Liqtech International Inc: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 22, 2023, and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Overview

LiqTech International, Inc. is a clean technology company that provides state-of-the-art gas and liquid purification products by manufacturing ceramic silicon carbide filters and membranes while also providing engineered systems. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in the following business areas: water treatment systems and services, ceramic membranes and systems for liquid filtration, diesel particulate filters (DPFs) to control soot exhaust particles from diesel engines, and plastic components for applications across various industries. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes that facilitate new applications and improve existing technologies. We market our products from our office in Denmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark.

The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly owned subsidiaries, which we collectively refer to herein as our “Subsidiaries”.

At present, we conduct our operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, Hobro, and Aarhus.

Our Strategy

Our strategy is to leverage our core competencies in material science, advanced filtration, automation and systems integration, creating differentiated products with compelling value propositions to penetrate attractive end markets with regulatory and ESG tailwinds. Essential imperatives associated with our strategy include the following:

• Develop and reinforce new products and applications to provide clean water and reduce pollution. We currently provide water filtration systems for scrubber technology providers, shipowners, and ship operators as well as tailored filtration systems for oil & gas clients, chemical producers, industrial wastewater applications, and other manufacturing companies. We are expanding our range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, global manufacturing, and chemical industries.
• Better penetrate existing end markets where our value proposition is strong. We have successfully sold products and installed systems into several end markets—including automotive/transportation, clean water and pool filtration, marine, industrial wastewater, and oil & gas. We are focused on targeting and activating new customers in these end markets while working with distributors, agents, and partners to access important geographic markets.
• Develop new end markets for our core products and applications. Our existing products and systems are relevant for and valuable to other end markets, and we regularly evaluate opportunities to partner with strategic customers to perfect new applications and validate associated value propositions.

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Results of Operations

The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.

The following table sets forth our revenues, expenses and net loss for the three months ended September 30, 2023 and 2022:

Revenue

Revenue for the three months ended September 30, 2023, was $5,070,446 compared to $3,305,534 for the same period in 2022, representing an increase of $1,764,912, or 53%. The favorable variance in revenue reflects a continued strengthening of our established business lines along with a significant increase in aftermarket sales, including membrane housings and general spare part sales, and increased deliveries for pool systems in Europe and Asia Pacific. Furthermore, the quarterly revenue benefitted from stable DPF activity, continued remediation work for marine systems, and progress on external R&D projects to further strengthen our technology base.

Gross Profit

Gross profit for the quarter ended September 30, 2023, of $948,565 (or 18.7% gross margin), increased $841,626, compared to a gross profit of $107,279 (or 3.2% gross margin) for the same period in 2022. The positive variance is a result of increased volume, an improved revenue mix with elevated contribution of high-margin aftermarket activities, enhanced pricing discipline, and targeted cost reductions. During the quarter, we have onboarded new hires to ramp up our ceramics manufacturing throughput, improve kiln utilization, and compress delivery lead times. Profitability was also underpinned by new quality and production optimization efforts, seeking to standardize our system and service delivery platforms.

Included in gross profit was depreciation of $663,938 and $436,257 for the three months ended September 30, 2023, and 2022, respectively, with the increase reflecting investments in manufacturing equipment and facilities as well as an accelerated depreciation schedule for select kiln equipment.

Expenses

Total operating expenses for the three months ended September 30, 2023, were $2,647,418, representing an increase of $260,123, or 11%, compared to $2,387,295 for the same period in 2022.

Selling expenses for the three months ended September 30, 2023, were $965,039 representing an increase of $288,619 or 43%, compared to $676,420 for the same period in 2022. The increase is attributable to the onboarding of additional sales representatives, including new sales leadership to help execute the Company’s strategy to increase established business and penetrate target end markets. In addition, the Company incurred increased investor relations and marketing costs during the quarter due to conference participation and associated travel.

General and administrative expenses for the three months ended September 30, 2023, were $1,253,779, representing a decrease of $175,536 or 12%, compared to $1,429,315 for the same period in 2022. The decrease is predominantly related to CEO transition and other management changes in the quarter ended September 30, 2022, and ongoing cost reductions, partly offset by IT-related costs associated with outsourcing of IT services, onboarding of new employees, and consulting expenses.

Included in general and administrative expenses were non-cash compensation of $143,195 and $382,111 for the three months ended September 30, 2023, and 2022, respectively.

The following is a summary of non-cash compensation:

Research and development expenses for the three months ended September 30, 2023, were $428,600, representing an increase of $145,076, or 51%, compared to $283,524 for the same period in 2022. The change was attributable to external costs related to finalizing ongoing projects, partially offset by a decrease in the average number of employees engaged in research and development activities, as the Company has streamlined and centralized the R&D function.

