What changed in this filing

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Item 4. Controls and Procedures

2022-05-10 compared with 2021-11-12 · 35 added, 11 removed, 6 unchanged (88% of the section changed)

3 unchanged sentences

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021.

Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level as a result of the material weaknesses that existed in our internal control over financial reporting as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

These material weaknesses related to our inventory cut-off, specifically due to lack of sufficient systems.

Remediation Plan for Material Weakness

We have taken steps intended to remediate the inventory cut-off material weakness through additional procedures and controls in the inventory and financial statement close processes while working to deploy system enhancements designed to improve the accuracy of inventory reporting.

These controls include instituting electronic data interchange with key inventory carriers as well as enhancements in the review process over in-transit inventory, especially related to timing of reviews.

These system enhancements and activities are designed to enable us to broaden the scope and quality of our internal review of underlying information related to financial reporting and to formalize and enhance our internal control procedures.

We have hired and are actively working with an external consulting firm that specializes in internal controls and internal audit work to assist in the organizational risk assessment, identification of control activities, controls documentation and testing and the enhancement of ongoing monitoring activities related to the internal controls over financial reporting.

With the oversight of senior management and our audit committee, we are taking the above steps and plan to take additional measures to remediate the underlying causes of the material weakness.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022.

Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weaknesses previously identified and disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and listed below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management determined that the previously disclosed material weaknesses in its internal control over financial reporting continue to exist at March 31, 2022, specifically:

Control Environment and Monitoring – We did not maintain appropriately designed entity-level controls impacting the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements.

These deficiencies were attributed to (i) the lack of a sufficient number of qualified resources and inadequate oversight and accountability over the performance of controls, and (ii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.

Control Activities – These material weaknesses contributed to the following additional material weaknesses within certain business processes:

• Inventory – We did not appropriately design and implement controls over the existence, accuracy, and cutoff of inventory.

As previously reported, we identified a material weakness relating to inventory cut-off and in-transit inventory, which continued to exist at March 31, 2022.

• Revenue Recognition – We did not design, implement and maintain effective controls over revenue recognized for certain contracts relating to the proper application of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Specifically, we did not maintain effective controls relating to (1) the identification and recognition of performance obligations for customer contracts and (2) evaluation of customer contracts for potential combination.

• Accounts Receivable – We did not fully design, implement and maintain effective controls over the existence of accounts receivable.

Specifically, we did not design controls at an appropriate precision level to identify material misstatements.

After giving full consideration to these material weaknesses, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with U.S.

GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S.

Remediation Plan for Existing Material Weaknesses

We have begun the process of, and we are focused on, designing and implementing effective measures to strengthen our internal controls over financial reporting and remediate the material weaknesses.

Our planned internal control remediation efforts include the following:

Control Environment and Monitoring – Consistent with the COSO 2013 Framework, Principle 4, attracting, developing, and retaining competent personnel, we have recently hired a Chief Accounting Officer who is providing an additional level of technical accounting expertise, oversight, and monitoring of the design and performance of both existing and newly implemented controls as noted below.

The Chief Accounting Officer has been updated on the control structure and material weaknesses and has begun to lead the effort on the remediation.

We further will continue to hire in 2022, additional accounting and IT personnel to bolster our accounting and IT capabilities and capacity, and we will concentrate on retaining key accounting, IT, and operational personnel.

These actions will further serve to remediate the noted material weakness under the COSO 2013 Framework, Principle 16, by enhancing the efforts towards separate evaluations regarding the presence and functionality of the components of internal control, specifically in the areas of inventory, revenue recognition, and accounts receivable, as noted below.

Control Activities:

• Inventory – We have begun to enhance the design of existing controls and will implement new controls over the accounting, processing, and recording of inventory.

Specifically, we have strengthened the design of the management review control over inventory-in-transit.

Additionally, we have implemented processes to ensure timely identification and evaluation of inventory cut-off and are requiring additional accountability from counterparties on the accuracy of incoming and outgoing shipment documentation.

We also plan to deploy information system enhancements and better use of current system capabilities in order to improve the accuracy of inventory cut-off, reporting, and reconciliation.

• Revenue Recognition – We have begun to enhance the design of existing controls and will implement new controls over the review of the application and recording of revenue for customer contracts under the guidance outlined in ASC 606.

We will also design and implement more precise reviews regarding evaluation of contract terms and whether contracts should be combined.

These reviews will include increased contract analysis from our legal team as well as ensuring qualified resources are involved and adequate oversight is performed during the internal technical accounting review process.

• Accounts Receivable – We have begun to enhance the design of existing controls and will implement new controls over the processing and review of accounts receivable billings.

We have begun to supplement our accounting staff with more experienced personnel.

In addition, we will evaluate information system capabilities in order to reduce the manual calculations within this business process.

While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.

Changes in Internal Control over Financial Reporting.

During the quarter ended September 30, 2021, there were control enhancements made to certain access controls.

With the exception of these enhancements, including the remediation measures in connection with the material weakness noted above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended March 31, 2022, except for the changes discussed above and the STI Acquisition, there have been no other changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 4. Controls and Procedures