(4) Going Concern
These Consolidated Condensed Financial Statements are presented assuming that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2018, the Company had sustained recurring losses from continuing operations, had working capital surplus of $910,361, and accumulated deficit of $129,073,774.
On May 9, 2018, the Company announced that the Committee on Foreign Investment in the United States (“CFIUS”) would likely not approve the second stage investment as anticipated in the Stock Purchase Agreement with China National Heavy Duty Truck Co., Ltd, which would have brought approximately $23 million of cash to the Company. Since that announcement, the Company has been investigating other favorable funding alternatives.
As of the date of the filing of this Form 10-Q, management has assessed the liquidity position of the Company per the requirements of ASU No. 2014-15 “Presentation of the Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Management’s cash flow forecast for the next twelve months, based on expectations of the receipt of new customer orders and revenues, indicates that the Company should be able to meet its obligations, but there can be no assurance that this will happen. Therefore, with the losses that the Company has sustained, and its working capital at June 30, 2018, substantial doubt exists about the Company’s ability to continue as a going concern without taking additional actions and/or finalizing orders that are currently in the negotiation stage. Management believes that additional funding may be necessary, and is evaluating numerous options, including but not limited to:
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·
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Renegotiation of the maturity date of Company’s line of credit with its bank;
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·
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Sale and leaseback transaction related to the Company’s facility;
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·
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Investments from strategic partners;
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·
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Capital market investment
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Management does not believe that there is an immediate need to raise capital given the recent improvements in revenues. Management believes that it is likely that additional funding will be available at the appropriate time given these options.
The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern
.
(5) Revenue Recognition
Accounting Policies
Product Sales
- Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated fixed price. The Company sells its products directly to customers under agreements with payment terms of prepayment or generally net 30 days for credit qualified customers.
Contract Services
- The majority of the Company’s contracts have a single performance obligation to transfer products or an agreed-upon task(s) over time. Accordingly, revenue is recognized using cost input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract, as the performance obligations
are satisfied. Costs incurred towards contract completion may include costs associated with direct materials, labor, subcontractors, and other indirect costs.
Shipping and Handling Costs-
We account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record customer payment of shipping and handling costs as a component of net sales, and classify such costs as a component of cost of sales.
Product Warranties
- Our standard product warranty is for one year and provides assurance to the customer that the purchased product will function as intended and complies with agreed-upon specifications. A customer can negotiate an extended warranty period from four months up to four years. The cost of the warranty can be included in the price of the unit or separately stated as a line item in the contract. A majority of our customers have the warranty to be included in the sales price of the product which is then accounted for as a guarantee. Warranties that are stated as a separate line item in the contract are considered a single performance obligation which is recognized by the time elapsed input method.
Unearned Revenue
- When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we record unearned revenue, which represents a contract liability. We recognize unearned revenue as net sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.
License Agreements
- We account for our license agreements as multi-element arrangements. Each element in the arrangement is considered a single performance obligation and is treated accordingly. Revenue recognition for the licensing element in the agreement is recognized by the time elapsed input method. Revenue recognition for the product sales element follows the revenue recognition rules as noted above for product sales.
The effect of the adoption of new revenue recognition standard (ASC 606) on our Consolidated Statement of Operations and Balance Sheet as of December 31, 2017 as reported in our Annual Report on Form 10-K was immaterial.
Disaggregation of Revenue
In the following table, revenue is disaggregated by geographic region (using the location of the client as the basis of attributing revenues to the individual regions):
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Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
United States & Canada
|
|
$
|
3,025,923
|
|
$
|
2,333,680
|
Asia Pacific
|
|
|
1,193,714
|
|
|
399,800
|
Europe
|
|
|
93,592
|
|
|
70,520
|
Total Revenues
|
|
$
|
4,313,229
|
|
$
|
2,804,000
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part II, Item 1A. Risk Factors and in our Annual Report on Form 10-K for the year ended December 31, 2017. Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the U.S. Securities and Exchange Commission (“SEC”). We assume no obligation to update, and, except as may be required by law, do not intend to update, any forward-looking statements.
Introduction
UQM Technologies, Inc. (the “Compnay”, “UQM”, “we”, or “us”) develops, manufactures, and sells power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, and industrial markets. We generate revenue from two principal activities: 1) the sale of motors, generators, electronic controls, and fuel cell compressors; and 2) research, development, and application engineering contract services. Our product sales consist of annually recurring volume production, prototype low volume sales, and revenues derived from the sale of refurbished and serviced products. The sources of engineering service revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value.
