What changed in this filing

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Item 4. Controls and Procedures

2024-02-05 compared with 2023-11-09 · 38 added, 19 removed, 4 unchanged (93% of the section changed)

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 to allow timely decisions regarding required disclosure as of December 31, 2023.

Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

At the conclusion of the period ended September 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2023, management identified three material weaknesses in internal control.

One material weakness in internal control related to ineffective information technology general controls (ITGCs) in the area of user access and lack of effective program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

We believe that these control deficiencies were a result of:

IT control processes lacking sufficient documentation and risk-assessment procedures to assess changes in the IT environment and program change management of personnel that could impact internal controls over financial reporting.

The second material weakness in internal control related to the reserve for excess and slow-moving inventory.

This control deficiency was a result of a lack of effective review and reconciliation controls over the forecasted sales and usage data.

In addition to the foregoing, during the Company’s closing of its books for the period ended June 30, 2023, management identified a third material weakness related to the Company’s Cost of Goods Sold (“COGS”) and Inventory during the first three quarters of fiscal 2023.

COGS reflected in the Company’s Original Form 10-Q was based on inventory costing as of June 30, 2022.

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 December 31, 2023.

Based on that evaluation, management concluded that such disclosure controls and procedures were not effective, at the reasonable assurance level, as of December 31, 2023, as a result of the material weaknesses in internal control over financial reporting discussed below.

Previously Identified Material Weaknesses in Internal Control over Financial Reporting

As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2023, management identified three material weaknesses in internal control as specified below.

One material weakness in internal control related to ineffective information technology general controls (“ITGCs”) over user access and change management review over certain information technology (“IT”) systems that support the Company’s financial reporting processes.

More specifically, several employees and IT consultants had full administrator access to allow them to perform certain job functions.

The review of the IT activity of these employees and consultants was not adequately reviewed by other management level employees of the Company.

Our business process controls (automated and manual) that are dependent on the above ITGCs were also deemed ineffective because they could have been adversely impacted by a failure in the ITGC’s.

We believe that these control deficiencies were a result of a lack of IT controls and procedures to assess program and data changes made in the IT environment by personnel that could impact internal controls over financial reporting.

The second material weakness in internal control related to the Company’s calculation of reserves for excess and slow-moving inventory.

The reserve calculation is partially dependent on the Company’s sales forecast by sku.

This control deficiency was a result of a lack of precise review controls over the accuracy and completeness of the forecasted sales and usage data and the historical sales data used in the reserve calculations.

The third material weakness related to the Company’s cost of goods sold (“COGS”) and inventory during the first three quarters of fiscal 2023.

COGS reflected in the Company’s Original Forms 10-Q for the first three quarters of fiscal 2023 was based on inventory costing as of June 30, 2022.

However, in the period following June 30, 2022, substantial fluctuations occurred in certain material costs.

Our inventory costing process did not identify these fluctuations in a timely manner resulting in Inventory being overstated and COGS being understated and resulting in an overstated gross profit, operating income, income before the provision for income taxes and net income for the first three quarters of fiscal 2023.

While the Company has begun the process to take measures which it believes will remediate the underlying causes of this material weakness, there can be no assurance as to when the remediation plan will be fully developed and implemented and whether such measures will be effective.

Until the Company’s remediation plan is fully implemented and effective, the Company will continue to devote time, attention and financial resources to these efforts.

Based on these material weaknesses, the Company’s management has concluded that at September 30, 2023 the Company’s internal controls over financial reporting were not effective.

Management, together with external consultants, is currently designing and implementing additional controls and procedures to remediate these items and expects to complete these actions during fiscal 2024.

While the Company has begun the process to take measures which it believes will remediate the underlying causes of these material weaknesses, there can be no assurance as to when the remediation plans will be fully developed and implemented and whether such measures will be effective.

Until the Company’s remediation plans are fully implemented and effective, the Company will continue to devote time, attention and financial resources to these efforts.

During the three months ended September 30, 2023, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting except as described above.

Our inventory costing process did not identify these fluctuations until the Company’s closing of its books for the period ended June 30, 2023, due to lack of precise reviews of inventory costs to identify material changes that would warrant interim adjustments, resulting in inventory being overstated and COGS being understated for the first three fiscal quarters.

This resulted in overstatements of gross profit, operating income, income before the provision for income taxes and net income for the first three quarters of fiscal 2023.

Plans for Remediation of Material Weaknesses

During the six months ended December 31, 2023, the Company engaged an external consultant to assist with its plan to remediate the material weaknesses.

The remediation plan includes the following activities:

● The Company installed monitoring software that logs and tracks the activity of the administrative users and generates reports of all logged activity.

These reports are reviewed by qualified personnel periodically.

All other users are provisioned access consistent with their job responsibilities and approved by a manager.

Access recertifications are performed periodically.

● The Company enhanced its review of the inventory forecast and added a reconciliation of the historical inventory data utilized in the forecast.

The control processes include the inventory reconciliation and documentation of the reasons for any adjustments to the historical data by production, sales and finance management.

● The Company refined the method it uses to calculate the cost of component parts and implemented a new control which expanded its review of the costs of components to identify any significant inventory cost fluctuations or errors prior to the filing of its quarterly and annual financial statements.

Our remediation efforts are ongoing and we will continue to implement and document policies, procedures, and internal controls.

Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2024 and beyond.

We will test the ongoing operating effectiveness of the new and existing controls in future periods.

The material weaknesses cannot be considered remediated until the applicable controls have operated for a sufficient period of time to enable management to conclude, through testing, that these controls are operating effectively.

While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not tested and concluded on the effectiveness of all remediation efforts identified herein.

Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects.

Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2023, there were no changes in the Company’s internal controls over financial reporting, except for the remediation efforts described above, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting except as described above.

OTHER INFORMATION

Legal Proceedings

The information called for by this item is incorporated herein by reference to Note 13, Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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