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

Note Regarding Forward-Looking Statements

Certain information in this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Act”). These forward-looking statements generally can be identified by use of phrases or terminology such as “intend,” “anticipate,” “expect” or other similar words or the negative of such terminology. Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of our management and are subject to certain events, risks, uncertainties and other factors. These risks and uncertainties include, but are not limited to, those described in our 2022 Form 10-K and those described from time to time in our future reports filed with the SEC. Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this report. All of the forward-looking statements contained herein speak only as of the date of this report.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

Overview

Medifast is the health and wellness company known for its habit-based and Coach-guided lifestyle solution OPTAVIA®, which provides people with a simple, yet comprehensive approach to help them achieve lasting optimal health and wellbeing. OPTAVIA offers clinically proven plans, scientifically developed products and a framework for habit creation reinforced by independent Coaches and Community support. As a physician-founded company with a 40+ year history, Medifast is a leader in the U.S. weight management industry, and has impacted more than 3 million lives to date. The company continues to innovate and build upon its scientific and clinical heritage to deliver on its mission of offering the world Lifelong Transformation, One Healthy Habit at a Time®.

Our OPTAVIA brand offers a highly competitive and effective lifestyle solution centered on developing new healthy habits through smaller, foundational changes called microHabits. OPTAVIA is built around four key components:

• Independent OPTAVIA Coaches: Coaches, about 90% of whom first started as Customers, provide individualized support and guidance to their Clients along their journeys to optimal health and wellbeing.
• OPTAVIA Community: A Community of like-hearted people provide each other with real-time connection and support.
• The Habits of Health® Transformational System: A proprietary evidence-based and holistic approach to lifestyle transformation which offers guidance on simple ways to create healthy habits in every area of life.
• Products & Plans: Lifestyle plans with clinically proven health benefits and scientifically developed products, backed by dietitians, scientists and physicians.

We help customers achieve their health goals through a network of approximately 47,100 independent active earning OPTAVIA Coaches. OPTAVIA Coaches introduce customers to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive OPTAVIA-branded “Fuelings.” Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with probiotic BC30™ cultures, vitamins and minerals, as well as other nutrients essential for good health. In the third quarter of 2023, the company announced OPTAVIA ACTIVE, a new line of premium exercise supplements and protein powders, OPTAVIA ACTIVE Essential Amino Acid (EAA) Blend and Whey Protein, designed to address age-related muscle mass decline and support muscle health. The new products work within existing OPTAVIA plans for those looking to achieve or maintain their optimal weight but also are a great solution for people wanting to enhance their health and wellbeing through movement. Our products support the process of integrating healthy habits into our customers’ day-to-day lives.

The OPTAVIA coaching model is customer-centric and boasts an energized health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. OPTAVIA Coaches provide personalized support to customers and motivate them by sharing their passion for healthy living and lifestyle transformation.

OPTAVIA Coaches are another key to our success, as they share their own health and wellness experience and attract new customers, a portion of whom go on to become OPTAVIA Coaches. We offer economic incentives designed to support each OPTAVIA Coach’s long-term success, providing the opportunity to improve their finances while supporting the healthy lifestyles in their families and communities they interact with.1

OPTAVIA Coaches are independent contractors, not employees, who support customers and market our products and services to friends, family and other acquaintances, primarily through word of mouth, email and social media channels such as Facebook, Instagram, X (formerly known as Twitter) and video conferencing platforms. Products are shipped directly to OPTAVIA customers. OPTAVIA Coaches do not handle inventory or deliver merchandise to customers. This arrangement frees our OPTAVIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.

We measure our success by the results our customers are able to achieve. The more OPTAVIA Coaches we have, the more customers we can serve. We believe our Coach-based model is scalable and drives both customer success and growth. We expect our continued investment in fostering a robust community around our OPTAVIA brand and Coaching model will continue to drive a sustainable, repeatable business rhythm focused on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time.

Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD and OPTAVIA Health Consultation (Shanghai) Co., Ltd.

