Item 4. Controls and Procedures
Item 4 . Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level due to material weaknesses in internal control over financial reporting.
Material weaknesses were initially identified at December 31, 2021 as previously disclosed in our Form S-1, as amended, filed on July 21, 2022 and related to the effectiveness of controls over our review and approval procedures with respect to financial information generated to prepare our consolidated financial statements, coupled with a lack of segregation of duties. 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 our annual or interim financial statements will not be presented or detected on a timely basis.
Specifically, the Company did not maintain an effective control environment as there was an insufficient complement of personnel within the finance and accounting function with appropriate degree of knowledge, experience and training in the application of U.S. generally accepted accounting principles (“U.S. GAAP). In addition, the Company did not have an effective risk assessment process that defined clear financial reporting objectives and elevated risks, including fraud risks, at a sufficient level of detail to identify all relevant risks of material misstatement including the risks associated with the use of outsourced consultants in the preparation of schedules supporting balances within the consolidated financial statements. These factors contributed to the following additional material weaknesses.
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We failed to design, implement and maintain effective controls regarding:
• the accounting for stock-based compensation and other stock-based financial instruments in accordance with U.S. GAAP. Specifically, we did not design and maintain controls to timely identify transactions requiring a valuation of our common stock and to review in sufficient detail, the valuation model assumptions used in determining the fair value of our common stock which is used as an input in accounting for stock-based compensation provided to employees and other stock-based financial instruments;
• the calculation of earnings per share in accordance with U.S. GAAP; and
• the reconciliation and review of significant account balances, authorization over cash disbursements, stock-based compensation calculations and related valuation models including inputs, period end financial reporting, risks associated with segregation of duties, and certain other entity level controls.
In addition, as of September 30, 2022, we failed to design implement and maintain effective controls regarding:
• the application of U.S. generally accepted accounting principles (“U.S. GAAP”) to effectively evaluate the accounting treatment for complex financial instruments.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2022, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than material weakness identified relating to the application of U.S. generally accepted accounting principles (“U.S. GAAP”) to effectively evaluate the accounting treatment for complex financial instruments. In light of the material weakness discussed above, we are taking steps to remediate the material weakness including the hiring of additional accounting staff. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Plan of Remediation
As we work towards remediating these material weaknesses, we will design and implement controls to properly identify transactions for which a valuation of our common stock is required and to review assumptions used in the valuation models to ensure our equity-based transactions are accounted for in accordance with U.S. generally accepted accounting principles. Additionally, we will design and implement controls to properly calculate basic and diluted weighted-average shares outstanding. Lastly, we will design, document, and consistently perform control activities in the identified areas which are currently lacking. To assist us in the remediation and performance of remediated controls we recently hired a Corporate Controller, and we will continue to utilize an accounting and financial reporting advisory firm with significant experience with publicly held companies to assist our management in evaluating transactions requiring the valuation of our common stock, in retaining and reviewing the work of valuation experts necessary to complete those valuations, and performing the calculation of basic and diluted weighted-average shares outstanding.
We may identify future material weaknesses in our internal controls over financial reporting or fail to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley, and we may be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. We cannot assure that our existing material weakness will be remediated or that additional material weaknesses will not exist or otherwise be discovered, any of which could adversely affect our reputation, financial condition and results of operations.
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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.