Strattec Security Corp: Form 10-Q for the period ended Dec 31, 2023

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis should be read in conjunction with STRATTEC SECURITY CORPORATION’s accompanying Condensed Consolidated Financial Statements and Notes thereto and its 2023 Form 10-K, which was filed with the Securities and Exchange Commission on September 7, 2023. Also, refer to discussion of prior period corrections under Basis of Financial Statements included in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. Unless otherwise indicated, all references to quarters and years refer to fiscal quarters and fiscal years.

Outlook

The key highlight of our fiscal year-to-date results has been $18.8 million of customer pricing increases, equating to $15.5 million gross margin improvement after factoring in the $3.3 million paid to key suppliers for negotiated price increases. Furthermore, of this $15.5 million gross margin improvement, $7.8 million is considered “ongoing” as it relates to present program price increases that will carry forward to subsequent years. For full fiscal year 2024, we now anticipate an annualized increase in “ongoing” pricing, net of higher costs paid to suppliers, to be at the higher end of our originally targeted $10.0 million to $15.0 million. We do not anticipate any further material one-time retroactive pricing adjustments for the remainder of the fiscal year.

Although net sales in the first half of the year were relatively unchanged versus prior year after adjusting for the aforementioned pricing achieved, we anticipate modest sales growth in the remainder of the fiscal year due to the launch of various customer programs in our second half of fiscal 2024, which is evidenced by the abnormally high level of recoverable customer tooling on our balance sheet awaiting program production starts relative to historical levels.

From a cost of sales perspective, anticipated key challenges persist, namely a strong Mexican Peso relative to the U.S. Dollar and the December 2023 Mexican government's announcement of another 20 percent mandated minimum wage increase starting in January 2024, both of which increase the cost of our Mexican operations. In our current fiscal year-to-date period the U.S. dollar to Mexican Peso exchange rate averaged 17.21 compared with a rate of 19.88 in the prior year period, resulting in approximately a $5.8 million increase in the cost of our Mexican operations. Meanwhile the Mexican government mandated minimum wage increase of January 2023 resulted in approximately $2.8 million higher wages and benefits in our fiscal year-to-date results and we expect the newly announced minimum wage increases for 2024 to have a similar financial effect on the back half of our fiscal year.

To help offset the increased cost of labor and overhead in our Mexican operations, we implemented a salaried staffing reduction in our Mexican operations in the 2024 first quarter that is projected to reduce costs by an annualized amount of approximately $800,000. Our results year-to-date on reducing non-employee cost of sales has been mixed, as the team has made meaningful progress on reducing material costs, notably for raw materials. In spite of these efforts, much of this benefit has been offset by higher shipping costs. Despite these results, we continue to target a net $3 million savings in non-employee cost of sales for the full 2024 fiscal year.

Regarding the balance sheet, we anticipate the balance of reimbursable customer tooling will remain increased over historical levels until later in the fiscal year at which time we expect a normalization to near historical levels with the launch of the associated programs. We expect the Mexican value-added tax (see Note on page 8) will return to historical levels in first quarter of fiscal 2025. As for net inventory, we saw an increase of $8 million in our inventory balances since the end of the 2024 first quarter due to delays in new product launches and lower than anticipated sales in December. However, we remain committed to improving our inventory turn in the second half of the fiscal year. Lastly, we plan on renewing our ADAC-STRATTEC credit facility within the fiscal year as the joint venture’s profitability improves through higher customer pricing and cost cutting measures.

For our fiscal 2024 capital expenditures, we have reduced our anticipated expenditures from $14 million to between $9 million and $12 million due to retiming and re-estimates.

