Cooper-Standard Holdings Inc.: Form 10-Q for the period ended Jun 30, 2019

This management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Our historical results may not indicate, and should not be relied upon as an indication of, our future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. See “Forward-Looking Statements” below for a discussion of risks associated with reliance on forward-looking statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (“2018 Annual Report”) see Item 1A. “Risk Factors.” The following should be read in conjunction with our 2018 Annual Report and the other information included herein. Our discussion of trends and conditions supplements and updates such discussion included in our 2018 Annual Report. References in this quarterly report on Form 10-Q (the “Report”) to “we,” “our,” or the “Company” refer to Cooper-Standard Holdings Inc., together with its consolidated subsidiaries.

Executive Overview

Our Business

We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use primarily in passenger vehicles and light trucks manufactured by global automotive original equipment manufacturers (“OEMs”). We are primarily a “Tier 1” supplier, with approximately 85% of our sales in 2018 made directly to major OEMs. We operate our business along four segments: North America, Europe, Asia Pacific and South America.

During the first quarter of 2019 and in prior periods, the Company also operated an anti-vibration systems business. On April 1, 2019, we completed the divestiture of the anti-vibration systems business.

Recent Trends and Conditions

General Economic Conditions and Outlook

The global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production. Business conditions may vary significantly from period to period or region to region.

In North America, general economic conditions have been strong and relatively stable since 2018. Led by the United States, economic growth in the region is expected to continue through 2019, albeit at a more modest rate than last year. Consumer confidence and employment levels remain healthy. Continued uncertainty regarding global trade relationships and Federal Reserve interest rate policies, among other factors, could dampen economic momentum, while positive developments in these areas could be a positive catalyst. Modest economic growth is also expected to continue in Canada and Mexico in 2019. The mix of vehicles produced and sold in North America continues to shift away from passenger cars in favor of crossover utility vehicles and light trucks.

In Europe, economic momentum slowed in the second half of 2018, which has carried over into the first half of 2019. Geopolitical concerns, the implementation of new environmental regulations in the automotive industry and the slowing of economic conditions within key trading partner countries have weighed on consumer confidence and industrial investment. The continuation of global trade tensions, financial pressures within some of the key European Union member countries and Britain’s pending separation from the European Union (“Brexit”) will continue to create a high level of uncertainty and challenge the regional economic outlook for 2019.

In Asia Pacific, China economic growth is lower than 2018 as rising debt, higher interest rates, inflation and uncertainty are pressuring domestic consumption, while continuing tension within U.S.-China trade relationships is impacting exports. The Chinese government has announced a series of tax cuts and increased planned investment in infrastructure projects in order to stimulate the economy.

In South America, the Brazilian economy has slowed, with GDP contracting slightly in the first quarter 2019. Exports, capital investment and private consumption have all been trending lower. We remain cautious for the mid to long-term outlook given the long history of political instability and economic volatility in the region.

Raw Materials

Our business is susceptible to inflationary pressures with respect to raw materials which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil and oil-derived commodities, continue to be volatile. In addition, we continue to expect commodity cost volatility to have an impact on future earnings and operating cash flows. As such, on an ongoing basis, we work with our customers and suppliers to mitigate both inflationary pressures and our material-related cost exposures.

Production Levels

Our business is directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America. New vehicle demand is driven by macroeconomic and other factors, such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends and government and tax incentives. The industry could face uncertainties that may adversely impact consumer demand for vehicles as well as the future production environment.

Light vehicle production in certain regions for the three and six months ended June 30, 2019 and 2018 was as follows:

(In millions of units)

(1) Production data based on IHS Automotive, July 2019.

(2) Includes Greater China units of 5.6 million and 6.7 million for the three months ended June 30, 2019 and 2018, respectively, and 11.7 million and 13.5 million for the six months ended June 30, 2019 and 2018, respectively.

In North America, second quarter total vehicle production declined compared to the second quarter of 2018. Continuing recent trends in consumer demand, production of passenger cars declined while production of sport utility vehicles and crossover vehicles increased. We expect these trends to continue in North America throughout 2019.

