Item 4. Controls and Procedures
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this quarterly report, our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act) were not effective as of September 30, 2020 due to the following material weaknesses which were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and continue to exist as of September 30, 2020:
• Material weakness related to the control environment
◦ We did not design or maintain an effective control environment commensurate with our financial reporting requirements. Given the rapid growth in the size and complexity of the business, we failed to maintain a sufficient number of professionals with an appropriate level of accounting and internal control knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. This material weakness contributed to the additional material weaknesses below.
• Material weakness related to the financial statement close process
◦ We did not effectively execute our controls over our financial statement close process, to ensure the prevention or detection of a misstatement that could be material. Specifically, we concluded we did not have an effective business performance review control used to monitor the completeness and accuracy of the financial results and to identify potential failures in lower level controls. This control may not detect errors in a timely manner that could be material to our interim or annual financial statements. Additionally, we did not have appropriate control over the review of journal entries to ensure that they were properly supported and recorded completely and accurately.
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• Material weakness related to the accounting for revenue and related accounts receivables and reserves
◦ We did not maintain effective controls with respect to the review of the accounting for revenue and related accounts receivable, including maintaining effective controls to prevent or detect errors in the assessment of bad debt and revenue reserves. Specifically, we did not detect errors within the contractual allowance and bad debt expense analyses which resulted in immaterial misstatements to revenue, accounts receivable and bad debt expense.
These material weaknesses resulted in the misstatement of our revenues, revenue reserves, bad debt expense, property and equipment, research and development expense and related financial disclosures, and in the revision of the Company’s consolidated financial statements for the years ended December 31, 2017, December 31, 2018, and each interim period therein as well as the quarters ended March 31, 2019, and June 30, 2019. Additionally, these material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Notwithstanding these material weaknesses, management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q state fairly, in all material aspects, our financial position at the end of, and the results of operations and cash flows for, the periods stated in conformity with accounting principles generally accepted in the United States.
Remediation Plan Activities
As previously disclosed in Part II, Item 9A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and December 31, 2019, we commenced a remediation plan with the goal of remediating the material weakness as soon as possible.
In carrying out our remediation plan, management performed the following actions related to each of the material weaknesses noted above:
• Material weakness related to the control environment;
◦ Increased the depth and experience of our Finance organization by increasing the number of management and staff members, expanding our technical experience in accounting, auditing and reporting matters, and performing internal controls training for management and staff members.
◦ Hired two Internal Audit Directors (one for Finance and one for IT) who focus on the development, maintenance and monitoring of our overall control environment and system of internal controls over financial reporting.
• Material weakness related to the financial statement close process;
◦ Modified the design of the controls related to the review of manual journal entries to ensure that they are properly supported and reviewed at a level of precision appropriate for recording completely and accurately.
◦ Modified the design of the existing business performance review control used to monitor the completeness and accuracy of the financial results. The modification results in a level of precision appropriate to detect errors that may result from failures in lower level preventive controls prior to the issuance of our interim or annual financial statements.
◦ The above changes were supported by the enhancements made to address the material weakness in the control environment and included various new members of management and staff identified as control owners for the modified controls.
• Material weakness related to the accounting for revenue and related accounts receivables and reserves;
◦ Management modified the design of existing key controls and implemented new key controls at a sufficient level of precision to verify the reliability of data, the reasonableness of assumptions and the accuracy of calculations involved in the accounting for revenue and related accounts receivable and bad debt and revenue reserves.
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◦ The above changes were supported by the enhancements made to address the material weakness in the control environment and included various new members of management and staff identified as control owners for the modified controls.
We remain committed to the continued hiring and on-boarding of additional members of the Finance organization. As of September 30, 2020, we have filled key positions within the Finance organization and will continue to add skilled talent as complexities grow and needs arise. We are in the process of testing the operational effectiveness of the key controls discussed above. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, we evaluated whether there were any changes in our internal control over financial reporting during the third quarter of fiscal year 2020. Based on that evaluation, other than the changes discussed above in connection with the changes designed and implemented as a result of our remediation plan of the previously identified material weaknesses, there were no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended September 30, 2020.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II. OTHER INFORMATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.