, healthcare and securities regulation;
• the effect of governmental regulations, including hours of service and licensing compliance for drivers, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, regulations of the Food and Drug Administration and Homeland Security, and healthcare and environmental regulations;
• unforeseen costs from new and existing data privacy laws;
• changes in accounting and financial standards or practices;
• widespread outbreak of an illness or any other communicable disease, including the COVID-19 pandemic;
• international conflicts and geopolitical instability;
• increasing investor and customer sensitivity to social and sustainability issues, including climate change;
• provisions in our governing documents and Delaware law that may have anti-takeover effects;
• issuances of equity that would dilute stock ownership;
• weakness, disruption or loss of confidence in financial or credit markets; and
• other financial, operational and legal risks and uncertainties detailed from time to time in the Company’s SEC filings.

These factors and risks are described in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as updated by Part II, Item 1A. of this Quarterly Report on Form 10-Q.

As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by applicable law.

Executive Overview

The Company’s business is highly correlated to non-service sectors of the general economy. The Company’s strategy is to improve profitability by increasing yield while also increasing volumes to build density in existing geography and to pursue geographic and terminal expansion to promote profitable growth and improve our customer value proposition over time. The Company’s business is labor intensive, capital intensive and service sensitive. The Company looks for opportunities to improve safety, cost effectiveness and asset utilization. Pricing initiatives have had a positive impact on yield and profitability. The Company continues to execute targeted sales and marketing programs along with initiatives to align costs with volumes and improve customer satisfaction. Technology continues to be an important investment as the Company continues to work toward improving customer experience, operational efficiencies, safety and company image.

Third Quarter Overview

The Company’s operating revenue increased by 6.2 percent in the third quarter of 2023 compared to the same period in 2022. This increase resulted primarily from increases in shipments and tonnage partially as a result of the redistribution of freight due to industry consolidation. This increase was partially offset by decreases in fuel surcharge revenue, resulting from lower diesel fuel prices. In the third quarter of 2023, LTL shipments per workday were up 12.2 percent and LTL tonnage per workday was up 6.7 percent compared to the prior year quarter. Additionally, increases in revenue were driven by improved revenue per hundredweight and revenue per shipment, excluding fuel surcharge, due to pricing and changes in business mix.

Consolidated operating income of $128.4 million for the third quarter of 2023 was relatively flat compared to the third quarter of 2022. Diluted earnings per share of $3.67 in the third quarter of 2023 was also flat compared to the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 83.4 percent in the third quarter of 2023 compared to 82.4 percent in the third quarter of 2022. The Company generated $416.3 million in net cash provided by operating activities in the first nine months of 2023 compared with $344.1 million in the same period last year.

General

The following Management’s Discussion and Analysis describes the principal factors affecting the results of operations, financial condition, liquidity and capital resources, as well as the critical accounting policies and estimates of Saia, Inc. and its wholly-owned subsidiaries (together, the Company or Saia).

Saia is a transportation company headquartered in Johns Creek, Georgia that provides national less-than-truckload (LTL) services through a single integrated organization. While more than 97 percent of revenue is historically derived from transporting LTL shipments across 45 states, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited transportation and logistics services across North America.

Our business is highly correlated to non-service sectors of the general economy. Our business also is impacted by a number of other factors as discussed under “Cautionary Note Regarding Forward Looking Statements” and Part II, Item 1A. “Risk Factors.” The key factors that affect our operating results are the volumes of shipments transported through our network, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundredweight (a measure of yield) and revenue per shipment; our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits; purchased transportation; claims and insurance expense; fuel and maintenance; and our ability to match operating costs to shifting volume levels.