European and Asia Pacific light vehicle production declined significantly as well, reflecting geopolitical instability, including uncertainty around tariffs and global trade relations in both regions and Brexit uncertainty in Europe. Accordingly, we remain cautious on the impact through the remainder of the year.

Results of Operations

(dollar amounts in thousands)

31

Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018

Sales

Sales for the three months ended June 30, 2019 decreased 17.6%, compared to the three months ended June 30, 2018.

(dollar amounts in thousands)

* Net of customer price reductions

Gross Profit

(dollar amounts in thousands)

* Net of customer price reductions

** Includes the net impact of acquisitions and divestiture

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 50% of total cost of products sold for the three months ended June 30, 2019 and 51% of total cost of products sold for the three months ended June 30, 2018. Cost of products sold was driven by continuous improvement and lean manufacturing, the sale of our anti-vibration systems (“AVS”) product line, restructuring savings, and material cost reductions. These items were partially offset by vehicle production volume and mix, commodity price fluctuations, foreign exchange, tariffs and wage inflation.

Gross profit for the three months ended June 30, 2019 decreased 53.4 million or 35.3% compared to the three months ended June 30, 2018. The decrease was driven by vehicle production volume and mix, commodity price inflation and foreign exchange pressures, tariffs, and wage inflation. These items were partially offset by net favorable operational performance and acquisitions.

Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration and engineering expense for the three months ended June 30, 2019 was 9.7% of sales compared to 8.2% for the three months ended June 30, 2018. The increase in rate was primarily due to lower sales. The decrease in expense was driven by savings generated from salaried employee initiatives and the sale of our anti-vibration systems (“AVS”) product line, partially offset by additional costs for newly acquired businesses, higher compensation-related expenses and general inflation.

Gain on Sale of Business. Gain on sale of business of $189.9 million for the three months ended June 30, 2019 related to the sale of our anti-vibration systems (“AVS”) product line within our North America, Europe and Asia Pacific segments. We completed the sale to Continental AG on April 1, 2019.

Restructuring. Restructuring charges for the three months ended June 30, 2019 decreased $4.1 million compared to the three months ended June 30, 2018. The decrease was driven by lower restructuring charges in North America and Europe as certain salaried employee initiatives were completed, partially offset by Asia Pacific mainly due to footprint rationalization.

Impairment Charges. Non-cash impairment charges of $2.2 million for the three months ended June 30, 2019 related to machinery and equipment were recorded due to the continuing adverse financial results in certain Asia Pacific locations.

Interest Expense, Net. Net interest expense for the three months ended June 30, 2019 increased $1.6 million compared to the three months ended June 30, 2018, primarily due to higher outstanding debt balances.

Other Expense, Net. Other expense for the three months ended June 30, 2019 increased $1.2 million compared to the three months ended June 30, 2018 primarily due to higher foreign currency losses.

Income Tax Expense. Income tax expense for the three months ended June 30, 2019 was $44.2 million on earnings before income taxes of $189.0 million. This compares to income tax expense of $9.1 million on earnings before income taxes of $52.3 million for the same period of 2018. The effective tax rate for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 differed primarily due to the geographic mix of increased pre-tax earnings as a result of the sale of the AVS product line and the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions.

Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018

Sales

Sales for the six months ended June 30, 2019 decreased 13.2%, compared to the six months ended June 30, 2018.

(dollar amounts in thousands)

* Net of customer price reductions

Gross Profit

(dollar amounts in thousands)

* Net of customer price reductions

** Includes the net impact of acquisitions and divestiture

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 51% of total cost of products sold for each of the six months ended June 30, 2019 and 2018. Cost of products sold was driven by continuous improvement and lean manufacturing, the sale of our anti-vibration systems (“AVS”) product line, restructuring savings, and material cost reductions. These items were partially offset by vehicle production volume and mix, commodity price fluctuations, foreign exchange, tariffs and wage inflation.