Recent Initiatives

The Company’s Fuel for the Future program is intended to optimize spending through value engineering, operational efficiency and improved procurement, and is expected to free up capital to invest in growth initiatives and raise margins. As a part of these efforts and due to economic changes in the Asia-Pacific region following the COVID-19 pandemic, Medifast exited its operations in Hong Kong and Singapore as of July 1, 2023. This departure was executed with the intention to help better prioritize resources that were previously dedicated to these markets in order to support initiatives that the Company anticipates will have a greater impact on revenues and profitability. This includes investing in technology and digital capabilities as well as rolling out product offerings that are complementary to its existing program, bringing OPTAVIA to new demographics and expanding the Company's total addressable market.

Additionally, on July 27, 2023, the Company announced a new product line, which was launched to customers in September 2023, OPTAVIA ACTIVE, which includes premium amino acid supplements and protein powders, OPTAVIA ACTIVE Essential Amino Acid (EAAs) Blend and OPTAVIA ACTIVE Whey Protein, with other products expected to be rolled out in 2024. Both the EAA Blend and the Whey Protein are designed to help new and existing customers of all fitness levels. With the announcement of the new product line, the Company targets new customer demographic segments and triples its total addressable market by entering the sports nutrition category, a $30 billion market. Further, the new product line is expected to extend the lifetime value of customers by extending their time with their OPTAVIA Coach as customers learn to live the habit of healthy motion. Finally, the new products also extend our offerings by adding exercise, making OPTAVIA a strong choice for those interested in using lifestyle modification along with the support of medically supported weight loss. Formulated to

1 OPTAVIA makes no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership. Please see the OPTAVIA Income Disclosure Statement (http://bit.ly/ids**OPTA**VIA) for statistics on actual earnings of Coaches.

work with or without OPTAVIA nutrition plans and guided by Coach support, OPTAVIA ACTIVE, similar to the Company’s other lines of products, is backed by science, made with no colors, flavors or sweeteners from artificial sources and is Informed Sport certified, which is a global standard in sports nutrition quality control that ensures its certified products contain no banned substances.

Through a small pilot launched in June 2023, in partnership with a network of several telehealth providers, the Company began exploring a combination of its habit-based, Coach-guided solution, OPTAVIA, together with innovations in medically supported weight loss, including GLP-1 medications. These pilots have provided valuable insight around potential future positioning and approach. The compelling three-way partnership between customer, clinician and Coach appears to resonate with the customer base who is interested in medically supported weight loss.

Medifast plans to continue investing in its offer to support all areas of its proprietary Habits of Health Transformational System, which includes weight loss, motion, hydration, sleep, and other macro-habits. The Company is committed to innovating as the industry evolves to continue delivering evidence-based solutions that are effective in helping customers create healthy habits and reach their wellness goals.

The Company is also pursuing expanding the customer base with a focus on Hispanic demographic groups in the US, where Medifast is underrepresented. To better connect with this group, we have translated approximately 70% of our main materials and website into Spanish, and expect to translate the remaining 30% by the end of the year. In October, in conjunction with National Hispanic Heritage month, the Company executed its first ever Spanish-language social and digital pilot, intended to build brand awareness and to learn how to best market OPTAVIA’s clinically proven health benefits and scientifically developed products, plans, Coaches and community to this growing demographic. The goal is to leverage the learnings from the social and digital pilot, with an anticipated larger, more comprehensive media effort to the US Hispanic market in 2024. We believe that advancing our business in the US Hispanic demographic will help us set the stage for future expansion into Latin America.

Macroeconomic Conditions

An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters, pandemics, geopolitical conflicts, inflation and potential worsening in economic conditions may affect consumer purchases and reduce demand for our products. These uncertainties make it challenging for our management to estimate our future business performance.

We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and put pressure on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could also adversely impact our business, financial condition or results of operations. Our variable cost structure can be utilized to adapt to changing market conditions with potential actions including adjustments to our manufacturing, distribution and customer support infrastructure. In addition, adverse labor market conditions could constrain our ability to manufacture and deliver products or increase the associated costs. As a response, we may periodically take incremental pricing actions to offset supply chain costs, inflationary pressures, and adverse labor market conditions.

In addition, beginning in February 2022, the war in Ukraine and corresponding events have had, and could continue to have, adverse effects on regional and global markets. Further, as the Israeli/Palestinian conflict in Gaza develops, it could have a similarly adverse impact on consumer sentiment and regional and global markets. While our operations are not directly impacted by these events, the duration of hostilities and the vast array of sanctions and related events (including cyberattacks) cannot be predicted. As a result, those events present uncertainty and risk. To date, the war in Ukraine and conflict in Gaza has had no material impact on our business.

