Recovering CPA/auditor here. If you're curious to what the second bullet point means...
When a CPA firm audits a public company, they're basically performing two parallel audits -- an audit of the books and records (i.e. are the numbers accurate/truthful?) and an audit of the internal controls over financial reporting (i.e are there procedures/controls to find correct errors/fraud?) This second audit is required because of Enron, basically.
Anyway, when the auditors find a big error, they will usually tell the Company how to fix it, so the books and records are fairly stated. However, since this error usually results from a deficiency in controls (i.e. you had nothing to catch this error), it is noted on the audit report on the internal controls.
A 'material weakness' is the worst kind of deficiency in internal controls. It basically means that an enormous error could occur (enormous in the sense that it would effect an investor's decision about buying or selling the stock) and the Company wouldn't be able to catch it/fix it or even know that it happens
In the S-1 they state:
"The material weakness that we and our independent registered public accounting firm identified occurred because (i) we had inadequate processes and controls to ensure an appropriate level of precision related to our revenue to cash reconciliation process, and (ii) we did not have sufficient resources with the adequate technical skills to meet the emerging needs of our financial reporting requirements"
So it basically means their accounting team was completely overwhelmed/inexperienced. My experience with software companies is that accounting is a total shitshow, so not surprising.
The surprising thing is that this weakness must be so pervasive, they can't predict with any confidence whether they will remediate it and be able to have sufficient controls over their numbers. So it sounds like they're probably trying to completely overhaul their accounting function while they try to go public. As a potential investor, wouldn't give me a huge deal of confidence in the accuracy of their financials. Pity the poor souls trying to fix this...
"To address this material weakness, we are hiring additional accounting, engineering, and business intelligence personnel and are implementing process level and management review controls to identify and address emerging risks. While we are undertaking efforts to remediate this material weakness, we cannot predict the success of such efforts or the outcome of our assessment of the remediation efforts at this time. We can give no assurance that our efforts will remediate this deficiency in internal control over financial reporting or that additional material weaknesses in our internal control over financial reporting will not be identified in the future."
When a CPA firm audits a public company, they're basically performing two parallel audits -- an audit of the books and records (i.e. are the numbers accurate/truthful?) and an audit of the internal controls over financial reporting (i.e are there procedures/controls to find correct errors/fraud?) This second audit is required because of Enron, basically.
Anyway, when the auditors find a big error, they will usually tell the Company how to fix it, so the books and records are fairly stated. However, since this error usually results from a deficiency in controls (i.e. you had nothing to catch this error), it is noted on the audit report on the internal controls.
A 'material weakness' is the worst kind of deficiency in internal controls. It basically means that an enormous error could occur (enormous in the sense that it would effect an investor's decision about buying or selling the stock) and the Company wouldn't be able to catch it/fix it or even know that it happens
In the S-1 they state:
"The material weakness that we and our independent registered public accounting firm identified occurred because (i) we had inadequate processes and controls to ensure an appropriate level of precision related to our revenue to cash reconciliation process, and (ii) we did not have sufficient resources with the adequate technical skills to meet the emerging needs of our financial reporting requirements"
So it basically means their accounting team was completely overwhelmed/inexperienced. My experience with software companies is that accounting is a total shitshow, so not surprising.
The surprising thing is that this weakness must be so pervasive, they can't predict with any confidence whether they will remediate it and be able to have sufficient controls over their numbers. So it sounds like they're probably trying to completely overhaul their accounting function while they try to go public. As a potential investor, wouldn't give me a huge deal of confidence in the accuracy of their financials. Pity the poor souls trying to fix this...
"To address this material weakness, we are hiring additional accounting, engineering, and business intelligence personnel and are implementing process level and management review controls to identify and address emerging risks. While we are undertaking efforts to remediate this material weakness, we cannot predict the success of such efforts or the outcome of our assessment of the remediation efforts at this time. We can give no assurance that our efforts will remediate this deficiency in internal control over financial reporting or that additional material weaknesses in our internal control over financial reporting will not be identified in the future."