We have invested considerable financial and human resources into the development of our technology and manufacturing operations. We have developed and production-validated a range of products for use in full-electric, hybrid electric, plug-in-hybrid and fuel cell applications for the commercial bus and truck, automotive, marine, and industrial markets. These products are all intended to be highly efficient permanent magnet designs and feature outstanding performance, package size, and weight valued by our customers. We believe our production capabilities and capacity are sufficient to meet the demands of our current and future customers for the foreseeable future. We are certified as an ISO 9001 and IATF 16949 quality supplier, which is the highest level of quality standards in the automotive industry, and we are ISO 14001 certified, meeting the highest environmental standards. We have a management team with significant experience in the automotive industry and the requirements for high quality production programs and very deep technical knowledge of the motor and controller business. We believe this team has the ability and background to grow the business to significantly higher levels.
Our most important strategic initiative going forward is to develop customer relationships that lead to longer-term supply contracts. Volume production is the key to our ongoing operations. We are taking steps to drive business development in various ways including:
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·
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We have created a well-defined, structured process to target potential customers of vehicle electric motor technology in the commercial truck/van and shuttles, passenger buses, automotive, marine, military and other targeted markets both domestically and internationally.
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·
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We hired our first employees in China in 2016. As China represents the largest market in the world for electric vehicles, we believe our presence in that market is critical to our long-term success.
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·
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On August 28, 2017, we entered into a definitive stock purchase agreement with
China National Heavy Duty Truck Group Co., Ltd.
through its wholly-owned subsidiary, Sinotruk (BVI) Limited (collectively, “CNHTC”), the parent company of Sinotruk (Hong Kong) Limited, a Chinese commercial vehicle manufacturer, and also announced that UQM and CNHTC plan to create a joint venture to manufacture and sell electric propulsion systems for commercial vehicles and other vehicles in China.
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·
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We have developed a customer pipeline where we identified potential customers that we believe are synergistic and strategic in nature for longer-term growth potential.
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·
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We are building potentially long term quantifiable and sustainable relationships within the identified target markets.
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·
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We provide service and support to our customers from pilot and test activities through commissioning processes and then ultimately leading to volume production operations.
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·
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We strive to improve our purchasing and manufacturing processes to develop competitive costs to ensure that our pricing to customers is market competitive.
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·
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We provide customized solutions to meet specification requirements that some customers require.
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·
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We participate in trade show events globally to demonstrate our products and engage with users of electric motor technology.
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·
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We involve all functional groups within the Company to support the needs of our customers.
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We believe that the successful execution of these activities will lead us to secure volume production commitments from customers, so that our operations will eventually become cash flow positive and ultimately profitable.
Recent Events
On June 7, 2018, we announced
that Green4U Technologies, Inc. (“Green4U”), located in Georgia, has chosen UQM to be its supplier of choice for eDrives for an array of electric vehicles designed for fleet operators. Green4U plans to market a range of U.S. manufactured EVs primarily for business use but also suitable for consumers. The UQM platform is expected to enable Green4U to expand its EV product line to SUVs and medium-to-large commercial vehicles like buses and work trucks.
On June 12, 2018, we announced the receipt of an order for a PowerPhase
®
DT system from the Chung Shing Group, located in Taiwan. Chung Shing has selected the UQM PowerPhase DT system for evaluation and trial for their electric bus offering.
Financial Condition
Cash and cash equivalents at June 30, 2018 were $2,599,995 and working capital was $910,361, compared with $6,309,269 and $7,762,363, respectively, at December 31, 2017. The change in cash and working capital is primarily attributable to operating losses, and investments in inventory, offset in part by prepayments received from customers.
Restricted cash (current and long-term) at June 30, 2018 was $408,786 versus $500,056 at December 31, 2017. The restricted cash is reserved for payment of the interest on the line of credit.
Accounts receivable increased $372,940 to $1,196,733 at June 30, 2018 from $823,793 at December 31, 2017. The increase is primarily due to the mix in customer credit terms and increased customer shipments at the end of the second quarter. Our sales are conducted through acceptance of customer purchase orders, or in some cases, through supply agreements. For international customers and customers without an adequate credit rating or history, our typical terms require irrevocable letters of credit or cash payment in advance of delivery. For credit qualified customers, our typical terms are net 30 days. As of June 30, 2018 and December 31, 2017, we had no allowance for bad debts.
Total inventories increased $1,568,670 to $3,910,030 at June 30, 2018 from $2,341,360 at December 31, 2017 reflecting an increase in raw materials and work-in-process for confirmed sales orders to be sold to customers in 2018.
Prepaid expenses and other current assets increased to $348,557 at June 30, 2018 from $233,566 at December 31, 2017, primarily due to an increase in vendor prepayments.