Results of Operations

Selected Results of Operations and Operating Statistics

For the quarters ended September 30, 2023 and 2022

(unaudited)

(in thousands, except ratios, workdays, revenue per hundredweight, revenue per shipment and length of haul)

Quarter and nine months ended September 30, 2023 compared to quarter and nine months ended September 30, 2022

Revenue and volume

Consolidated revenue for the quarter ended September 30, 2023 increased 6.2 percent to $775.1 million. This increase resulted primarily from increases in shipments and tonnage partially as a result of the redistribution of freight due to industry consolidation. This increase was partially offset by decreases in fuel surcharge revenue as a result of lower diesel fuel prices. For the third quarter of 2023, Saia’s LTL tonnage was up 5.0 percent to 1.5 million tons, and LTL shipments increased 10.4 percent to 2.2 million total shipments. LTL revenue per hundredweight, excluding fuel surcharge, increased 8.4 percent to $21.39 per hundredweight for the third quarter of 2023 as a result of changes in business mix and pricing actions. For the third quarter of 2023, approximately 75 to 80 percent of the Company’s operating revenue was subject to specific customer price negotiations that occur throughout the year. The remaining 20 to 25 percent of operating revenue was subject to a general rate increase. For customers subject to a general rate increase, Saia implemented 6.5 and 7.5 percent general rate increases on January 30, 2023 and January 24, 2022, respectively. Competitive factors, customer turnover and mix changes impact the extent to which customer rate increases are retained over time.

Operating revenue includes revenue recognized from the Company’s fuel surcharge program, which is designed to reduce exposure to fluctuations in diesel fuel prices by adjusting freight charges to account for changes in the price of diesel fuel. The Company’s fuel surcharge is generally based on the average national price for diesel fuel (as published by the United States Energy Information Administration) and is typically reset weekly. Fuel surcharges are widely accepted in the industry and are a significant component of revenue and pricing. Fuel surcharges are an integral part of customer contract negotiations, but represent only one portion of overall customer price negotiations. Fuel surcharge revenue as a percentage of operating revenue decreased to 16.9 percent for the quarter ended

September 30, 2023 compared to 20.5 percent for the quarter ended September 30, 2022, as a result of decreases in the average cost of diesel fuel, pricing structures and changes in mix for the quarter compared to the prior year.

For the nine months ended September 30, 2023, operating revenues were $2.1 billion, down 0.3 percent from operating revenues for the nine months ended September 30, 2022. Shipments and tonnage were relatively flat year over year. Decreases in fuel surcharge revenue, resulting from lower diesel fuel prices, were partially offset by increased revenue per shipment, excluding fuel surcharge, during the first nine months of 2023 compared to the same period in the prior year. Fuel surcharge revenue as a percentage of operating revenue decreased to 16.9 percent for the nine months ended September 30, 2023 compared to 19.8 percent for the nine months ended September 30, 2022, as a result of decreases in the cost of fuel.

Operating expenses and margin

Consolidated operating income of $128.4 million for the third quarter of 2023 was relatively flat compared to the third quarter of 2022. Overall, increased operating revenue was primarily offset by increased salaries, wages and employees’ benefits as well as depreciation and amortization expense during the third quarter of 2023. The third quarter of 2023 operating ratio (operating expenses divided by operating revenue) was 83.4 percent compared to 82.4 percent for the same period in 2022.

Salaries, wages and employees’ benefits increased $47.4 million in the third quarter of 2023 compared to the third quarter of 2022. This change was primarily driven by increases in employee hours and headcount in response to overall increased volumes during the quarter combined with a Company-wide wage increase in July of 2023 of approximately 4.1 percent. Purchased transportation decreased $8.7 million in the third quarter of 2023 compared to the third quarter of 2022 primarily due to a decrease in non-asset truckload volume in addition to a decrease in cost per mile, partially offset by an increase in LTL purchased transportation miles compared to the same period in 2022. Fuel, operating expenses and supplies decreased by $1.2 million compared to the third quarter of 2022 largely due to decreases in fuel expense during the quarter, partially offset by increased vehicle maintenance costs and facility costs. Claims and insurance expense in the third quarter of 2023 was $2.0 million higher than the third quarter of 2022 primarily due to increases in insurance premiums as well as accident related self-insurance costs. Depreciation and amortization expense increased $4.9 million in the third quarter of 2023 compared to the same period in 2022 primarily due to ongoing investments in revenue equipment and network expansion.

For the nine months ended September 30, 2023, consolidated operating income was $347.8 million, down 7.9 percent compared to $377.8 million for the nine months ended September 30, 2022. This decrease was largely due to increased salaries, wages and employee’s benefits, partially offset by a decrease in purchased transportation and fuel expense.