Other Income (Expenses)

Other Income for the three months ended September 30, 2023, was $270,143, representing a decrease in other income of $243,916, or 47%, compared to $514,059 for the comparable period in 2022, with the change reflecting a reduced gain on currency transactions, partially offset by increased interest income due to a more favorable deposit interest rate.

Net Loss

Net loss for the three months ended September 30, 2023, was $(1,414,230), representing an improvement of $338,434, or 19%, compared to $(1,752,664) recorded in the quarter ended September 30, 2022. The change was attributable to the increased volume from system and aftermarket sales and elevated gross profit margin due to realization of manufacturing efficiencies and associated cost reductions across our business. This was partially offset by increased operating expenses of $260,123, predominantly caused by onboarding of additional sales representatives and cost associated with finalizing ongoing R&D projects and reduced gain on currency transactions.

Comparison of the Nine Months Ended September 30, 2023, and September 30, 2022

The following table sets forth our revenues, expenses and net loss for the nine months ended September 30, 2023 and 2022:

Revenue

Revenue for the nine months ended September 30, 2023, was $14,071,984 (or 17.8% gross margin), representing an increase of $2,110,922, or 18%, compared to $11,961,062 (or 4.2% gross margin) recorded in for the same period in 2022. The positive variance reflects an increase in system sales and aftermarket activities, including increased spare parts and membrane housing orders, due to the establishment of a new, dedicated aftermarket organization, coupled with continued traction within our system business related to pool and marine system deliveries as well as oil & gas and industrial system applications. Furthermore, the period benefitted from a general increase in sales of plastic products and completion of external R&D projects.

The positive variance for the nine months ended September 30, 2023, was partly offset by a decrease in sale of ceramic products (DPF and membranes) as the period ended September 30, 2022, benefitted from delivery of a large legacy DPF order, and the Company is deliberately targeting an improved revenue mix consisting of higher-margin products.

Gross Profit

Gross profit for the nine months ended September 30, 2023, was $2,502,435 representing an increase of $2,001,475 or 400% compared to the gross profit of $500,960 reported for the same period in 2022. The increase derives from a reduction in cost of goods sold due to improved product mix and renewed pricing discipline within the recurring ceramic DPF business and the continued delivery of profitable system and aftermarket orders within the pool and phosphoric acid businesses.

The efforts specified above resulted in improved profitability, despite remediation costs related to legacy system deliveries and increased depreciation from recent investments in manufacturing equipment and facilities to improve kiln utilization and manufacturing throughput. Included in the gross profit was depreciation of $1,915,515 and $1,406,003 for the nine months ended September 30, 2023, and 2022, respectively.

Expenses

Total operating expenses for the nine months ended September 30, 2023, were $7,996,913, representing a decrease of $2,711,303, or 25%, compared to $10,708,216 for the comparable period in 2022, partly due to the restructuring costs of $1,786,863 incurred in the quarter ended June 30, 2022. Adjusting for the reported restructuring costs, total operating expenses decreased $924,440, or 9%.

Selling expenses for the nine months ended September 30, 2023, were $3,175,699, representing an increase of $242,818, or 8%, compared to $2,932,881 for the same period in 2022, primarily attributable to the onboarding of new sales and commercial leadership in 2023, partly offset by the ongoing focus on cost reduction and reduced bad debt expenses.

General and administrative expenses for the nine months ended September 30, 2023, were $3,690,211, representing a decrease of $921,164, or 20%, compared to $4,611,375 recorded in the same period of 2022. The decrease reflects reduced legal expenses and the absence of costs associated with the now-closed production facility in China, CEO transition and other transition costs, management changes executed in 2022. Non-cash compensation included in general and administrative expenses was $494,293 and $782,360 for the nine months ended September 30, 2023, and 2022, respectively.

The following is a summary of non-cash compensation:

Research and development expenses for the nine months ended September 30, 2023, of $1,131,003 represented a decrease of $246,094, or 18%, compared to $1,377,097 recorded for the same period in 2022. The decrease was attributable to the centralization of R&D to inspire more focused R&D efforts, partially offset by costs related to completion of external R&D projects in the third quarter of 2023.

Restructuring costs for the nine months ended September 30, 2023, were $0 compared to $1,786,863 for the same period in 2022. The restructuring program was executed in the second quarter of 2022.

Other Income (Expenses)

Other Income for the nine months ended September 30, 2023, was $92,360, representing an increase of $1,933,525, compared to $(1,841,165) for the comparable period in 2022. The favorable variance is predominantly a result of early repayment of the Convertible Note in the second quarter of 2022, including associated amortization cost incurred, and increased interest income due to a more favorable deposit interest rate, offset by a lower gain on currency transactions, the non-recurring gain on the lease termination related to the now-closed production facility in China, and the receipt of COVID-19 grants in the second quarter of 2022.

