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 June 30, 2022, the end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer 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 this report were not effective as of June 30, 2022 because of the material weaknesses in internal control over financial reporting, as described below under “Material Weaknesses in Internal Control over Financial Reporting.”
Notwithstanding the ineffective disclosure controls and
procedures as a result of the identified material weaknesses, the Chief Executive Officer and Chief Financial Officer have concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all
material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).
Material Weaknesses in Internal Control over
Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified the following material weaknesses in the Company’s
internal control over financial reporting as of June 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 sufficient 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 financial 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
In response to the matters discussed in the Explanatory Note, management is devoting
substantial resources to the planning and ongoing implementation of remediation efforts to address the material weaknesses described herein, as well as other identified areas of risk. These remediation efforts, summarized below, which either have
already been implemented or are continuing to be implemented, are intended to address both the identified material weaknesses and to enhance the Company’s overall internal control over financial reporting and disclosure controls and procedures.
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;
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 controls 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 based incentives, and (ii) formal controls to ensure the accuracy of the estimated accrued liability analysis;
h. Evaluate finance and commercial operations talent and address identified gaps;
i. Enhance training programs on revenue recognition for commercial and finance personnel.
In addition, the Company took the following remedial actions to improve disclosure
controls and procedures:
a. Enhanced existing 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.
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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.
As of the filing of this Form 10-Q, the material weaknesses
described above have not yet 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.
The Company’s management will continue to work towards full
remediation of these material weaknesses to improve its internal control over financial reporting.
Changes in Internal Control Over Financial
Reporting
There have been no changes in the Company’s internal
control over financial reporting that occurred during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Refer to Part I, Item 1, Note 15 Commitments and Contingencies, in the Notes to
Unaudited Interim Consolidated Financial Statements of this Form 10-Q.
Item 1A – Risk Factors
There have been no material changes to the risk factors as
disclosed in Part 1A, “Risk Factors” in the Company’s 2021 Form 10-K/A.
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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.