Middlesex Water Co: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Forward-Looking Statements

Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The Company intends that these statements be covered by the safe harbors created under those laws. They include, but are not limited to statements as to:

• expected financial condition, performance, prospects and earnings of the Company;
• strategic plans for growth;
• the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;
• the Company’s expected liquidity needs during the upcoming fiscal year and beyond and the sources and availability of funds to meet its liquidity needs;
• expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results;
• financial projections;
• the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on plan assets;
• the ability of the Company to pay dividends;
• the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs;
• the safety and reliability of the Company’s equipment, facilities and operations;
• the Company’s plans to renew municipal franchises and consents in the territories it serves;
• trends; and
• the availability and quality of our water supply.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to:

• effects of general economic conditions;
• increases in competition for growth in non-franchised markets to be potentially served by the Company;
• ability of the Company to adequately control selected operating expenses which are necessary to maintain safe and proper utility services, and which may be beyond the Company’s control;
• availability of adequate supplies of quality water;
• actions taken by government regulators, including decisions on rate increase requests;
• new or modified water quality standards and compliance with related legal and regulatory requirements;
• weather variations, including climate variability, and other natural phenomena impacting utility operations;
• financial and operating risks associated with acquisitions and/or privatizations;
• acts of war or terrorism;
• cyber-attacks;
• changes in the pace of new housing development;
• availability and cost of capital resources;
• timely availability of materials and supplies for operations and critical infrastructure projects;
• effectiveness of internal control over financial reporting;

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• impact of pandemics; and
• other factors discussed elsewhere in this report.

Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company’s understanding as of the date of this report. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Overview

Middlesex Water Company (Middlesex or the Company) has operated as a water utility in New Jersey since 1897 and in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We operate water and wastewater systems under contract for governmental entities and private entities primarily in New Jersey and Delaware and provide regulated wastewater services in New Jersey. We are regulated by state public utility commissions as to rates charged to customers for water and wastewater services, as to the quality of water and wastewater service we provide and as to certain other matters in the states in which our regulated subsidiaries operate. Only our Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Services, Inc. (White Marsh) subsidiaries are not regulated public utilities as related to rates and services quality. All municipal or commercial entities whose utility operations are managed by these entities, however, are subject to environmental regulation at the federal and state levels.

Our principal New Jersey water utility system (the Middlesex System) provides water services to approximately 60,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water sales under contract to municipalities in central New Jersey with a total population of over 0.2 million. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands) provide water and wastewater services to approximately 2,500 customers in Southampton Township, New Jersey.

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC, provide water services to approximately 60,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services approximately 4,300 households in Kent and Sussex Counties through various operations and maintenance contracts.

USA-PA operates the water and wastewater systems for the City of Perth Amboy, New Jersey (Perth Amboy) under a 10-year operations and maintenance contract expiring in 2028. In addition to performing day-to day operations, USA-PA is also responsible for emergency response and management of capital projects funded by Perth Amboy.

USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2032. USA also operates the Borough of Highland Park, New Jersey’s (Highland Park) water and wastewater systems under a 10-year operations and maintenance contract expiring in 2030. In addition to performing day-to-day service operations, USA is responsible for emergency response and management of capital projects funded by Avalon and Highland Park.

Under a marketing agreement with HomeServe USA Corp. (HomeServe) expiring in 2031, USA offers residential customers in New Jersey and Delaware water and wastewater related services and home maintenance programs. HomeServe is a leading national provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. USA also provides unregulated water and wastewater services under contract with several New Jersey municipalities.

Recent Developments

Middlesex Chief Financial Officer Retirement and Succession Announcement – On June 10, 2024, the Company named Mohammed G. Zerhouni as its new Senior Vice President, Chief Financial Officer and Treasurer effective June 24, 2024. Mr. Zerhouni joined Middlesex following a comprehensive search for a successor to former Senior Vice President, Treasurer and Chief Financial Officer, A. Bruce O’Connor.

Middlesex Base Water Rate Increase Approval - The approval by the New Jersey Board of Public Utilities (NJBPU) in February 2024 of the negotiated settlement of the Middlesex 2023 base rate case is expected to increase annual operating revenues by $15.4 million effective March 1, 2024. The approved tariff rates were designed to recover increased operating costs as well as a return on invested capital of $563.1 million, based on an authorized return on common equity of 9.6%. Middlesex has made capital infrastructure investments to ensure prudent upgrade and replacement of its utility assets to support continued regulatory compliance, resilience and overall quality of service.