Net Loss

Net loss for the nine months ended September 30, 2023, was $(5,359,025) compared to $(12,006,147) for the comparable period in 2022, representing an improvement in net loss of $6,647,122. The improvement was attributable to increased volume; the favorable trend in gross profit margin due to improved mix from system sales and aftermarket activities, and cost efficiencies realized through elevated manufacturing throughput, reduced operating expenses from the absence of restructuring costs incurred in the quarter ended June 30, 2022, and the reduction in other expense following the repayment of the Convertible Note in 2022.

Liquidity and Capital Resources

Based on the prevailing market volatility and macro-economic uncertainty, including the geopolitical unrest pertaining to the Middle East and the Russia/Ukraine conflicts, the Company is unable to predict the full impact this will have on its long-term financial condition, results of operations, liquidity, and cash flows. The Company has recently planned and executed on decisive measures to help safeguard the business and its financial position by reducing cost, headcount controlling, and overall capex commitments, improving the Company’s ability to fund investments and general operating expenses from anticipated future Company profits.

Furthermore, in relation to the delivery and installation of new machinery and equipment to facilitate revenue growth, the Company has secured approximately $1.4 million of new finance leases from financial institutions to further strengthen its liquidity. On September 30, 2023, the Company proactively addressed the maturity of the $6 million senior promissory notes, extending the original maturity from June 2024 to January 2026 with terms and conditions that are aligned with the original agreement dated on June 22, 2022.

Based on current projections, which are subject to significant uncertainties, including the duration and severity of global macroeconomic issues, geopolitical instability, commodity price volatility, and continued global supply chain disruptions, the Company believes that the cash on hand, as well as ongoing cash generated from operations, will be sufficient to cover its capital requirements and committed investments for the next 12 months.

Continued market uncertainty and reduced order intake caused by weakening global macroeconomic conditions, continued and escalating geopolitical instability, or a resurgence of the COVID-19 pandemic, however, could unfavorably impact the Company’s ability to generate positive cash flow and thereby significantly reduce its profitability and liquidity position.

While the Company anticipates that its proactive measures will be sufficient to protect the business over the coming 12 months, the Company cannot predict the specific duration and severity of the unfavorable market dynamics that may adversely affect the business. In the future, the Company may experience reduced or changed demand characteristics for its products and services, especially if there is a global recession, structural shift in regulation, or the continuation of escalating interest rates that adversely impacts the investment decisions of our customers.

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. On September 30, 2023, we had cash of $11,832,959 and net working capital of $16,836,699, and on December 31, 2022, we had cash of $16,597,371 and net working capital of $21,581,287. On September 30, 2023, our net working capital had decreased by $4,744,588 compared to December 31, 2022, mainly due to a reduction in cash and cash equivalents.

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee, or a security bond. For that purpose, we maintain a guaranteed credit line of EUR 850,000 (approximately $900,000). The credit line is secured by a cash deposit.

Going Concern and Management’s Plans

The financial statements included herein for the period ended September 30, 2023, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. As of September 30, 2023, we had cash and cash equivalents of $11,832,959, net working capital of $16,836,699, an accumulated deficit of $72,710,060, and total assets and liabilities of $36,839,028 and $17,563,507, respectively. We have incurred losses from continuing operations, used cash in our continuing operations, and remain dependent on external financing to fund operations. These conditions raise substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The Company has initiated substantial cost reductions and profitability improvement measures to help right-size the business and develop a clear and sustainable path to profitability, further underpinned by an updated strategy and onboarding of key executives. There can be no assurance, however, that the Company will be able to obtain any sources of funding. Such additional funding may not be available or may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources could be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

Convertible Note

On March 24, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior convertible note (the “Convertible Note”) maturing on October 1, 2023 and 10,000 shares of our Common Stock, for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Securities Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the closing.

The Convertible Note was a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity (October 1, 2023), or earlier upon redemption or repurchase as set forth in the Convertible Note. The Convertible Note was convertible into shares of Common Stock pursuant to the terms of the Convertible Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate was 805.3992 shares of Common Stock per $1,000 of principal amount of the Convertible Note. The conversion rate was subject to anti-dilution adjustments, including for stock dividends, splits, and combinations; issuances of options, warrants, or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Convertible Note.

Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company was required to redeem $840,000 of the amounts due under the Convertible Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $14.00 per share. Beginning on March 1, 2022, the Company paid the first monthly installment of $840,000 in cash.

As of June 22, 2022, the Note, including accrued interest and all relevant obligations, was repaid in full, amounting to $13,446,875 and allocated between a principal repayment of $11,640,000 and contractual repayment premium of $1,806,875.