Salaries, wages and employees’ benefits increased $73.7 million during the first nine months of 2023 compared to the same period last year. This change was primarily driven by a Company-wide wage increase in July 2023 of approximately 4.1 percent combined with headcount increases which allowed us to optimize our internal resources to support our current volumes and network expansion. Purchased transportation decreased $82.3 million for the first nine months of 2023 compared to the same period in the prior year primarily due to a decrease in purchased transportation miles in addition to a decrease in cost per mile for purchased transportation. Fuel, operating expenses and supplies increased $5.6 million during the first nine months of 2023 compared to the same period last year largely due to increased vehicle maintenance costs, investments in information technology network support and an increase in facility costs. These changes were partially offset by decreases in costs of fuel during the period. During the first nine months of 2023, claims and insurance expense was $8.1 million higher than the same period last year primarily due to increases in insurance premiums as well as accident related self-insurance costs. Depreciation and amortization expense increased $15.6 million during the first nine months of 2023 compared to the same period in 2022 primarily due to ongoing investments in revenue equipment and network expansion.

Other

Interest expense for the quarter and nine months ended September 30, 2023 was lower than the same period in 2022 as the Company continued to pay down finance lease obligations.

Interest income for the quarter and nine months ended September 30, 2023 was higher than the same period in 2022 due to increased interest rates on higher average deposit balances during the period.

The effective tax rate was 24.6 percent and 23.3 percent for the quarters ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the effective tax rate was 24.2 and 23.5 percent, respectively. For the nine months ended September 30, 2023 approximately $57.8 million in net cash tax payments were made compared to $102.1 million in the nine months ended September 30, 2022 due to the timing of estimated tax payments.

Net income was $98.2 million, or $3.67 per diluted share, in the third quarter of 2023 compared to net income of $97.9 million, or $3.67 per diluted share, in the third quarter of 2022. Net income was $265.6 million, or $9.93 per diluted share, for the first nine months of 2023 compared to net income of $286.6 million, or $10.75 per diluted share, for the first nine months of 2022.

Outlook

Our business remains highly correlated to non-service sectors of the general economy and competitive pricing pressures, as well as the success of Company-specific improvement initiatives. Our outlook for the remainder of 2023 and beyond is dependent on a number of external factors, including strength of the economy, inflation, labor availability, diesel fuel prices and supply chain constraints. The potential impact of these factors on our operations, financial performance and financial condition, as well as the impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict.

As the market continues to absorb the redistribution of volumes resulting from a large LTL competitor ceasing operations, we believe both positive and challenging effects remain on our business operations and financial performance. The profitability related to any increased volume resulting from the redistribution is uncertain, as revenue increases may be offset by higher costs, or may otherwise be less profitable than our historical business due to changes in freight characteristics.

We are continuing initiatives to improve and enhance customer service in an effort to support our ongoing pricing and business mix optimization, while seeking to control costs and improve productivity. Planned revenue initiatives include building density in our current geography, targeted marketing initiatives to grow revenue in more profitable areas, further expansion of our geographic and terminal network, as well as pricing and yield management. On January 30, 2023 and January 24, 2022 Saia implemented 6.5 and 7.5 percent general rate increases, respectively, for customers comprising approximately 20 to 25 percent of Saia’s operating revenue. The success of these revenue initiatives is impacted by what proves to be the underlying economic trends, competitor initiatives and other factors discussed under “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”

If we build market share, including through our geographic and terminal expansion, we expect there to be numerous operating leverage cost benefits. Conversely, should the economy soften, we plan to match resources and capacity to shifting volume levels in an effort to lessen unfavorable operating leverage. The success of cost improvement initiatives is impacted by a number of factors, including the cost and availability of drivers, dock workers and personnel, and availability and cost of purchased transportation, cost of diesel fuel, cost of insurance, and inflation.

Effective July 2023, the Company implemented a market competitive salary and wage increase for all employees. The compensation increase was approximately 4.1 percent, and the Company anticipates the impact will be partially offset by productivity and efficiency gains.

