Catheter Precision, Inc. 10-Q

ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Executive Chairman of the Board and Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2024. Our objective in designing our disclosure controls and procedures is that they provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon this evaluation, due to the existence of the material weaknesses found in our internal controls over financial reporting described below, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of June 30, 2024, our disclosure controls and procedures were not effective at the reasonable assurance level. As disclosed in our Form 10-K for the year ended December 31, 2023 and Form 10-Q for the quarter ended March 31, 2024, for the reasons set forth therein, our Chief Executive Officer and Interim Chief Financial Officer had previously concluded that, as of March 31, 2023, June 30, 2023, September 30, 2023 December 31, 2023 and March 31, 2024 our disclosure controls and procedures were not effective at the reasonable assurance level. 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 and corrected on a timely basis. In preparation of our financial statements for the period covered by this report, we identified material weaknesses in internal control over financial reporting related to our control environment that existed as of June 30, 2024, as described below. Specifically, we identified material weaknesses with respect to (1) the lack of segregation of duties, (2) the lack of designed and operating review controls with respect to oversight of the financial reporting process, (3) errors with respect to the review of work performed by service providers, (4) errors in connection with accounting for the royalty obligation acquired in the merger with Old Catheter, (5) use of an incorrect discount rate in calculating the fair value of the royalty obligation, and (6) timing of revenue recognition. Notwithstanding the identified material weaknesses, management believes that the Financial Statements and related financial information included in this Quarterly Report, its quarterly report for the quarter ended March 31, 2024, and in its Quarterly and Annual Reports filed during and with respect to the year ended December 31, 2023, fairly present, in all material respects, our consolidated balance sheets, statements of operations, shareholders’ equity and cash flows as of and for the periods presented. Remediation Plan Management is in the process of developing a remediation plan and believes significant progress has been made, including the following remediation items: 1. Segregation of duties –All payroll items are now reviewed by our Interim Chief Financial Officer prior to processing the payroll. Invoices are entered by one clerk and checks cut by another, after approval from the Interim CFO authorizing which invoices to pay. Checks are signed by the Chief Executive Officer. Wires are entered by one clerk and approval is required by the Interim Chief Financial Officer. Addition of a permanent Chief Financial Officer would strength the reviews/controls already in place and a search is currently in process. 48 Table of Contents 2. Lack of designed and operating review controls with respect to oversight of the financial reporting process – A third party contractor prepares the financial reports and they are reviewed and approved by management prior to inclusion in any filings. Addition of a permanent Chief Financial Officer will create an additional layer of review. 3. Errors with respect to the review of work performed by service providers – work performed by service providers is reviewed and any errors identified are sent back to service provider for resolution before being incorporated into the company’s financial reports. 4. Errors in connection with accounting for the royalty obligations acquired in the merger with Old Catheter – the first royalty calculations did not include the royalty for LockeT inventor. Any new contracts are now reviewed by the Interim Chief Financial Officer for any assets or liabilities that would need to be recorded. 5. Use of an incorrect discount rate in calculating the fair value of the royalty obligation – Calculations are reviewed by management to ensure inputs are reasonable prior to incorporating the calculations into the Company’s financial reports. 6. Timing of revenue recognition – Revenue is recognized when product is delivered to the customer. We have implemented a tracking spreadsheet for all shipments which contains delivery date, and invoicing/recognition of revenue is then dated to match the delivery date. This is reviewed at month end by the Interim Chief Financial Officer to ensure revenue is recognized in the proper period. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. The Company will monitor the effectiveness of its remediation plans and will make changes management determines to be appropriate. Additional anticipated remediation measures include continuing assessment of the need to expand the Company’s current accounting and financial reporting teams to include individuals with requisite experience to meet the requirements associated with the increasing operations of a publicly traded company, establishment of policies and procedures to ensure full review and sign offs with respect to the inputs sent to third-party service providers as well as the reports and documentation upon the completion of their work prior to any adjustments being made to the financial statements, establishment of policies and procedures related to the review of all contracts the Company enters into to ensure any terms or conditions are evaluated for any accounting required or accounting treatment or disclosure, and establishment of policies and procedures to review the inputs to royalties payable and other fair value calculations as well as the outputs impacting the balance at each reporting period. Changes in Internal Control over Financial Reporting Except as noted above, there have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 49 Table of Contents PART II. — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the information disclosed under Item 3 — " Legal Proceedings " in the Fiscal 2023 10-K.