Item 1A. Risk Factors
Item 1A . Risk Factors.
Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in the final prospectus for our initial public offering dated July 27, 2022 under the heading “ Risk Factors” and filed with the SEC on July 29, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our final prospectus, other than as set forth below.
We identified material weaknesses in our internal control over financial reporting, and we may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate any material weaknesses or if we otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
Upon becoming a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our controls over financial reporting. Although are required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404 until the later of (i) the year following our first annual report required to be filed with the SEC or (ii) the date we are no longer an emerging growth company. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an emerging growth company, as defined in the JOBS Act. We could be an emerging growth company for up to five years.
We identified deficiencies in our internal control that we consider to be material weaknesses in our internal control over financial reporting which existed as of December 31, 2021. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.
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
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within the consolidated financial statements. These factors contributed to the following additional material weaknesses.
We failed to design, implement and maintain effective controls regarding:
1. 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;
2. the calculation of earnings per share in accordance with U.S. GAAP; and
3. 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, in connection with SEC pronouncements related to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), we re-evaluated our accounting for the issuance of ratchet shares to certain private investors that purchased shares of our common stock prior to our initial public offering (the “IPO”) and warrants issued to the underwriters in connection with its initial public offering (the “Underwriter Warrants”). As a result, we determined that the ratchet shares that were issued had improperly been treated as a deemed dividend instead of operating expense and the Underwriter Warrants were improperly classified as equity instead of a liability.
On February 3, 2023, the audit committee (“Audit Committee”) of our board of directors concluded, after discussion with our management, that it was appropriate to restate our previously issued unaudited condensed consolidated balance sheet as of September 30, 2022, the unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of comprehensive loss and unaudited condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022, and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2022 included in our previously filed Quarterly Report on Form 10-Q with the Securities and Exchange Commission (the “Form 10-Q” and, the financial statements included in the Form 10-Q, the “Non-Reliance Financial Statements”). The Audit Committee concluded that the Non-Reliance Financial Statements should no longer be relied upon, and that we would amend the Form 10-Q to include restatements of the Non-Reliance Financial Statements. The changes do not impact our cash position.
Our management also concluded that in light of the errors described above, a material weakness exists in our internal control over financial reporting and that our disclosure controls and procedures were not effective.
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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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.