Analysis of Results of Operations

Three months ended December 31, 2023 compared to the three months ended January 1, 2023

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Net sales to each of our customers or customer groups in the current year quarter and prior year quarter were as follows (in millions):

The quarter-over-quarter sales increase of $5.3 million reflects net price increases from our major OEM customers of $8.0, which includes the following:

• $3.8 million of ongoing increases in current part prices for parts shipped during the current year quarter.
• $2.6 million of ongoing increases in current part prices for parts shipped during our fiscal 2024 first quarter for which the price increases were finalized during the current quarter.
• $1.6 million of one-time retroactive price increases for parts shipped in our prior fiscal year for which the price increases were finalized during the current quarter.

Quarter-over-quarter sales were not materially impacted by the UAW strike. Net customer production volume and content changes resulted in net sales reductions, which partially offset the net price increases discussed above. The following volume and content changes specifically impacted sales to the noted customer groups between quarters:

• Sales to Stellantis were negatively impacted by reduced customer vehicle production volumes, specifically related to several passenger car programs ending and customer plant closures during the current year quarter affecting Chrysler Pacifica minivan production.
• Sales to Tier 1 Customers improved in the current year quarter compared to the prior year quarter due to new door hardware content on the F-Series Super Duty Pickup, which is sold to a Tier 1 customer.
• Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, increased between quarterly periods. The current year quarter includes sales for new business awarded from Aston Martin.
• Sales to Hyundai / Kia were positively impacted due to an overall increase in customer vehicle production volumes between quarters.

Prior year quarter reclassifications have been made for consistency with current year quarter presentation.

Total cost of goods sold decreased $800,000 between quarterly periods. The quarter-over-quarter reduction in direct material costs of $2.4 million was the result of the net reduction in sales volumes, as discussed above, and reduced zinc costs of approximately $870,000 in the current year quarter as compared to the prior year quarter. These favorable impacts were partially offset by $1.8 million of negotiated material price increases paid to key suppliers. Price increases paid to suppliers attributed to ongoing operations totaled $880,000, while the remaining $910,000 relates to one-time retroactive price increases. The quarter-over-quarter increase in labor and overhead costs of $1.6 million was impacted by the following:

• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $2.5 million in the current year quarter as compared to the prior year quarter due to an unfavorable Mexican peso to U.S. dollar exchange rate between periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 17.28 pesos to the dollar in the current year quarter from approximately 19.57 pesos to the dollar in the prior year quarter.
• Mexico wages and benefits increased $1.3 million in the current year quarter as compared to the prior year quarter as a result of a January 1, 2023 20 percent government mandated minimum wage increase. This increase was partially offset by $780,000 due to a September 2023 salaried staff reduction in Mexico and current year quarter production efficiencies that controlled headcount and hours worked.
• Freight costs increased $1.3 million between quarterly periods due to an increase in shipments from foreign vendors, a change in shipping terms with a major supplier that occurred in June 2023, and an increase in expedited shipments.

The unfavorable impact of specific labor and overhead cost increases noted above was partially offset by favorable absorption of our fixed overhead costs in the current year quarter as compared to the prior year quarter due to higher production volumes between quarters associated with increases in finished and work in process inventories during the current year quarter and reductions in finished and work in process inventories during the prior year quarter.

Gross profit margin improvement between quarterly periods was driven by pricing increases achieved during the current year quarter as discussed above. The net impact of customer and supplier pricing for parts shipped during our fiscal 2024 first quarter and our prior fiscal year for which the price increases were finalized during the current quarter increased the current year quarter gross profit margin percentage by 2.4 percentage points. Additionally, favorable impacts of ongoing customer price increases for parts shipped during the current year quarter, reduced zinc costs between quarterly periods, favorable absorption resulting from increased production and production efficiencies in Mexico were partially offset by an unfavorable U.S. dollar to Mexican peso exchange rate combined with the mandatory Mexican minimum wage increase in 2023 and higher freight costs, all as discussed above.

Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:

Engineering, selling and administrative expenses increased $1.3 million between quarterly periods due to one-time charges of approximately $900,000 associated with the transition of our Chief Executive Officer position as well as higher outside expenditures for new product development costs associated with utilizing third-party vendors for a portion of our development work.