Gross profit for the six months ended June 30, 2019 decreased 33.1% compared to the six months ended June 30, 2018. The decrease was driven by vehicle production volume and mix, commodity price inflation and foreign exchange pressures, tariffs and wage inflation. These items were partially offset by net favorable operational performance and acquisitions.

Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration and engineering expense for the six months ended June 30, 2019 was 9.8% of sales compared to 8.3% for the six months ended June 30, 2018. This increase was primarily due to additional costs for newly acquired businesses, divestiture-related expenses for our AVS business and general inflation, partially offset by savings from salaried employee initiatives.

Gain on Sale of Business. Gain on sale of business of $189.9 million for the six months ended June 30, 2019 related to the sale of our AVS product line within our North America, Europe and Asia Pacific segments. We completed the sale to Continental AG on April 1, 2019.

Restructuring. Restructuring charges for the six months ended June 30, 2019 increased $6.5 million compared to the six months ended June 30, 2018. The increase was driven by higher restructuring charges in North America primarily related to salaried employee initiatives and in Asia Pacific mainly due to footprint rationalization.

Impairment Charges. Non-cash impairment charges of $2.2 million for the six months ended June 30, 2019 related to machinery and equipment were recorded due to the continuing adverse financial results in certain Asia Pacific locations.

Interest Expense, Net. Net interest expense for the six months ended June 30, 2019 increased $3.7 million compared to the six months ended June 30, 2018, primarily due to higher outstanding debt balances.

Other Expense, Net. Other expense for the six months ended June 30, 2019 increased $0.3 million compared to the six months ended June 30, 2018 primarily due to higher benefit related costs.

Income Tax Expense. Income tax expense for the six months ended June 30, 2019 was $46.6 million on earnings before income taxes of $187.7 million. This compares to income tax expense of $21.0 million on earnings before income taxes of $121.6 million for the same period of 2018. The effective tax rate for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 differed primarily due to the geographic mix of increased pre-tax earnings as a result of the sale of the AVS product line and the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions.

Segment Results of Operations

The Company operates in four reportable segments: North America, Europe, Asia Pacific and South America. Consistent with how management assesses performance of the segments, effective January 1, 2019, we changed the measurement of our segments to adjusted EBITDA. We have defined adjusted EBITDA as net income before interest, taxes, depreciation, amortization, restructuring expense, and special items. The results of each segment include certain allocations for general, administrative, interest, and other shared costs.

The following tables present sales and segment adjusted EBITDA for each of the reportable segments.

Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018

Sales

(dollar amounts in thousands)

* Net of customer price reductions

• The impact of foreign currency exchange primarily relates to the Euro, Chinese Renminbi, Brazilian Real and the Canadian Dollar.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price reductions

• The impact of foreign currency exchange is primarily driven by the Chinese Renminbi, Euro, Canadian Dollar, Mexican Peso, Polish Zloty and Czech Koruna.
• The Cost (Increases) / Decreases category above includes:
• The increase in commodity cost pressure, general inflation and tariffs;
• Launch related activity for engineering, prototypes and tooling; and
• Net operational efficiencies of $26.5 million primarily driven by our North America, Europe and Asia Pacific segments.

Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018

Sales

(dollar amounts in thousands)

* Net of customer price reductions

• The impact of foreign currency exchange primarily relates to the Euro, Chinese Renminbi, Brazilian Real, Mexican Peso and the Canadian Dollar.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price reductions

• The impact of foreign currency exchange is primarily driven by the Chinese Renminbi, Euro, Canadian Dollar and Mexican Peso, partially offset by the Brazilian Real, Polish Zloty and Czech Koruna.
• The Cost (Increases) / Decreases category above includes:
• The increase in commodity cost pressure, general inflation, and tariffs;
• Launch related activity for engineering, prototypes and tooling; and
• Net operational efficiencies of $51.5 million primarily driven by our North America, Europe and Asia Pacific segments.