In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTAVIA Coaches and customers.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes in our critical estimates during the first nine months of 2023.

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the 2022 Form 10-K. We consider all of our significant accounting policies and estimates to be critical. During Q1 2023 we made a change to our customer terms and conditions (“Customer T&Cs”) that resulted in a change to our revenue recognition policy which is described below. There were no other significant changes in our critical accounting policies during the first nine months of 2023.

Revenue Recognition: Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight management, and other healthy living products. Prior to a change in our Customer T&Cs in the first quarter of 2023, revenue was recognized upon receipt by the customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. Upon the change of our Customer T&Cs, revenue is now recognized upon delivery to the shipping carrier and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. The impact of this change to the quarter ended March 31, 2023 was an increase of approximately $9.1 million in revenue and $2.8 million of income from operations.

Revenue is recognized when control of the promised products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products. When determining whether the customer has obtained control of the products, we consider any future performance obligations.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. Our contracts have performance obligations to fulfill and deliver products from the point of sale transaction along with the related customer reward programs.

Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially all of our revenue for the nine months ended September 30, 2023 and 2022. Revenue on these contracts is recognized when the obligations under the terms of the contract with our customer are satisfied.

Our return policy allows for customer returns of consumable products within 30 days of purchase and upon our authorization. We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to customers. We estimate expected returns based on historical levels and project this experience into the future.

Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to acquire additional products at a discount can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements, and promotions.

We reduce the transaction price for customer reward programs and certain incentive offerings including pricing arrangements, promotions, and incentives that represent variable consideration and separate performance obligations. The Company accounts for sales rewards that provide the customer with a material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the customer reward program and incentive offering.

Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and are recorded as revenue in our Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the Company for the delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in our Consolidated Statements of Income.

We expense OPTAVIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned. These costs are recorded in selling, general and administrative expense in our Consolidated Statements of Income.

Overview of Results of Operations

Our product sales accounted for approximately 98% of our revenues for each of the three months ended September 30, 2023 and 2022.

The following tables reflect our income statements (in thousands, except percentages):

19

Revenue: Revenue decreased $154.5 million, or 39.6%, to $235.9 million for the three months ended September 30, 2023 from $390.4 million for the three months ended September 30, 2022. The decline in revenue for the three months ended September 30, 2023 was primarily driven by a decrease in the number of active earning OPTAVIA Coaches to 47,100 as of September 30, 2023 from 66,200 as of September 30, 2022 and the decline in the productivity per active earning OPTAVIA Coach. The average revenue per active earning OPTAVIA Coach was $5,008 for the three months ended September 30, 2023 compared to $5,897 for the three months ended September 30, 2022. Revenue decreased $380.3 million, or 30.2%, to $881.0 million for the nine months ended September 30, 2023 from $1,261.3 million for the nine months ended September 30, 2023. The decline in revenue for the nine months ended September 30, 2023 was driven by a decrease in the number of active earning OPTAVIA Coaches and the decline in productivity per active earnings OPTAVIA Coach, partially offset by a $9.1 million impact from a timing difference related to changes in the Company’s sales order terms and conditions with its customers in the first quarter. The average revenue per active earning OPTAVIA Coach was $5,545 for the nine months ended September 30, 2023 compared to $6,367 for the nine months ended September 30, 2022. The decrease in productivity per active earning OPTAVIA Coach for the three months ended September 30, 2023 and nine months ended September 30, 2023 was driven by continued pressure on customer acquisition, partially offset by a price increase implemented in November 2022.

Cost of sales: Cost of sales decreased $49.1 million, or 45.6%, to $58.5 million from $107.5 million for the three months ended September 30, 2023 from the corresponding period in 2022. The decrease in cost of sales for the three months ended September 30, 2023 was primarily driven by decreased volumes, efficiencies in inventory management and lower supply chain costs including benefits from the optimization of our distribution center footprint. These decreases are partially offset by higher product costs resulting from inflationary pressures on raw ingredient costs, shipping costs, and labor costs. Cost of sales decreased $108.0 million, or 30.5%, to $246.6 million from $354.5 million for the nine months ended September 30, 2023. The decrease in cost of sales for the nine months ended September 30, 2023 was primarily driven by decreased volumes, partially offset by higher product costs resulting from inflationary pressures on raw ingredient costs, shipping costs, and labor costs.