Income from operations was $58,000 in the current year quarter compared to loss from operations of $4.7 million in the prior year quarter due to improvement in gross profit margin dollars partially offset by an increase in engineering, selling and administrative expenses as discussed above.

Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of the Equity Restructuring Agreement within Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements within this Form 10-Q for additional information regarding the sale of STRATTEC's VAST LLC interest to WITTE Automotive. The equity loss of joint ventures was $4,000 in the current year quarter compared to equity earnings of joint ventures of $588,000 in the prior year quarter. The current year quarter equity loss of joint ventures was the result of additional professional fees incurred during the period related to the sale of STRATTEC's investment in VAST LLC. The $4,000 is an adjustment to the gain on sale of VAST LLC, which was recorded in our fiscal 2023. Our adjusted loss on sale of VAST LLC totals $159,000.

Included in Other Income (Expense), net in the current year quarter and prior year quarter were the following items (in thousands):

Set forth below is a discussion of the items comprising certain of the components of our Other Income (Expense), net:

• Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
• The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
• We entered into the Mexican peso currency forward contracts to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of December 31, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
• Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

Our effective tax rate was 25.3 percent and 40.8 percent for the three-month periods ended December 31, 2023 and January 1, 2023, respectively. The higher effective tax rate in the prior year three-month period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The change in our effective tax rate between quarterly periods was also impacted by the sale of our interest in VAST LLC and the purchase of the remaining non-controlling interest in SPA, which were both effective June 30, 2023. Our prior year period effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC is taxed as a partnership for U.S. tax purposes. SPA was taxed as a partnership in our fiscal 2023.

Six months ended December 31, 2023 compared to the six months ended January 1, 2023

Net sales to each of our customers or customer groups in the current year period and prior year period were as follows (in millions):

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The period-over-period sales increase of $20.4 million reflects net price increases from our major OEM customers of $18.8 million of which $9.3 million is attributed to ongoing increases in current part prices and $9.5 million relates to one-time retroactive price increases for parts shipped in the prior fiscal year for which the price increases were finalized during the current year-to-date period. Period-over-period sales were not materially impacted by the UAW strike. In addition to the net price increases, the following items specifically impacted sales to the noted customer groups between year-to-date periods:

• Sales to Ford Motor Company were positively impacted due to new power end gate content we supply on the F-Series Super Duty Pickup.
• Excluding the impact of net price increases described above, sales to Stellantis were negatively impacted by reduced customer vehicle production volumes, specifically related to several passenger car programs ending and customer plant shutdowns during the current year period affecting Chrysler Pacifica minivan production.
• Sales to Tier 1 Customers improved in the current year period compared to the prior year period due to new door hardware content on the F-Series Super Duty Pickup, which is sold to a Tier 1 customer.
• Sales to Commercial and Other OEM Customers, which are comprised of aftermarket products and vehicle access control products, such as latches, fobs, driver controls and door handles, increased slightly between year-to-date periods. Increased sales in the current year period for new business awarded from Aston Martin was mostly offset by decreased sales between periods due to door handle programs ending with Honda Motor Company.
• Sales to Hyundai / Kia were positively impacted due to an overall increase in customer vehicle production volumes.

Prior year period reclassifications have been made for consistency with current year period presentation.

Total cost of goods sold increased $8.0 million between year-to-date periods. The period-over-period increase in direct material costs of $1.3 million was the result of $3.3 million of negotiated material price increases paid to key suppliers. Price increases paid to suppliers attributed to ongoing operations totaled $1.5 million, while the remaining $1.8 million relates to one-time retroactive price increases. The impact of material price increases paid to suppliers was partially offset by reduced zinc costs of approximately $1.6 million in the current year period as compared to the prior year period. The period-over-period increase in labor and overhead costs of $6.7 million was impacted by the following:

