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Evaluation of Disclosure Controls and Procedures
−Removed: 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 March 31, 2024.
+Added: 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 September 30, 2024.
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.
−Removed: 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, 2024.
−Removed: Based on that evaluation, management concluded that such disclosure controls and procedures were not effective, at the reasonable assurance level, as of March 31, 2024, as a result of the material weaknesses in internal control over financial reporting discussed below.
+Added: 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, 2024.
+Added: Based on that evaluation, management concluded that such disclosure controls and procedures were not effective, at the reasonable assurance level, as of September 30, 2024, 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
−Removed: 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.
−Removed: 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.
−Removed: More specifically, several employees and IT consultants had full administrator access to allow them to perform certain job functions.
−Removed: The review of the IT activity of these employees and consultants was not adequately reviewed by other management level employees of the Company.
−Removed: 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.
−Removed: 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.
−Removed: The second material weakness in internal control related to the Company’s calculation of reserves for excess and slow-moving inventory.
−Removed: The reserve calculation is partially dependent on the Company’s sales forecast by sku.
−Removed: 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.
−Removed: The third material weakness related to the Company’s cost of goods sold (“COGS”) and inventory during the first three quarters of fiscal 2023.
−Removed: 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.
−Removed: However, in the period following June 30, 2022, substantial fluctuations occurred in certain material costs.
−Removed: 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.
−Removed: 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.
+Added: As disclosed in our Annual Report on Form 10-K for the year ended June 30, 2024, management identified a material weakness in internal control related to inventory costing.
+Added: The material weakness was a result of ineffective review of information used in the inventory costing process.
Plans for Remediation of Material Weaknesses
−Removed: During the nine months ended March 31, 2024, the Company engaged an external consultant to assist with its plan to remediate the material weaknesses.
−Removed: The remediation plan includes the following activities:
−Removed: ● The Company installed monitoring software that logs and tracks the activity of the administrative users and generates reports of all logged activity.
−Removed: These reports are reviewed by qualified personnel periodically.
−Removed: All other users are provisioned access consistent with their job responsibilities and approved by a manager.
−Removed: Access recertifications are performed periodically.
−Removed: ● The Company enhanced its review of the inventory forecast and added a retrospective reconciliation of the historical inventory data utilized in the inventory reserve and forecast.
−Removed: 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.
−Removed: ● 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.
−Removed: Our remediation efforts are ongoing and we will continue to implement and document policies, procedures, and internal controls.
−Removed: Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2024 and beyond.
−Removed: We will test the ongoing operating effectiveness of the new and existing controls in future periods.
−Removed: 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.
−Removed: Testing of these newly designed controls is underway.
−Removed: 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 completed testing or concluded on the effectiveness of all remediation efforts identified herein.
−Removed: 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.
+Added: Management, with the oversight of the audit committee of our Board of Directors, is currently designing and implementing reconciliation procedures to determine that the information used in the costing of inventory is complete and accurate and expects to complete these actions during fiscal 2025.
+Added: While the Company has begun the process of taking measures which it believes will remediate the underlying cause 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.
+Added: Until the Company’s remediation plan is fully implemented and effective, the Company will continue to devote time, attention and financial resources to this effort.
Changes in Internal Control over Financial Reporting
−Removed: During the three months ended March 31, 2024, 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.
+Added: During the three months ended September 30, 2024, 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
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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.
+Added: Information regarding the Company’s Risk Factors are set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2024 as well as the Form 424(b)(7) Prospectus, filed on March 7, 2024.
+Added: There has been no material change in the risk factors previously disclosed in the Company’s Form 10-K and Form 424(b)(7) for the three months ended September 30, 2024.
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.