Gross profit: Gross profit decreased $105.5 million, or 37.3%, to $177.4 million from $282.8 million for the three months ended September 30, 2023 from the corresponding period in 2022. The decrease in gross profit for the three months ended

September 30, 2023 was due to lower revenue. As a percentage of revenue, gross profit increased 270 basis points to 75.2% for the three months ended September 30, 2023 from 72.5% for the corresponding period in 2022. Gross profit as a percentage of revenue was positively impacted by efficiencies in inventory management and lower supply chain costs including benefits from the optimization of our distribution center footprint. For the nine months ended September 30, 2023, gross profit decreased $272.3 million, or 30.0%, to $634.5 million from $906.8 million for the nine months ended September 30, 2023. The decrease in gross profit for the nine months ended September 30, 2023 was due to lower revenue as well as cost inflation from raw ingredient costs, shipping costs, and labor costs. As a percentage of revenue, gross profit increased 10 basis points to 72.0% for the nine months ended September 30, 2023 from 71.9% for the corresponding period in 2022.

Selling, general, and administrative: SG&A expenses were $151.9 million for the three months ended September 30, 2023, a decrease of $82.8 million, or 35.3%, as compared to $234.7 million from the corresponding period in 2022. SG&A expenses decreased for the three months ended September 30, 2023 primarily due to decreased Coach compensation on lower volumes and fewer active earning Coaches, as well as progress on several cost reduction and optimization initiatives, and charitable donations in 2022. As a percentage of revenue, SG&A expenses were 64.4% for the three months ended September 30, 2023 as compared to 60.1% for the corresponding period in 2022. SG&A expenses as a percentage of revenue increased for the three months ended September 30, 2023 primarily reflecting the loss of leverage on fixed costs due to lower sales volumes compared to 2022 as well as market research and investment costs related to medically supported weight loss activities. SG&A expenses included research and development costs of $1.3 million and $1.1 million for the three months ended September 30, 2023 and 2022, respectively, in connection with the development of new products, programs and clinical research activities. SG&A expenses were $516.8 million for the nine months ended September 30, 2023, a decrease of $237.9 million, or 31.5%, as compared to $754.6 million from the corresponding period in 2022. As a percentage of revenue, SG&A expenses were 58.7% for the nine months ended September 30, 2023 as compared to 59.8% for the corresponding period in 2022 primarily reflecting progress on several cost reduction and optimization initiatives and charitable donations in 2022, partially offset by the loss of leverage on fixed costs due to lower sales volumes compared to 2022. SG&A expenses included research and development costs of $3.4 million and $3.3 million for the nine months ended September 30, 2023 and 2022, respectively, in connection with the development of new products and programs and clinical research activities. SG&A expenses decreased for the nine months ended September 30, 2023 primarily due to decreased Coach compensation on lower volumes and fewer active earning Coaches, as well as progress on several cost reduction and optimization initiatives, and charitable donations in 2022.

Income from operations: For the three months ended September 30, 2023, income from operations decreased $22.6 million to $25.5 million from $48.2 million for the corresponding period in 2022 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue decreased to 10.8% for the three months ended September 30, 2023 from 12.3% for the corresponding period in 2022 due to the factors described above impacting SG&A expenses, partially offset by the factors impacting gross profit. For the nine months ended September 30, 2023, income from operations decreased $34.5 million to $117.7 million from $152.2 million for the corresponding period in 2022 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue increased to 13.4% for the nine months ended September 30, 2023 from 12.1% for the corresponding period in 2022 due to the factors above impacting gross profit and SG&A expenses.

