Item 4. Controls and Procedures
ITEM 4. CONTROLS AND PROCEDURES
As previously disclosed in the section titled “ Part II, Item 9A. Controls and Procedures ” in our Annual Report on Form 10-K, management concluded that our internal control over financial reporting was not effective at a reasonable assurance level as of December 31, 2023 due to deficiencies in the operating effectiveness of our internal controls associated with the valuation of our inventory, including excess and obsolescence reserves (the “ Inventory Valuation MW ” ), and the accounting for property and equipment, net (the “ Property and Equipment MW ” ). These deficiencies constituted material weaknesses in our internal control over financial reporting. 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 prevented or detected on a timely basis. Through the date of this Quarterly Report on Form 10-Q, we have not identified any material misstatements as a result of these material weaknesses.
Management has been actively engaged in the implementation of remediation efforts to address the material weaknesses, as well as other identified areas of risk. For a complete description of management ’ s remediation plan, refer to the section titled “ Part II, Item 9A. Controls and Procedures ” in our Annual Report on Form 10-K, as may be updated in the section titled “ Part I. Item 4. Controls and Procedures ” of our subsequently filed Quarterly Reports on Form 10-Q. For updates on management ’ s remediation plan as of March 31, 2024, refer to the section titled “ Management ’ s Implementation of Remediation Plan ” below.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2024. Because our efforts to remediate the material weaknesses in our internal control over financial reporting are still underway and we have not had a sufficient period of time to test the operating effectiveness of our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of March 31, 2024.
Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the Consolidated Financial Statements and Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q fairly present, in all material
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respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.
Management ’ s Implementation of Remediation Plan
Management, with oversight from the Audit Committee of our Board of Directors, previously commenced implementing changes to our internal control over financial reporting in order to remediate the control deficiencies that resulted in the Inventory Valuation MW and Property and Equipment MW disclosed in our Annual Report on Form 10-K. As of March 31, 2024, we believe that we are on track with the remediation plan disclosed therein. Our ongoing efforts for remediation include, but are not limited to, the following:
● we have engaged accounting advisory consultants to implement new software systems to automate manual key inventory valuation processes and outputs;
● we continue to strengthen and document our existing controls and, starting in the first quarter of 2024, have implemented additional compensating controls and will continue to do so throughout the remainder of fiscal year 2024;
● we continue to execute controls that we worked to improve during fiscal year 2023 that did not have a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023;
● we continue to evaluate, enhance, and add personnel in the finance organization with a focus on the requisite exper ience in the areas of accounting, SEC financial reporting, and associated internal controls. Additionally, for key additions or vacancies on our team, we have engaged accounting consultants to provide additional depth and breadth in our period end closes, financial reporting capabilities, and internal controls compliance until we have filled the positions with qualitied personnel for a sufficient period of overlap to ensure successful transition of responsibilities;
● we have engaged a third-party consulting firm to perform an assessment of our remediation plan and provide recommendations to enhance the effectiveness of the related controls; and
● we continue to provide trainings on a regular basis related to internal control over financial reporting for all control owners.
We will continue our efforts to remediate, and test the remediation of, the Inventory Valuation MW and Property and Equipment MW through fiscal year 2024. We believe that the implementation of the above steps will allow us to address the deficient controls within our internal control environment, which will facilitate the remediation of these material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies and we may modify certain of the remediation measures described above. Given that many of the remediation efforts described above are in the process of being implemented and our controls continue to undergo independent testing, we will not be able to consider the material weaknesses as described in our Annual Report on Form 10-K remediated until the applicable remedial controls operate for a sufficient period of time and our management has concluded, through testing, that our controls are operating effectively. We, along with our Audit Committee, will continue to monitor and evaluate the effectiveness of these remedial actions and take further actions as we deem appropriate.
Changes in Internal Control over Financial Reporting
Other than the changes outlined above to remediate the material weaknesses, there have been no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.