Middlesex Distribution System Improvement Charge (DSIC) - In May 2024, the NJBPU approved a DSIC rate, effective May 26, 2024, that is expected to result in $0.5 million of annual revenues. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements made between general rate case proceedings.

Tidewater DSIC - Effective July 1, 2024, Tidewater increased its Delaware Public Service Commission (DEPSC)-approved DSIC rate, which is expected to generate revenue of approximately $1.6 million annually.

Tidewater Deferred Accounting Treatment Petition for Lead Service Line Inventory Costs - In July 2024, Tidewater filed a petition seeking DEPSC approval of deferred accounting treatment for costs associated with Tidewater’s obligation to identify and inventory lead service lines throughout Tidewater’s service area, as required by federal law and Delaware regulations. Through June 30, 2024, Tidewater has spent $0.3 million, included in Operations and Maintenance Expense, and expects to spend approximately $2.1 million through September 30, 2024.

United States Environmental Protection Agency (USEPA) Issues Final Perfluoroalkyl Substances (PFAS) Regulations - In April 2024, the USEPA finalized drinking water regulations for PFAS, establishing maximum contaminant levels (MCLs) for three PFAS compounds (Regulated PFAS) that are lower than the current New Jersey Department of Environmental Protection MCLs adhered to by the Company. Under the new USEPA regulations, effective April 2024, water systems must monitor for Regulated PFAS and have three years to complete initial monitoring (by April 2027), followed by ongoing compliance monitoring. Water systems must also provide the public with information on the levels of Regulated PFAS in their drinking water beginning in 2027. Water systems have five years (by April 2029) to implement solutions that reduce Regulated PFAS if monitoring shows that drinking water levels exceed these MCLs.

Beginning in April 2029, water systems that have Regulated PFAS in drinking water which exceeds one or more of these MCLs must take action to reduce levels of these PFAS compounds in their drinking water and must provide notification to the public of the violation.

In anticipation of these new USEPA standards, in 2023, the Company began, and continues, implementing its strategy to meet these lower MCLs for Regulated PFAS and is currently performing preliminary engineering studies to ensure that effective PFAS treatment approaches are implemented.

Capital Construction Program - The Company’s multi-year capital construction program encompasses numerous projects designed to upgrade and replace utility infrastructure as well as enhance the integrity and reliability of assets to maintain and improve service for the current and future generations of water and wastewater customers. The 2024 projects include, but are not limited to:

• Replacement of approximately 17,000 linear feet of cast iron 6" water main with ductile iron 8” water main in Woodbridge, New Jersey;
• Replacement of control room and electrical distribution equipment at our Carl J. Olsen Surface Water Treatment Plant (CJO Plant);
• Supply and storage improvements and installation of emergency generators at several of our Tidewater facilities;
• Upgrades and improvements to our Enterprise Resource Planning System; and
• Various water main replacements and improvements.

The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

Outlook

Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management and customer growth. These factors are discussed in the Results of Operations section below. Unfavorable weather patterns may occur at any time, which can result in lower customer demand for water.

We continue to make investments in system infrastructure and our operating costs continue to increase in 2024 in a variety of categories. These factors, among others, will require a base rate increase request filing for Tidewater in the third quarter of 2024 and may require base rate increase request filings for Pinelands Water and Pinelands Wastewater in the near term.

Overall, organic residential customer growth continues in our Tidewater system (approximately 4% in 2023). However, current and evolving economic market conditions may challenge that growth.

Our strategy for profitable growth is focused on the following key areas:

• Invest in projects, products and services that complement our core water and wastewater competencies;
• Timely and adequate recovery of infrastructure investments and other costs to maintain service quality;
• Prudent acquisitions of investor and municipally-owned water and wastewater utilities; and
• Operation of municipal and industrial water and wastewater systems on a contract basis which meet our risk profile.

Operating Results by Segment

The discussion of the Company’s operating results is on a consolidated basis and includes significant factors by subsidiary. The Company has two operating segments, Regulated and Non-Regulated. The operations of the Regulated segment are subject to regulations promulgated by state public utility commissions as to rates and level of service. Rates and level of service in the Non-Regulated segment are subject to the terms of individually-negotiated and executed contracts with municipal, industrial and other clients. Both segments are subject to federal and state environmental, water and wastewater quality and other associated legal and regulatory requirements.

