Rein Therapeutics, Inc. 10-Q

Item 4. Controls and Procedures. Limitations on Effectiveness of Controls and Procedures The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are 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 recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. 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, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and our principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2024, because of the identified material weaknesses in our internal control over financial reporting described below. Material Weaknesses A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In the year ended December 31, 2023, management identified material weaknesses primarily related to the accounting for the business combination with Lung Therapeutics, Inc., specifically the (i) lack of sufficient accounting and supervisory personnel to maintain appropriate segregation of duties relating to user access of the financial accounting system and who have the appropriate level of technical accounting 27 experience and training, (ii) lack of evidence over reviews of account reconciliations and supporting schedules, and (iii) lack of adequate procedures and controls to ensure that accurate financial statements could have been prepared and reviewed on a timely basis for annual reporting purposes. In the year ended December 31, 2023, management identified material weaknesses related to the accounting for our acquisition of Lung, including a lack of sufficient precision in the performance of reviews supporting the purchase price allocation accounting, and a lack of timely oversight over third-party specialists and the reports they produced to support the accounting for the Lung Acquisition. Management’s Plan to Remediate the Material Weaknesses We have implemented and are continuing to implement procedures to remediate these material weaknesses, including the hiring of a Controller with the requisite supervisory background and knowledge in financial reporting, integration into one accounting system, engaging third party accounting specialists and building a more streamlined process in order to prepare and review financial information, however, our control environment needs improvement, and as a result we may be exposed to errors. Our remediation plan also includes the hiring of additional accounting employees and/or consultants with the specific technical accounting experience necessary to assist with complex, non-routine transactions and to support the timely completion of financial close procedures, the implementation of robust processes, and to assist with the preparation of financial statements and our compliance with SEC reporting obligations. Management has engaged an external advisor to assist in evaluating and documenting the design and operating effectiveness of our internal control over financial reporting, and their work is ongoing. With the help of third-party consultants, we have nearly completed the integration of the acquired systems from the Lung Acquisition into our financial and accounting systems. Additionally, we intend to develop and implement consistent accounting policies and internal control procedures and provide additional training to our accounting and financial reporting personnel. We continue to take actions to remediate the deficiencies in our internal control over financial reporting and are implementing additional processes and controls designed to address the underlying causes associated with the above-mentioned material weaknesses. Our internal control remediation efforts include the following: • Enhanced the execution of our risk assessment activities by evaluating whether the design of our internal controls appropriately addresses changes in the business (including changes to people, processes and systems) that could impact our system of internal controls. • Substantially completed the integration of the acquired systems from the Lung Acquisition into our financial and accounting systems to allow for systematic segregation of duties, and to enhance the accurate and timely preparation and review of financial statements and supporting schedules. In addition to implementing and executing the aforementioned activities, the following activities are expected to be completed in fiscal year 2024: • Continue to reassess staffing and add additional resources, as required, with the requisite technical accounting experience and training, to further allow for segregation of duties and to support our system of internal control. • As needed, we will also supplement our internal resources with third-party resources and enhance our corporate oversight and monitoring over these resources, process-level controls and structures to ensure that there is appropriate assignment of authority, responsibility, and accountability. • Engage a third-party to assist in redesigning, documenting, and testing the internal control activities that support the Company’s timely preparation and review of account reconciliations, financial statements and supporting schedules. • Continue to report regularly to the audit committee on the progress and results of the remediation plan, including the identification, status and resolution of internal control deficiencies. The material weaknesses will not be considered remediated until management completes the design and implementation of the measures described above and the controls operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. Management believes that the remediation measures described above will be implemented in a manner such that the controls can be tested, and the identified material weaknesses can be determined to be remediated, however, no assurance can be made that such remediation will occur or that additional material weaknesses will not be identified. Changes in Internal Control Over Financial Reporting Except for the above noted and previously reported material weaknesses and the related ongoing remediation activities described above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has occurred during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 28 PART II—OTHER INFORMATION