We invested $220,431 for the acquisition of property and equipment during the six months ended June 30, 2018, compared to $37,407 during the comparable period last year. We purchase property and equipment to augment and replace existing fixed assets.
Patent costs increased $12,598 for the six months ended June 30, 2018 due to new patent costs offset by amortization. Trademark costs decreased $2,248 for the six months ended June 30, 2018 due to amortization.
Accounts payable increased $793,838 to $1,742,713 at June 30, 2018 from $948,875 at December 31, 2017, primarily due to the timing of vendor payments and increased purchases of inventory.
Unearned revenue increased to $1,698,895 at June 30, 2018 from $153,944 at December 31, 2017. The increase is attributable to an increase in customer deposits for future shipments.
Other current liabilities increased to $881,735 at June 30, 2018 from $819,839 at December 31, 2017. The change is attributable to an increase in accrued warranty costs which reflect the increase in sales in the current year.
Debt net of deferred financing costs (current and long-term) increased $18,653 during the six months ended June 30, 2018 due to amortization of the deferred financing costs.
Billings in excess of costs and estimated earnings on engineering services contracts were $92,294 and $199,160 at June 30, 2018 and December 31, 2017, respectively. The decrease was due to timing of billings and completion of customer contracts in 2018.
Other long-term liabilities decreased $10,000 to $111,667 at June 30, 2018 from $121,667 at December 31, 2017 due to amortization of a license fee received from a customer under a ten-year cooperation agreement.
Common stock and additional paid-in capital were $541,405 and $134,310,065, respectively, at June 30, 2018 compared to $541,085 and $133,901,406 at December 31, 2017. The increase in common stock and additional paid-in capital were primarily attributable to the issuance of common stock under the employee stock purchase plan and the periodic expensing of non-cash share-based payments associated with option and stock grants under our equity compensation plans.
Results of Operations
Quarter Ended June 30, 2018
Revenue
Product sales revenue for the quarter ended June 30, 2018 increased to $2,343,999 versus $1,571,390 for the comparable period last year, reflecting increased shipments in all product lines.
Revenue from contract services was $357,656 for the quarter ended June 30, 2018 versus $217,565 for the comparable period last year. The increase is due to customer contracts in progress.
Gross Profit Margin
Total gross profit margin for the quarter ended June 30, 2018 decreased to 26.7 percent compared to 39.2 percent for the comparable period in the prior year. Gross profit margin on product sales for the quarter this year decreased to 19.5 percent compared to 35.9 percent for the same period last year primarily due to higher sales of lower margin products. Gross profit margin on contract services was 73.4 percent for the quarter this year compared to 63.0 percent for the same period last year, resulting from a change in the mix of contracts in process during the respective periods.
Costs and Expenses
Research and development expenditures for the quarter ended June 30, 2018 increased to $827,129 compared to $555,465 for the same period last year. The increase is related to a greater focus on internally funded development projects.
Selling, general and administrative expenses for the quarter ended June 30, 2018 was $2,318,636 compared to $1,470,914 for the same period last year. The increase is primarily attributable to legal fees and timing of annual bonuses in the current period compared to the same period last year.
Other income and (expenses)
Interest income increased to $2,472 versus $449 for the quarter ended June 30, 2018 compared to the same period last year. The increase is attributable to higher levels of invested cash balance.
Interest expense was $47,578 for the quarter ended June 30, 2018 compared to $21,363 as of June 30, 2017. The increase is attributable to interest paid on the borrowings from the bank line of credit which was secured in March 2017.
Amortization of deferred financing costs was $9,327 for each quarter ended June 30, 2018 and 2017, respectively.
Other income for the quarter ended June 30, 2018 was $9,988 compared to $6,635 for the same period last year. The increase is primarily attributable to miscellaneous payments received in the respective periods.
Net Loss
As a result, net loss for the quarter ended June 30, 2018 was $2,469,726, or $0.05 per common share, compared to a net loss of $1,348,221, or $0.03 per common share, for the comparable period last year.
Six Months Ended June 30, 2018
Revenue
Product sales revenue for the six months ended June 30, 2018 increased to $3,749,363 versus $2,416,925 for the comparable period last year, reflecting increased shipments in all product lines.
Revenue from contract services was $563,866 for the six months ended June 30, 2018 versus $387,075 for the comparable period last year. The increase is due to customer contracts in progress.
Gross Profit Margin
Total gross profit margin for the six months ended June 30, 2018 decreased to 23.8 percent compared to 36.7 percent for the comparable period in the prior year. Gross profit margin on product sales for the six months this year decreased to 18.3 percent compared to 33.2 percent for the same period last year primarily due to increased production department expenses related to increased headcount to support higher production demands and higher sales of lower margin products. Gross profit margin on contract services was 60.3 percent for the six months this year compared to 58.3 percent for the same period last year, resulting from a change in the mix of contracts in process during the respective periods.