The segments in the tables included below consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands and Southern Shores; Non-Regulated-USA, USA-PA, and White Marsh.

Results of Operations – Three Months Ended June 30, 2024

(In Thousands)

Operating Revenues

Operating revenues for the three months ended June 30, 2024 increased $6.3 million from the same period in 2023 due to the following factors:

• Middlesex System revenues increased $5.2 million due to the approved base rate increase effective March 1, 2024 and higher commercial and industrial customer billings;
• Tidewater System revenues increased $0.6 million due to customer growth and higher customer demand;
• Non-regulated revenues increased $0.4 million, primarily due to higher supplemental contract services; and
• Pinelands revenues increased $0.1 million due to scheduled rate increases resulting from Pinelands 2023 base rate increase.

Operations and Maintenance Expense

Operations and Maintenance Expense for the three months ended June 30, 2024 increased $0.6 million from the same period in 2023 due to the following factors:

• An enhanced water treatment process at Middlesex’s Park Avenue Plant resulted in $0.4 million of increased costs;
• Labor costs increased $0.4 million due to wage increases;
• Tidewater lead service line inventory compliance costs increased costs by $0.3 million. See Note 2 for additional details;
• Outside professional support service costs for legal, finance and regulatory matters rose by $0.1 million;
• Amortization of proceeds from the 3M Company (3M) settlement agreement (Settlement Agreement) reduced costs $0.8 million. The conclusion of Middlesex’s 2023 base rate increase request allowed Middlesex to recover costs, including certain prior year operating expenses, from the proceeds of the 3M Settlement Agreement between Middlesex and 3M to resolve a lawsuit Middlesex previously initiated claiming 3M introduced PFAS into the Company’s water supply for its Park Avenue Wellfield. See Note 2 for additional details; and
• All other operation and maintenance expense categories increased $0.2 million.

Depreciation

Depreciation expense for the three months ended June 30, 2024 increased $0.1 million from the same period in 2023 due to additional utility plant in service.

Other Taxes

Other Taxes for the three months ended June 30, 2024 increased $1.0 million from the same period in 2023 primarily due to higher gross receipts taxes on higher revenues in our Middlesex System and higher payroll related taxes on increased labor costs in our Middlesex System.

Other Income, net

Other Income, net for the three months ended June 30, 2024 increased $0.5 million from the same period in 2023 due primarily to the recovery of carrying costs on the PFAS treatment at Middlesex’s Park Avenue Plant and higher actuarially-determined retirement benefit plans non-service benefit. Lower Allowance for Funds Used During Construction resulting from a lower level of capital projects in progress partially offset these increases. The conclusion of Middlesex’s 2023 base rate increase request allowed Middlesex to recover costs, including carrying costs, from the proceeds from the 3M Settlement Agreement. See Note 2 for additional details.

Interest Charges

Interest Charges for the three months ended June 30, 2024 increased $0.8 million from the same period in 2023 due to higher average debt outstanding and an increase in average borrowing rates.

Income Taxes

Income Taxes for the three months ended June 30, 2024 increased by $3.7 million from the same period in 2023, primarily due to higher pre-tax income and lower income tax benefits associated with decreased repair expenditures on tangible property in the Middlesex System offset by the recovery of income taxes on the taxable portion of the proceeds from the 3M Settlement Agreement recognized in the current period. See Note 2 for additional details.

Results of Operations – Six Months Ended June 30, 2024

(In Thousands)

Operating Revenues

Operating Revenues for the six months ended June 30, 2024 increased $8.7 million from the same period in 2023 due to the following factors:

• Middlesex System revenues increased $6.8 million due to the approved base rate increase effective March 1, 2024 and higher commercial and industrial customer billings;
• Tidewater System revenues increased $1.4 million due to customer growth and higher customer demand;
• Pinelands revenues increased $0.2 million due to scheduled rate increases resulting from Pinelands 2023 base rate increase;

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• Non-regulated revenues increased $0.2 million, primarily due to higher supplemental contract services; and
• All other revenue categories increased $0.1 million.