Liquidity and Capital Resources

Short and Long-Term Liquidity Considerations and Risks

We intend to fund our ongoing working capital, capital expenditures, debt service and other funding requirements through a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility

(“ABL Facility”) and receivables factoring. The Company utilizes intercompany loans and equity contributions to fund its worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds. See Note 11. "Debt" to the unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Report for additional information.

Based on our current and anticipated levels of operations and the conditions in our markets and industry, we believe that our cash flows from operations, cash on hand, borrowings under our ABL Facility and receivables factoring will enable us to meet our ongoing working capital, capital expenditures, debt service and other funding requirements for the next twelve months. However, our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants, including borrowing base limitations, under our ABL Facility, depend on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, the state of the overall automotive industry and financial and economic conditions and other factors.

Cash Flows

Operating Activities. Net cash used in operations was $9.0 million for the six months ended June 30, 2019, compared to net cash provided by operations of $98.3 million for the six months ended June 30, 2018. The outflow was primarily due to decreased cash earnings and timing of customer payments, partially offset by changes in accrued liabilities.

Investing Activities. Net cash provided by investing activities was $149.5 million for the six months ended June 30, 2019, compared to net cash used in investing activities of $113.0 million for the six months ended June 30, 2018. Cash provided by investing activities consisted primarily of gross proceeds of $243.4 million from the sale of our AVS product line, partially offset by capital spending of $95.5 million for the six months ended June 30, 2019. We anticipate that we will spend approximately $175 million to $185 million on capital expenditures in 2019.

Financing Activities. Net cash used in financing activities totaled $91.2 million for the six months ended June 30, 2019, compared to net cash used in financing activities of $59.4 million for the six months ended June 30, 2018. The change was primarily due to the repayment of our revolving credit facility and local borrowing lines. Cash used for stock repurchases was $36.6 million and $43.5 million for the six months ended June 30, 2019 and 2018, respectively.

Share Repurchase Program

In June 2018, our Board of Directors approved a new common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by us and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. The specific timing and amount of any future repurchase will vary based on market and business conditions and other factors. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. As of June 30, 2019, we had approximately $98.7 million of repurchase authorization remaining under the 2018 Program.

2019 Repurchases

In May 2019, we entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution to repurchase our common stock pursuant to the 2018 Program. Under the ASR agreement, we made an up-front payment of $30.0 million and received an initial delivery of 626,305 shares of our common stock in the second quarter of 2019. The total number of shares to be ultimately delivered, and therefore the average price paid per share, will be determined at the end of the repurchase period based on the volume weighted average price of our common stock during that period. The ASR is expected to be completed no later than the third quarter of 2019.

In addition to the repurchase under the ASR agreement, during the six months ended June 30, 2019, we utilized $5.9 million of cash on hand to repurchase 85,000 shares of common stock.

2018 Repurchases

In June 2018, we entered into an accelerated repurchase (“ASR”) agreement with a third-party financial institution to repurchase our common stock. Under this ASR agreement, we made an up-front payment of $35.0 million and received an initial delivery of 207,193 shares in the second quarter of 2018. The ASR was completed in the third quarter of 2018 when we received an additional 51,092 shares. A total of 258,285 shares were repurchased at a weighted average purchase price of $135.51 per share.

In addition to the repurchase under this ASR agreement, during the six months ended June 30, 2018, we repurchased 69,503 shares of our common stock at an average purchase price of $122.64 per share, excluding commissions, for a total cost of $8.5 million.

Non-GAAP Financial Measures

In evaluating our business, management considers EBITDA and Adjusted EBITDA to be key indicators of our operating performance. Our management also uses EBITDA and Adjusted EBITDA:

• because similar measures are utilized in the calculation of the financial covenants and ratios contained in our financing arrangements;
• in developing our internal budgets and forecasts;
• as a significant factor in evaluating our management for compensation purposes;
• in evaluating potential acquisitions;
• in comparing our current operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
• in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company.