Senior Promissory Notes

On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $6.0 million (the “Notes”) and issued warrants to purchase 531,250 shares of Common Stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the “Purchasers”), pursuant to a Note and warrant purchase agreement entered into with the Purchasers.

The Notes have a term of 24 months and do not bear interest during this period. If the Notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10% per annum, which will increase by 1% each month the Notes remain unpaid, up to a maximum of 16% per annum, payable monthly.

On October 13, 2023, the Company and the Purchasers entered into an amendment to the Note and Warrant Purchase Agreement (the “Amendment”) and Allonge No. 1 to each of the Notes (collectively, the “Allonges”) effective as of September 30, 2023, pursuant to which the Company and the Purchasers extended the maturity date of the Notes from June 20, 2024, to January 1, 2026 (the “Extension”). As consideration for the Extension, simultaneously with the entry into the Amendment and Allonges, the Company issued to the Purchasers additional warrants to purchase an aggregate of 531,250 shares of Common Stock at an exercise price of $5.20 per share, subject to adjustment as provided therein (the “2023 Warrants”). The 2023 Warrants are exercisable at any time prior to the five-year anniversary of the initial exercise date of September 30, 2023. The Amendment qualifies as a modification and entitles the Purchasers to registration rights with respect to the shares of Common Stock issuable upon exercise of the 2023 Warrants pursuant to the existing Registration Rights Agreement, dated June 22, 2022, by and between the Company and the Purchasers.

Cash Flows

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Cash flows from operating activities for the period ending September 30, 2023 consist of the net loss for the period, adjusted for non-cash items and changes in assets and liabilities. Cash flows from operating activities for the nine months ended September 30, 2023 were $(2,973,663), representing an improvement of $8,509,273 compared to $(11,482,936) for the nine months ended September 30, 2022. The favorable change reflects the reported improvement in net loss benefiting from an improved gross profit and a general reduction in both operating and other expenses adjusted for depreciation and other non-cash-related items, and further underpinned by a reduction in Changes in assets and liabilities of $3,976,848 for the nine months ended September 30, 2023 compared to the same period in 2022, mainly caused by a reduction in prepaid expenses and increase in accrued expenses.

Cash flows from investing activities were $(2,261,131) for the nine months ended September 30, 2023 as compared to $(791,881) for the nine months ended September 30, 2022, representing an increase of $1,469,250. The investing activities were mainly related to growth investments in new machinery for ceramics production, as we redirected purchased and inbound equipment from our closed facility in China, as well as general maintenance investments across our manufacturing facilities.

Cash flows from financing activities were $718,327 for the nine months ended September 30, 2023 compared to $13,359,415 for the nine months ended September 30, 2022, representing a decrease of $12,641,088. The decrease was mainly driven by the equity raise recorded in May 2022, generating net proceeds of $24,418,612 from the issuance of Common Stock and prefunded warrants, coupled with proceeds of $6,000,000 from the issuance of the new Senior Promissory Notes, and partly offset by the full repayment of the Convertible Note issued in April 2021 of $16,800,000.

Off Balance Sheet Arrangements

As of September 30, 2023, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

Significant Accounting Policies and Critical Accounting Estimates

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:

• The assessment of revenue recognition, which impacts revenue and cost of sales;
• the assessment of allowance for product warranties, which impacts gross profit;
• the assessment of collectability of Accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts;
• the assessment of recoverability of long-lived assets, which impacts gross profit or operating expenses when and if we record asset impairments or accelerate their depreciation;
• the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;
• the valuation of inventory, which impacts gross profit;
• the recognition and measurement of loss contingencies, which impact gross profit or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment; and
• the valuation of warrants issued in connection with the Senior Promissory Notes, which impacts other income (expense).

Recently Enacted Accounting Standards

For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 1: Recently Enacted Accounting Standards” in the accompanying Financial Statements.

We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Quarterly Report. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2023 were not effective as of the period covered by this Quarterly Report due to material weaknesses in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 31, 2023 for the year ended December 31, 2022.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management's Remediation Initiatives

In response to the identified material weaknesses, Company management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company has hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2023 by improving competencies and work processes. Further, the Company made an investment in a new ERP system along with other supporting IT systems to support the controls and processes of the Company. These investments are an important part of our remediation plan. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to financial reporting to ensure the effective design and operation of process-level controls.

While management believes that the steps taken and those planned will improve internal control over financial reporting and will remediate the identified material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable relevant controls operate for a sufficient period of time.

Limitations on the Effectiveness of Internal Controls

An internal 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, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of 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 control. 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, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

While management believes that the steps that we have taken and plan to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.