See “Cautionary Note Regarding Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” for a more complete discussion of potential risks and uncertainties that could materially adversely affect our financial condition, results of operations, cash flows and prospects.

Financial Condition, Liquidity and Capital Resources

The Company’s liquidity needs arise primarily from capital investment in new equipment, land and structures, information technology and letters of credit required under insurance programs, as well as funding working capital requirements.

Working capital/capital expenditures

Working capital at September 30, 2023 was $346.4 million, an increase from $212.9 million at September 30, 2022.

Current assets at September 30, 2023 increased by $94.2 million as compared to September 30, 2022, driven by an increase in cash and cash equivalents of $99.4 million and accounts receivable of $10.3 million, partially offset by a decrease in prepaid expenses of $19.4 million. Current liabilities decreased by $39.2 million at September 30, 2023 compared to September 30, 2022 primarily related to a decrease in claims and insurance accruals largely due to the settlement of certain outstanding claims.

A summary of our cash activity is presented below:

(in thousands)

Cash flows provided by operating activities were $416.3 million for the nine months ended September 30, 2023 versus $344.1 million for the nine months ended September 30, 2022. The increase is primarily due to changes in working capital compared to the prior year, partially offset by decreased net income compared to the prior period. For the nine months ended September 30, 2023, net cash used in investing activities was $337.0 million compared to $278.0 million in the same period last year, a $59.0 million increase. This increase resulted from increased capital expenditures as the Company continues to expand its footprint and add density in markets. For the nine months ended September 30, 2023, net cash used in financing activities was $17.4 million compared to $22.8 million during the same period last year, as a result of decreased capital lease payments and less taxes withheld and remitted for equity based compensation shares during the first nine months of 2023 compared to the same period in 2022.

The Company has historically generated cash flows from operations to fund a large portion of its capital expenditure requirements. The timing of capital expenditures can largely be managed around the seasonal working capital requirements of the Company. The Company believes it has adequate sources of capital to meet short-term liquidity needs through its cash on hand, operating cash flows and availability under its credit agreement, discussed below. Future operating cash flows are primarily dependent upon the Company’s profitability and its ability to manage its working capital requirements, primarily accounts receivable, accounts payable and wage and benefit accruals.

The Company currently expects that net capital expenditures in 2023 will be in excess of $400 million, subject to the ongoing evaluation of market conditions. Projected 2023 capital expenditures include normal replacement cycles of revenue equipment and investments in technology. In addition, the Company plans to add revenue equipment and real estate investments to support growth initiatives. Net capital expenditures were $338.4 million in the first nine months of 2023. Approximately $139.8 million of the 2023 remaining capital budget was committed as of September 30, 2023.

Credit Agreement

Prior to February 3, 2023, the Company was party to a Sixth Amended and Restated Credit Agreement (the Amended Credit Agreement) with a banking group that provided up to a $300 million revolving line of credit through February 2024. The Amended Credit Agreement also had an accordion feature that allowed for an additional $100 million availability, subject to certain conditions and availability of lender commitments. The Amended Credit Agreement provided for a pledge by the Company of certain land and structures, accounts receivable and other assets to secure indebtedness under the Amended Credit Agreement.

On February 3, 2023, the Company entered into a new unsecured credit agreement with a banking group (the 2023 Credit Agreement) and terminated the Amended Credit Agreement. The 2023 Credit Agreement maintains the amount of the previous line of credit of $300 million and extends the term until February 2028. The 2023 Credit Agreement contains an accordion feature that allows the Company to increase the size of the facility by up to $150 million, subject to certain conditions and availability of lender commitments. Under the 2023 Credit Agreement, the Company is subject to a maximum consolidated net lease adjusted leverage ratio of less than 3.50 to 1.00 with the potential to be temporarily increased in the event the Company makes an acquisition that meets certain criteria. The 2023 Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. Under the 2023 Credit Agreement, if an event of default occurs, the banks will be entitled to take various actions, including the acceleration of amounts due. The Company was in compliance with its debt covenants at September 30, 2023.