Provision for income taxes: For the three months ended September 30, 2023, the Company recorded $3.4 million in income tax expense, an effective tax rate of 12.9%, as compared to $11.7 million in income tax expense, an effective tax rate of 24.5%, for the three months ended September 30, 2022. The decrease in the effective tax rate for the three months ended September 30, 2023 was primarily driven by the increase in the tax benefit for charitable donations of inventory, an increase in research and development tax credits, and a decrease in state income taxes. During the quarter ended September 30, 2023, the Company completed its 2022 Federal income tax return, which included an update to the estimated tax-basis cost of charitable donations of inventory and the estimated research and development tax credits. For the nine months ended September 30, 2023, the Company recorded $25.6 million in income tax expense, an effective tax rate of 21.5%, as compared to $34.6 million in income tax expense, an effective tax rate of 22.8%, for the nine months ended September 30, 2022. The decrease in the effective tax rate for the nine months ended September 30, 2022 was primarily driven by the increase in the tax benefit for charitable donations of inventory.

Net income: Net income was $23.1 million and $93.4 million, or $2.12 and $8.55 per diluted share for the three and nine months ended September 30, 2023 as compared to $36.2 million and $117.1 million, or $3.27 and $10.30 per diluted share, for the three and nine months ended September 30, 2022. The period-over-period changes were driven by the factors described above.

Liquidity and Capital Resources

The Company had stockholders’ equity of $193.0 million and working capital of $114.2 million at September 30, 2023 as compared with $155.0 million and $81.9 million at December 31, 2022, respectively. The $38.0 million net increase in stockholders’ equity reflects $93.4 million in net income for the nine months ended September 30, 2023 offset by $3.6 million used for repurchases of the Company’s common stock and $54.5 million for dividends paid to holders of the Company’s common stock as well as the other equity transactions described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in this report. On September 7, 2023, the Company declared a quarterly dividend of $1.65 per share payable on November 7, 2023, to stockholders of record as of September 19, 2023. Future share repurchases and the payment of any future dividends are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, industry conditions, covenant compliance, changes in laws and regulations, current economic environment and other factors considered relevant. The Company’s cash, cash equivalents and investment securities increased from $87.7 million at December 31, 2022 to $157.8 million at September 30, 2023.

Net cash provided by operating activities decreased by $5.7 million to $137.1 million for the nine months ended September 30, 2023 from $142.8 million for the nine months ended September 30, 2022 primarily driven by a $25.9 million increase related to changes in inventory balances, a $6.1 million increase in prepaid expenses and other current assets, a $3.9 million increase in other assets, an increase of $1.7 million in depreciation and amortization expenses, offset by a $23.7 million decrease in net income, a $2.3 million reduction in share-based compensation, a $3.8 million reduction in deferred income taxes, a $1.2 million reduction in non-cash lease expense, and a $13.1 million reduction in accounts payable and accrued expenses. We decreased our inventory purchases during the period ended September 30, 2023 to align with sales demand. Accounts payable and accrued expenses decreased due to the timing of payments.

Net cash used in investing activities was $50.3 million for the nine months ended September 30, 2023 as compared to $2.4 million for the nine months ended September 30, 2022. The increase was primarily due to the purchase of investment securities during the nine months ended September 30, 2023. Net cash used in financing activities decreased by $113.4 million to $61.9 million for the nine months ended September 30, 2023 from $175.3 million for the nine months ended September 30, 2022. This decrease was primarily due to the $100.0 million accelerated share repurchase (“ASR”) program as of June 30, 2022 that did not recur in 2023, a $16.4 million decrease in other repurchases of the Company’s common stock, partially offset by a $1.8 million increase in net shares repurchased for taxes and an increase of $1.3 million of cash dividends paid to stockholders.

In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash requirements in both the short term and the long term, if any, to be funded from operating cash flow and financing activities.

From time to time, the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity or debt. We have no present understandings, commitments or agreements with respect to any material acquisitions.

On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on SOFR, from LIBOR (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $225.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to credit facilities. As of September 30, 2023, the Company had no borrowings under the credit facility and was in compliance with all of its debt covenants.

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.

The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility and investment portfolio. Its current investment policy is to maintain an investment portfolio consisting of corporate bonds and U.S. money market securities directly or through managed funds. Its cash is deposited in and invested through highly rated financial institutions in North America. Its marketable securities are subject to interest rate risk and market pricing risk and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at September 30, 2023, the Company estimates that the fair value of its investment portfolio would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments. As of September 30, 2023 the Company also did not have any outstanding borrowings.

There have been no material changes to our market risk exposure since December 31, 2022.

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Act, as amended, as of September 30, 2023. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.