• The U.S. dollar value of our Mexican operations was negatively impacted by approximately $5.8 million in the current year period as compared to the prior year period due to an unfavorable Mexican peso to U.S. dollar exchange rate between periods. The average U.S. dollar / Mexican peso exchange rate decreased to approximately 17.21 pesos to the dollar in the current year period from approximately 19.88 pesos to the dollar in the prior year period.
• Mexico wages and benefits increased $2.8 million in the current year period as compared to the prior year period as a result of a January 1, 2023 20 percent government mandated minimum wage increase. This increase was partially offset by $1.2 million due to a September 2023 salaried staff reduction in Mexico and current year period production efficiencies that controlled headcount and hours worked.
• Freight costs increased $2.3 million between year-to-date periods due to an increase in shipments from foreign vendors, a change in shipping terms with a major supplier that occurred in June 2023, and an increase in expedited shipments.

The unfavorable impact of specific labor and overhead cost increases noted above was partially offset by favorable absorption of our fixed overhead costs in the current year period as compared to the prior year period due to higher production volumes between year-to-date periods associated with increases in finished and work in process inventories during the current year-to-date period and reductions in finished and work in process inventories during the prior year-to-date period.

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Gross profit margin improvement between year-to-date periods was driven by pricing increases achieved during the current year period as discussed above. The net impact of one-time retroactive customer and supplier pricing in the current year period increased the gross profit margin percentage by 2.7 percentage points. Additional current year period favorable impacts of ongoing customer price increases, reduced zinc costs between year-to-date periods, favorable absorption resulting from increased production and production efficiencies in Mexico were partially offset by ongoing price increases paid to suppliers, an unfavorable U.S. dollar to Mexican peso exchange rate combined with the mandatory Mexican minimum wage increase in 2023, and higher freight costs, all as discussed above.

Engineering, selling and administrative expenses in the current year quarter and prior year quarter were as follows:

Engineering, selling and administrative expenses increased $1.3 million between year-to-date periods due to one-time charges of approximately $900,000 associated with the transition of our Chief Executive Officer position as well as higher outside expenditures for new product development costs associated with utilizing third-party vendors for a portion of our development work.

Income from operations was $6.2 million in the current year period compared to loss from operations of $4.9 million in the prior year period due to improvement in gross profit margin dollars partially offset by an increase in engineering, selling and administrative expenses as discussed above.

Effective June 30, 2023, STRATTEC sold its one-third interest in VAST LLC to WITTE. Refer to the discussion of the Equity Restructuring Agreement within Joint Ventures and Majority Owned Subsidiaries included in the Notes to Financial Statements within this Form 10-Q for additional information regarding the sale of STRATTEC's VAST LLC interest to WITTE Automotive. The equity loss of joint ventures was $269,000 in the current year period compared to equity earnings of joint ventures of $1.1 million in the prior year period. The current year period equity loss of joint ventures was the result of additional professional fees incurred during the period related to the sale of STRATTEC's interest in VAST LLC. The $269,000 is an adjustment to the gain on sale of VAST LLC of $110,000, which was recorded in our fiscal 2023. Our adjusted loss on sale of VAST LLC totals $159,000.

Included in Other Income (Expense), net in the current year period and prior year period were the following items (in thousands):

Set forth below is a discussion of the items comprising certain of the components of our Other Income (Expense), net:

• Foreign currency transaction gains and losses resulted from activity associated with foreign denominated assets held by our Mexican subsidiaries.
• The Rabbi Trust assets fund our amended and restated supplemental executive retirement plan. The investments held in the Trust are considered trading securities.
• We entered into the Mexican peso currency forward contracts to reduce earnings volatility resulting from changes in exchange rates affecting the U.S. dollar cost of our Mexican operations. Unrealized gains and losses on the peso forward contracts recognized as a result of mark-to-market adjustments as of December 31, 2023 may or may not be realized in future periods, depending on actual Mexican peso to U.S. dollar exchange rates experienced during the balance of the contract period.
• Pension and postretirement plan costs include the components of net periodic benefit cost other than the service cost component.

