Item 4. Controls and Procedures
Item 4 – Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2021, the end of the period covered by the Original Filing. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer originally concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered
by the Original Filing were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed and submitted under the Securities Exchange Act of 1934, as amended, 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 management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
However, as a result of the matters described in the Explanatory Note to this Form
10-Q/A, the current Chief Executive Officer and current Chief Financial Officer re-evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by the Original Filing and concluded that such disclosure controls and procedures were not effective as of September 30, 2021, due to the material weaknesses identified and described below.
Material Weaknesses
Management identified the following material weaknesses in the Company’s
internal control over financial reporting as of September 30, 2022 :
a. The Company did not design and maintain an effective internal control environment as
former management failed to set an appropriate tone at the top. Specifically, certain members of senior management, including the Company’s former Chief Executive Officer and former Chief Financial Officer, engaged in conduct that was
inconsistent with the Company’s culture of compliance and Code of Ethics and Business Conduct.
b. The Company did not maintain a s ufficient complement of personnel with an appropriate level of knowledge about accounting for variable consideration related to customer incentive arrangements in a manner
commensurate with our financial reporting requirements.
These material weaknesses contributed to the following additional material weakness:
c. The Company did not design and maintain effective controls associated with approving, communicating, and accounting for incentive arrangements with customers, impacting the completeness and
accuracy of revenues, including variable consideration.
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These material weaknesses resulted in the restatement of our consolidated
financial statements for the year ended December 31, 2021, and the unaudited interim finacial information for the three and nine months ended September 30, 2021. These material weaknesses also resulted in adjustments to substantially all of our
accounts and disclosures for the interim and annual periods related to 2019, 2020, and 2021. Additionally, each of these material weaknesses could result in a misstatement of substantially all of our account balances or disclosures that would
result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan and Status
With oversight from the Audit and Finance Committee and input from the Board of
Directors, management has begun designing and implementing changes in processes and controls to remediate the material weaknesses and to enhance our internal control over financial reporting as noted below. Management and the Board of Directors,
including the Audit and Finance Committee, are working to remediate the material weaknesses identified herein. While the Company expects to take other remedial actions, actions taken to date include:
a. Appointment of a new Chief Executive Officer, a new Chief Financial Officer and a new Chief Accounting Officer; and
b. Termination of certain members of senior management as well as non-executive employees for violations of the Code of Ethics and Business Conduct;
In addition to the remedial actions taken to date, the Company is taking, or plans
to take, the following actions to remediate the material weaknesses identified herein:
a. Review and enhance the Company’s Code of Ethics and Business Conduct to clarify responsibilities related to the Company’s financial reporting and disclosures
and provide incremental training to Company personnel on the updated Code of Ethics and Business Conduct;
b. Implement written policies and procedures to provide governance and establish responsibility for oversight of incentive arrangements provided to customers,
including the appropriate delegation of authority for such approvals;
c. Formalize written policies and procedures to provide governance and establish responsibility for guidelines, documentation and oversight of product returns
from customers when a contractual right to return exists in a customer agreement;
d. Require and provide trainings for employees who have a role in negotiating, assessing, agreeing, and accounting for customer incentive arrangements with
distributors;
e. Provide training on new processes to individuals responsible for execution, oversight and review of customer incentive arrangements with customers;
f. Enhance processes to ensure all applicable terms and conditions for incentive-based programs and customer agreements are timely communicated to individuals
responsible for accounting and financial reporting;
g. Strengthen internal control over the accounting for customer incentive arrangements, including: (i) implementing formal controls to continuously review and
document the methodology and assumptions used in estimating variable consideration related to customer incentives, (ii) formal controls to ensure the accuracy of the estimated accrued liability analysis;
h. Evaluate finance and commercial operations talent and address identified gaps; and
i. Enhance training programs on revenue recognition for commercial and finance personnel.
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In addition, the Company took the following remedial actions to improve disclosure
controls and procedures:
a. Enhanced exisiting Disclosure Committee responsibilities through a more formal charter, which identifies members and sets forth the roles and responsibilities
of the Disclosure Committee, among other requirements; and
b. Implemented additional and enhance existing sub-certifications and internal management representation letters, including providing training on the purpose and
execution of these processes.
Management developed a detailed plan and timetable for the implementation of the
foregoing remediation efforts and will oversee the effective execution. In addition, under the direction of the Audit and Finance Committee, management will continue to identify and implement actions to improve the effectiveness of its disclosure
controls and procedures and internal control over financial reporting, including plans to enhance its resources and training with respect to financial reporting and disclosure responsibilities and make necessary changes to policies and procedures
to improve the overall effectiveness of such controls.
Management believes the foregoing efforts will effectively remediate the material
weaknesses described above. As the Company continues to evaluate and work to improve its internal control over financial reporting and disclosure controls and procedures, management may determine to take additional measures to improve controls or
determine to modify the remediation plan described above. The Company is working to remediate the material weaknesses as efficiently and effectively as possible and expects that remediation will go beyond December 31, 2022. At this time, the
Company cannot provide an estimate of costs expected to be incurred in connection with implementing this remediation plan; however, these remediation measures will be time consuming, will result in the Company incurring significant costs, and
will place significant demands on financial and operational resources.
As of the filing of this Form 10-Q/A, the material weaknesses described above have
not been remediated. The material weaknesses described above cannot be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are
designed and operating effectively. Accordingly, management will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the activities affected by the material weaknesses described above.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the three months ended September 30, 2021 that materially
affected, or were reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Reference to Part I, Item 1, Note 15 Commitments and Contingencies, in the Notes to
Unaudited Interim Consolidated Financial Statements of this Form 10-Q/A.
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.