In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in evaluating our performance. We define Adjusted EBITDA as net income (loss) plus income tax expense (benefit), interest expense, net of interest income, depreciation and amortization or EBITDA, as adjusted for items that management does not consider to be reflective of our core operating performance. These adjustments include, but are not limited to, restructuring costs, impairment charges, non-cash fair value adjustments and acquisition-related costs.

EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA as a supplement to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, nor as an alternative to cash flow from operating activities as a measure of our liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of our results of operations as reported under U.S. GAAP. These limitations include:

• they do not reflect our cash expenditures or future requirements for capital expenditure or contractual commitments;
• they do not reflect changes in, or cash requirements for, our working capital needs;
• they do not reflect interest expense or cash requirements necessary to service interest or principal payments under our ABL Facility, Term Loan Facility and Senior Notes;
• they do not reflect certain tax payments that may represent a reduction in cash available to us;
• although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
• other companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.

In addition, in evaluating Adjusted EBITDA, it should be noted that in the future, we may incur expenses similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by special items.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA from net income, which is the most comparable financial measure in accordance with U.S. GAAP:

(dollar amounts in thousands)

(1) Gain on sale of AVS product line. See Note 4. "Divestiture."

(2) Non-cash impairment charges related to fixed assets.

(3) Project costs recorded in selling, administration and engineering expense related to acquisitions and divestiture.

(4) Lease termination costs no longer recorded as Restructuring charges in accordance with ASC 842. See Note 2. "New Accounting Pronouncements."

(5) Loss on refinancing and extinguishment of debt related to the applicable amendment of the Term Loan Facility entered into during such period.

Contingencies and Environmental Matters

The information concerning contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 22. "Commitments and Contingencies" to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, is incorporated herein by reference.

Recently Issued Accounting Pronouncements

See Note 2. "New Accounting Pronouncements" to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

Critical Accounting Estimates

There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2019.

Forward-Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of U.S. federal securities laws, and we intend that such forward-looking statements be subject to the safe harbor created thereby. Our use of words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “outlook”, “guidance”, “forecast,” or future or conditional verbs, such as “will,” “should,” “could,” “would,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs and projections will be achieved. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. Among other items, such factors may include: prolonged or material contractions in automotive sales and production volumes; our inability to realize sales represented by awarded business; escalating pricing pressures; loss of large customers or significant platforms; our ability to successfully compete in the automotive parts industry; availability and increasing volatility in costs of manufactured components and raw materials; disruption in our supply base; competitive threats and commercial risks associated with us entering new markets; possible variability of our working capital requirements; risks associated with our international operations, including changes in laws, regulations, and policies governing the terms of foreign trade such as increased trade restrictions and tariffs; foreign currency exchange rate fluctuations; our ability to control the operations of our joint ventures for our sole benefit; our substantial amount of indebtedness; our ability to obtain adequate financing sources in the future; operating and financial restrictions imposed on us under our debt instruments; the underfunding of our pension plans; significant changes in discount rates and the actual return on pension assets; effectiveness of continuous improvement programs and other cost savings plans; manufacturing facility closings or consolidation; our ability to execute new program launches; our ability to meet customers’ needs for new and improved products; the possibility that our acquisitions and divestitures may not be successful; product liability, warranty and recall claims brought against us; laws and regulations, including environmental, health and safety laws and regulations; legal proceedings, claims or investigations against us; work stoppages or other labor disruptions; the ability of our intellectual property to withstand legal challenges; cyber-attacks, other disruptions in, or the inability to implement upgrades to, our information technology systems; the possible volatility of our annual effective tax rate; changes in our assumptions as a result of IRS issuing guidance on the Tax Cuts and Jobs Act; the possibility of future impairment charges to our goodwill and long-lived assets; and our dependence on our subsidiaries for cash to satisfy our obligations.

You should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except where we are expressly required to do so by law.

This quarterly report on Form 10-Q also contains estimates and other information that is based on industry publications, surveys, and forecasts. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of the information.

There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously disclosed in the Company’s 2018 Annual Report.

Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. 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. Based on that evaluation, the Company’s Chief Executive Officer along with the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.