Our effective tax rate was 24.0 percent and 40.7 percent for the six-month periods ended December 31, 2023 and January 1, 2023, respectively. The higher effective tax rate in the prior year six-month period was due to the impact of available R&D and foreign tax credits on projected pre-tax book losses for the fiscal year. The change in our effective tax rate between quarterly periods was also impacted by the sale of our interest in VAST LLC and the purchase of the remaining non-controlling interest in SPA, which were both effective June 30, 2023. Our prior year period effective tax rate differs from the statutory tax rate due to the application of the Global Intangible Low Taxed Income (GILTI) tax provisions, our available R&D tax credit and the non-controlling interest portion of our pre-tax income. The non-controlling interest portion impacts the effective tax rate as ADAC-STRATTEC LLC is taxed as a partnership for U.S. tax purposes. SPA was taxed as a partnership in our fiscal 2023.

Liquidity and Capital Resources

Working Capital (in millions)

Outstanding Receivable Balances from Major Customers

Our primary source of cash flow is from our major customers, which include General Motors Company, Stellantis and Ford Motor Company. As of the date of filing this Form 10-Q with the Securities and Exchange Commission, all of our major customers are making payments on their outstanding accounts receivable in accordance with the payment terms included on their purchase orders. A summary of our outstanding receivable balances from our major customers as of December 31, 2023 was as follows (in millions):

Cash Balances in Mexico

We earn a portion of our operating income in Mexico. As of December 31, 2023, $3.3 million of our $11.6 million cash and cash equivalents balance was held in Mexico. These funds are available for repatriation as deemed necessary.

Cash Flow Analysis (in millions)

The reduction in cash provided by operating activities between periods was due to an increase in working capital requirements between periods partially offset by improved profitability in the current year period as compared to the prior year period. Working capital requirement changes between periods were comprised of the following items (in millions):

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Set forth below is a summary of the items impacting the change in our working capital requirements between periods:

• Accounts receivable balances decreased in the current year period due a reduction in sales in the December 2023 quarter as compared to the June 2023 quarter and the collection of billings for customer tooling, which were outstanding as of June 2023.
• The change in inventory levels reflected an increase during the current year period and a decrease during the prior year period. The current year period increase in finished, in-process and purchased material inventory balances is due to actual December 2023 sales volumes being lower than customer planned releases and the initial purchase of materials required for new program launches, which are scheduled during the remainder of our fiscal 2024. The prior year period decrease was due to a reduction in inventory balances to align with historical customer production patterns.
• The change in other assets includes an increase in balances during both the current and prior year to date periods. Customer tooling balances increased during both periods. Additionally, the current year period includes an increase in value-added tax recoverable balances related to our operations in Mexico. Customer tooling balances changed due to the timing of tooling development spending required to meet customer production requirements and the timing of related customer billings for tooling cost reimbursement. Value-added tax recoverable balances increased $10.0 million during the current year period due to a temporary issue with our Mexican tax certification. Although the certification issue was resolved during the quarter ended December 31, 2023, we were required to pay VAT on all parts temporarily imported into Mexico before seeking reimbursement for periods in which the certification issue was outstanding, which periods are now open to audit with the Mexican tax authority. The temporary increases in the VAT recoverable balance will remain elevated until the periods under audit are closed.
• Accounts payable and accrued liability balances decreased in the current year period. Accounts payable balances for each period reflected the timing of purchases and payments with our vendors based on normal, established payment terms. The current year period reduction is primarily due to a change in inventory management, shipping terms, and payment terms with a significant vendor during the fourth quarter of our fiscal 2023. Increased accounts payable balances as of June 2023 that resulted from the change were paid during the current year period.

Net cash used in investing activities during the current year period of $2.4 million included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $4.4 million, offset by $2.0 million in proceeds received from the sale of our investment in VAST LLC, which sale was effective during the fourth quarter of our fiscal 2023. Net cash used in investing activities during the prior year period of $9.6 million included capital expenditures made in support of requirements for new product programs and the upgrade and replacement of existing equipment of $9.5 million and an investment in our VAST LLC joint venture of $104,000.