Costs and Expenses
Research and development expenditures for the six months ended June 30, 2018 increased to $1,505,634 compared to $1,188,247 for the same period last year. The increase is related to a greater focus on internally funded development projects.
Selling, general and administrative expenses for the six months ended June 30, 2018 was $3,838,548 compared to $2,774,121 for the same period last year. The increase is primarily attributable to legal fees and timing of annual bonuses in the current period compared to the same period last year.
Other income and (expenses)
Interest income increased to $5,603 versus $2,099 for the six months ended June 30, 2018 compared to the same period last year. The increase is attributable to higher levels of invested cash balance.
Interest expense was $91,346 for the six months ended June 30, 2018 compared to $22,731 as of June 30, 2017. The increase is attributable to interest paid on the borrowings from the bank line of credit which was secured in March 2017.
Amortization of deferred financing costs was $18,654 for the six months ended June 30, 2018 versus $10,881 in the same period last year.
Other income for the six months ended June 30, 2018 was $18,905 compared to $11,738 for the same period last year. The increase is primarily attributable to miscellaneous payments received in the respective periods.
Net Loss
As a result, net loss for the six months ended June 30, 2018 was $4,402,524, or $0.08 per common share, compared to a net loss of $2,954,247, or $0.06 per common share, for the comparable period last year.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the six months ended June 30, 2018 were adequate to meet operating needs. At June 30, 2018, we had working capital of $910,361 compared to $7,762,363 at December 31, 2017. The decrease in working capital is primarily attributable to funding operations, higher unearned revenue and debt being reclassified from long-term to current because of its maturity date.
For the six months ended June 30, 2018, net cash used in operating activities was $3,590,261 compared to net cash used in operating activities of $2,513,106 for the comparable period last year. The increase in cash used in operating activities is due to higher accounts receivable and inventory purchases which is offset by higher unearned revenue.
Net cash used in investing activities for the six months ended June 30, 2018 was $243,135 compared to net cash used in investing activities of $45,098 for the comparable six months last year. The increase for the six months ended June 30, 2018 was primarily due to the acquisition of property and equipment
.
Net cash provided by financing activities for the six months ended June 30, 2018 was $32,852 compared to net cash provided by financing activities of $3,118,447 for the comparable period last year. The change is primarily due to borrowings on the line of credit in the prior year.
We expect to fund our operations over the next year from existing cash and cash equivalent balances, cash generated from operations, and bank financing resources.
On March 15, 2017, the Company entered into a non-revolving line of credit with a lender for $5.6 million. The interest rate is variable based upon the one month LIBOR rate plus 4.0% per annum on the outstanding balance. The non-revolving line of credit will expire on March 15, 2019 and the amounts repaid during the term of the loan may not be re-borrowed. At the expiry date, all outstanding principal and interest are due.
For additional information, see Note 10 of the Consolidated Condensed Financial Statements. Although we expect to manage our operations and working capital requirements to minimize the future level of operating losses and working capital usage, our working capital requirements may increase in the future. If customer demand accelerates substantially, our working capital requirements may also increase substantially.
If our existing financial resources are not sufficient to execute our business plan, we may issue equity or debt securities in the future, although we cannot assure that we will be able to secure additional capital should it be required to implement our current business plan. In the event financing or equity capital to fund future growth is not available on terms acceptable to us, or at all, we will modify our strategy to align our operations with then available financial
resources. See Footnote 4 to the Consolidated Condensed Financial Statements related to management’s assessment of the Company’s ability to continue as a going concern.
Contractual Obligations
The following table presents information about our contractual obligations and commitments as of June 30, 2018:
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Payments due by Period
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Less Than
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More than
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Total
|
|
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
5 Years
|
Long-term debt obligations
|
|
$
|
3,164,529
|
|
$
|
3,164,529
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Purchase obligations
|
|
|
4,387,627
|
|
|
4,387,627
|
|
|
—
|
|
|
—
|
|
|
—
|
Total
|
|
$
|
7,552,156
|
|
$
|
7,552,156
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the dollar values reported in the Consolidated Condensed Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. There have been no material changes in our Condensed Consolidated Financial Statements based on any of our critical accounting policies including the adoption of ASC 606, during the six months ended June 30, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks and do not hold or issue financial instruments for trading purposes. All of our product sales, and related receivables are payable in U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15 under the U.S. Securities and Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2018, we performed an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2018.
There were no changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.