Operations and Maintenance Expense

Operations and Maintenance Expense for the six months ended June 30, 2024 increased $0.8 million from the same period in 2023 due to the following factors:

• Labor and employee benefit cost increased $1.4 million due to compensation and 401k Plan contribution increases;
• An enhanced water treatment process at Middlesex’s Park Avenue Plant resulted in $0.8 million of increased costs;
• Outside professional support service costs for legal, finance and regulatory matters rose by $0.3 million;
• Tidewater lead service line inventory compliance costs increased costs by $0.3 million. See Note 2 for additional details;
• Higher business insurance premiums increased costs by $0.3 million;
• Recovery of prior year water treatment operating costs at the Park Avenue Plant and amortization of proceeds from the 3M Settlement Agreement reduced costs $2.4 million. The conclusion of Middlesex’s 2023 base rate increase request allowed Middlesex to recover costs, including certain prior year operating expenses, from the proceeds from the 3M Settlement Agreement. See Note 2 for additional details; and
• All other operation and maintenance expense categories increased $0.1 million.

Depreciation

Depreciation for the six months ended June 30 decreased $0.5 million from the same period in 2023 due to the recovery of prior year depreciation related to upgrades at Middlesex’s Park Avenue Plant partially offset by additional utility plant in service. The conclusion of Middlesex’s 2023 base rate increase request allowed Middlesex to recover costs, including deprecation, from the proceeds from the 3M Settlement Agreement. See Note 2 for additional details.

Other Taxes

Other Taxes for the six months ended June 30, 2024 increased $1.3 million from the same period in 2023 primarily due to higher gross receipts taxes on higher revenues in our Middlesex System and higher payroll related taxes on increased labor costs in our Middlesex System.

Other Income, net

Other Income, net for the six months ended June 30, 2024 increased $4.2 million from the same period in 2023 due primarily to the recovery of carrying costs on the PFAS treatment upgrades at Middlesex’s Park Avenue Plant and higher actuarially-determined retirement benefit plans non-service benefit. Lower Allowance for Funds Used During Construction resulting from a lower level of capital projects in progress partially offset these increases. The conclusion of Middlesex’s 2023 base rate increase request allowed Middlesex to recover costs, including carrying costs, from the proceeds from the 3M Settlement Agreement. See Note 2 for additional details.

Interest Charges

Interest Charges for the six months ended June 30, 2024 increased $1.5 million from the same period in 2023 due to higher average debt outstanding and an increase in average borrowing rates.

Income Taxes

Income Taxes for the six months ended June 30, 2024 increased by $4.3 million from the same period in 2023, primarily due to higher pre-tax income and lower income tax benefits associated with decreased repair expenditures on tangible property in the Middlesex System offset by the recovery of income taxes on the taxable portion of the proceeds from the 3M Settlement Agreement recognized in the current period. See Note 2 for additional details.

Liquidity and Capital Resources

Operating Cash Flows

Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and customer growth. The effect of those factors on net income is discussed in “Results of Operations.”

For the six months ended June 30, 2024, cash flows from operating activities decreased $11.4 million to $17.9 million. The decrease in cash flows from operating activities primarily resulted from accrued recovered costs from Middlesex’s 3M Settlement, timing of vendor payments and higher interest payments partially offset by the impact of Middlesex’s approved base rate increase effective March 1, 2024.

Investing Cash Flows

For the six months ended June 30, 2024, cash flows used in investing activities decreased $21.9 million to $28.7 million due to decreased utility plant expenditures in 2024.

For further discussion on the Company’s future capital expenditures and expected funding sources, see “Capital Expenditures and Commitments” below.

Financing Cash Flows

For the three months ended June 30 , 2024, cash flows from financing activities decreased $5.4 million to $16.5 million. The decrease in cash flows provided by financing activities is due to lower proceeds from the issuance of common stock under the Middlesex Water Company Investment Plan (Investment Plan) and lower net borrowings.

Capital Expenditures and Commitments

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings, proceeds from sales of common stock under the Investment Plan and proceeds from sales offerings to the public of our common stock. In addition, in July 2024, we received proceeds of $63.6 million from the 3M Settlement Agreement, which were used to pay down our lines of credit outstanding balance to further support the funding of our capital program.

Middlesex has received approval from the NJBPU to borrow up to $300.0 million from the New Jersey SRF Program, the New Jersey Economic Development Authority, private placement and other financial institutions as needed through December 31, 2025. The Company expects to issue debt securities in a series of one or more transaction offerings over a multi-year period to help fund Middlesex’s multi-year capital construction program.