At September 30, 2023 and December 31, 2022, the Company had no outstanding borrowings and outstanding letters of credit of $32.1 million and $31.2 million, respectively, under these credit agreements. At September 30, 2023, the Company had $267.9 million in availability under the 2023 Credit Agreement. The available portion of the 2023 Credit Agreement may be used for general corporate purposes, including capital expenditures, working capital and letter of credit requirements, as needed.

Finance Leases

The Company is obligated under finance leases with seven-year original terms covering revenue equipment. Total liabilities recognized under finance leases were $18.9 million and $31.0 million as of September 30, 2023 and December 31, 2022, respectively. Amortization of assets held under the finance leases is included in depreciation and amortization expense. The weighted average interest rates for the finance leases at September 30, 2023 and December 31, 2022 were 3.9 percent and 3.7 percent, respectively.

Contractual Obligations

Contractual obligations for the Company are comprised of lease agreements, purchase obligations and long-term debt obligations related to any outstanding balance under the Company’s revolving line of credit. Contractual obligations for operating leases at September 30, 2023 totaled $154.5 million, including operating leases with original maturities of less than one year, which are not recorded in our consolidated balance sheet in accordance with U.S. generally accepted accounting principles. Contractual obligations in the form of finance leases were $19.7 million at September 30, 2023, which includes both principal and interest amounts. For the remainder of 2023, $0.4 million of interest payments are anticipated based on borrowings and commitments outstanding at September 30, 2023. See Note 5 to the accompanying unaudited condensed consolidated financial statements in this Current Report on Form 10-Q. Purchase obligations at September 30, 2023 were $141.7 million, including commitments of $141.1 million for capital expenditures. As of September 30, 2023, the revolving line of credit had no outstanding principal balance.

Other commercial commitments of the Company typically include letters of credit and surety bonds required for collateral towards insurance agreements and amounts outstanding under the revolving line of credit. As of September 30, 2023 the Company had total outstanding letters of credit of $33.9 million and $56.4 million in surety bonds. Additionally at September 30, 2023, the Company had $267.9 million available under its revolving credit facility, subject to existing debt covenants.

The Company has accrued approximately $4.6 million for uncertain tax positions and $0.5 million for interest and penalties related to the uncertain tax positions as of September 30, 2023. At September 30, 2023, the Company has accrued $93.1 million for claims and insurance liabilities.

Critical Accounting Policies and Estimates

There have been no significant changes to the application of the critical accounting policies and estimates contained in our Annual Report on Form 10-K for the year ended December 31, 2022. The reader should refer to our 2022 Annual Report on Form 10-K for a full disclosure of all critical accounting policies and estimates of amounts recorded in certain assets, liabilities, revenue and expenses.

The Company is exposed to a variety of market risks including the effects of interest rates and diesel fuel prices. The detail of the Company’s debt structure is more fully described in Note 5 “Debt and Financing Arrangements” of the accompanying unaudited condensed financial statements in this Form 10-Q. To help mitigate our risk to rising diesel fuel prices, the Company has an established fuel surcharge program.

The following table provides information about the Company’s third-party financial instruments as of September 30, 2023. The table presents principal cash flows (in millions) and related weighted average interest rates by contractual maturity dates. The fair value of the fixed rate debt (in millions) was estimated based upon level two inputs in the fair value hierarchy. The fair value of finance leases is based on current market interest rates for similar types of financial instruments.

19

Quarterly Controls Evaluation and Related CEO and CFO Certifications

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company conducted an evaluation of the effectiveness of the design and operation of its “disclosure controls and procedures” (Disclosure Controls). The Disclosure Controls evaluation was performed under the supervision and with the participation of management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Based upon the controls evaluation, the Company’s CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Disclosure Controls are effective to ensure that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported timely. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components of its internal control over financial reporting which consists of control processes designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

Limitations on the Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that its Disclosure Controls or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings — For a description of legal proceedings, see Note 3 “Commitments and Contingencies” of the accompanying unaudited condensed consolidated financial statements.

Item 1A. Risk Factors— In addition to the other information included in this report and in our other reports and statements that we file with the SEC, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition and/or operating results. The risks discussed in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

There have been no material changes to the risk factors identified in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022.