Net cash provided by financing activities of $37,000 during the current year period included $2 million of borrowings under our credit facility, which borrowings were repaid during the period resulting in no net impact to the change in cash during the period, and $37,000 received for purchases under our employee stock purchase plan. Net cash provided by financing activities of $5.5 million during the prior year period included $9 million of additional borrowings under our credit facility and $146,000 received for the exercise of stock options under our stock incentive plan and purchases under our employee stock purchase plan, partially offset by $3.0 million of repayments of borrowings under our credit facilities and $600,000 of dividend payments to non-controlling interests in our subsidiaries.

We anticipate total capital expenditures will be approximately $9 million to $12 million in fiscal 2024, of which $4.4 million has been made through December 31, 2023, in support of requirements for new product programs and the upgrade and replacement of existing equipment.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program to buy back outstanding shares of our common stock. Shares authorized for buy back under the program totaled 3,839,395 at December 31, 2023. A total of 3,655,322 shares have been repurchased over the life of the program through December 31, 2023, at a cost of approximately $136.4 million. No shares were repurchased during the six-month periods ended December 31, 2023 or January 1, 2023. Additional repurchases may occur from time to time and are expected to continue to be funded by cash flow from operations and current cash balances. Based on the current economic environment and our preference to conserve cash for other uses, we anticipate modest or no stock repurchase activity for the remainder of fiscal year 2024.

Credit Facilities

STRATTEC has a $40 million secured revolving credit facility (the “STRATTEC Credit Facility”) with BMO Harris Bank N.A. ADAC-STRATTEC LLC has a $25 million secured revolving credit facility (the “ADAC-STRATTEC Credit Facility”) with BMO Harris Bank N.A., which is guaranteed by STRATTEC. The STRATTEC Credit Facility expires August 1, 2026. The ADAC-STRATTEC Credit Facility expires August 1, 2024. We are working with BMO Harris Bank on a renewal of the ADAC-STRATTEC Credit Facility for completion in our fiscal 2024. Borrowings under either credit facility are secured by our U.S. cash balances, accounts receivable, inventory, and fixed assets. Interest on borrowings under the STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate or LIBOR plus 1.25 percent through February 22, 2023, SOFR plus 1.35 percent for the period February 23, 2023 through September 5, 2023, and SOFR plus 1.85 percent subsequent to September 5, 2023. Interest on borrowings under the ADAC-STRATTEC Credit Facility were at varying rates based, at our option, on the bank's prime rate or LIBOR plus 1.25 percent through February 6, 2023 and SOFR plus 1.35 percent subsequent to February 6, 2023. Both credit facilities contain a restrictive financial covenant that requires the applicable borrower to maintain a minimum net worth level. The ADAC-STRATTEC Credit Facility includes an additional restrictive financial covenant that requires the maintenance of a minimum fixed charge coverage ratio. As of December 31, 2023, we were in compliance with all financial covenants required by these credit facilities. There were no outstanding borrowings under the STRATTEC Credit Facility at December 31, 2023 or July 2, 2023. The average outstanding borrowings and weighted average interest rate on the STRATTEC Credit Facility loans were approximately $66,000 and 8.5 percent, respectively, during the six-month period ended December 1, 2023. Outstanding borrowings under the ADAC-STRATTEC Credit Facility totaled $13 million at December 31, 2023 and at July 2, 2023. The average outstanding borrowings and weighted average interest rate on the ADAC-STRATTEC Credit Facility loans were approximately $13.0 million and 6.7 percent, respectively, during the six-month period ended December 31, 2023.

Joint Ventures and Majority Owned Subsidiaries

Refer to the discussion of Investment in Joint Ventures and Majority Owned Subsidiaries and discussion of Equity (Loss) Earnings of Joint Ventures included elsewhere in Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

Other Information

There have been no material changes to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on September 7, 2023.