In May 2024, Tidewater closed on four DEPSC-approved Delaware SRF loans totaling $5.6 million, all at interest rates of 2.0% with expected maturity dates in 2044. These loans are for the construction, relocation, improvement, and/or interconnection of transmission mains and construction of a water treatment facility. Each project has its own construction timetable with the last spending set to occur in 2026.

In July 2024, Tidewater received a commitment for a $2.2 million Delaware SRF loan with a 0.0% interest rate. This loan is for costs associated with Tidewater’s obligation, as required by federal law and Delaware regulations, to identify and inventory lead service lines throughout Tidewater’s service area. After approval is received from the DEPSC, Tidewater expects to close on this loan in September 2024 and draw down the full amount in the fourth quarter of 2024.

In order to fully fund the ongoing investment program in our utility plant infrastructure and maintain a balanced capital structure consistent with regulators’ expectations for a regulated water utility, Middlesex may offer for sale additional shares of its common stock. The amount, the timing and the sales method of the common stock is dependent on the timing of the construction expenditures, the level of additional debt financing and financial market conditions. As approved by the NJBPU, the Company is authorized to issue and sell up to 1.0 million shares of its common stock in one or more transactions through December 31, 2025.

Recent Accounting Pronouncements – See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and guidance.

We are exposed to market risk associated with changes in interest rates and commodity prices. The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company’s interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2024 to 2059. Over the next twelve months, approximately $8.0 million of the current portion of existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

Our risks associated with price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates charged to the Company’s regulated utility customers. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, financial position and cash flows.

We are exposed to credit risk for both our Regulated and Non-Regulated business segments. Our Regulated operations serve residential, commercial, industrial and municipal customers while our Non-Regulated operations engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through customers’ rates.

The Company's retirement benefit plan assets are subject to fluctuating market prices of debt and equity securities. Changes to the Company's retirement benefit plan asset values can impact the Company's retirement benefit plan expense, funded status and future minimum funding requirements. Risk is mitigated by our ability to recover retirement benefit plan costs through rates for regulated utility services charged to our customers.

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure.

As required by Rule 13a-15 under the Exchange Act, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted by the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer for the quarter ended June 30, 2024. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that no changes in internal control over financial reporting occurred during the quarter ended June 30, 2024 that has materially affected, or are reasonably likely to materially affect, internal control over financial reporting and that our disclosure controls and procedures were not effective as of June 30, 2024 due to the material weakness described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

In 2023, the Company’s independent registered public accounting firm, Baker Tilly US, LLP (Baker Tilly), conducted a routine internal quality review of its integrated audit of the Company’s 2022 consolidated financial statements and internal control over financial reporting as of December 31, 2022. As a result of this review, Baker Tilly re-examined the Company’s information technology general controls (ITGCs) in the areas of user access and change management over certain information technology (IT) systems that support the Company’s financial reporting processes. Certain of those controls were found to be deficient because of a lack of sufficient IT control processes designed to prevent or detect unauthorized changes in applications and data in selected IT environments. These ineffective controls create a possibility that material misstatements in financial reporting processes and financial statement accounts in our consolidated financial statements will not be prevented or detected on a timely basis and, therefore, based on the assessment, management has concluded that they represent a material weakness in our internal control over financial reporting and that the Company’s internal control over financial reporting was not effective as of June 30, 2024.

Notwithstanding the material weakness referred to above, Management, including our Principal Executive Officer and Principal Financial Officer, believe that the financial statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company for all periods presented in accordance with accounting principles generally accepted in the United States of America.

We are committed to remediating the material weakness in a timely manner. Our remediation process includes, but is not limited to, enhancements to our ITGCs and automated auditing features of our IT systems as well as increased monitoring of IT system changes made through certain user accounts. Since the material weakness was first identified, Management has implemented various auditing and monitoring solutions that provide greater transparency into changes made within our information technology (IT) systems. These control solutions are supported by a timely review process that focuses on the proper authorization and approval of IT system changes. We have completed the design of and implemented additional controls to remediate the ITGC material weakness and are currently testing the operating effectiveness of these controls.

The Audit Committee of our Board of Directors and Company Management will continue to closely monitor the remediation efforts discussed in this section, including any additional remediation efforts that our Management identifies as necessary. When they are completed, tested and determined effective, we will be able to conclude that the material weakness has been remediated.

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.