Host Digital Inc.
For the period ended Dec 31, 2024. Filed Mar 28, 2025.
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FY2024 · Filed Mar 28, 2025
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Item 9A. Controls and Procedures
We are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures. Our management, including our Principal Executive Officer and Principal Financial Officer, carried out an evaluation on internal controls during the year ended December 31, 2024 in regard to the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act. Based on the evaluation, our Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective.
Inherent Limitations of Internal Controls over Financial Reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ending December 31, 2024 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2024 and noted the material weaknesses as follows:
| ● | Failure to have properly documented and designed disclosure controls and procedures and testing of the operating effectiveness of our internal control over financial reporting. |
| ● | Failure to perform periodic cycle inventory counts and as such, does not monitor the inventory activity, between its semi-annual counts. In addition, the Company did not implement controls related to the review of inventory rollback and roll-forward procedures related to the year-end inventory counts. The Company did not implement segregation of duties surrounding the inventory purchase order process. |
| ● | Segregation of duties due to lack of personnel. |
| ● | Inadequacy in documenting accounts payable procedures and controls surrounding vendor master file changes. |
| ● | Segregation of duties due to lack of personnel. |
| ● | Failure to follow accounts payable policies and procedures for vendor information updates. |
| ● | Ineffective design and implementation over Information Technology General Controls (“ITGCs”): |
| (a) | Multiple individuals in the accounting software system have virtually unlimited access to the accounting application and to the inventory point of sale applications. As such, such individuals can post journal entries and change pricing, which poses a risk that duties amongst employees with incompatible roles are not adequately segregated. |
| (b) | Management does not evidence independent preparer and reviewer of journal entries, to demonstrate adequate segregation of duties, and the precision of the review of journal entries. |
| (c) | Ineffective design, implementation and operation of controls over logical user access, physical security, change management, cyber security, and vendor management. The Company should have had controls for: |
| (i) | Periodic review of access rights for networks and applications on a defined periodic basis, at least once per year; |
| (ii) | Ensuring adequate physical safeguards and environmental controls over the Company’s servers at all Company locations, including stores; |
| (iii) | Performing a cybersecurity assessment, training all personnel, performing phishing exercises, obtaining cybersecurity insurance; and performing third party audits when appropriate; |
| (iv) | IT program and data changes affecting the Company’s financial IT applications and underlying accounting records, should be identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate. |
| (v) | Obtaining and reviewing third party service provider SOC reports, and; |
| (vi) | Review of Service-Level Agreements (SLAs) for all IT service relationships across the Company to ensure active SLAs are in place and enforced. |
Our management concluded that considering internal control deficiencies, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of December 31, 2024 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Remediation Efforts
Following this assessment and during the twelve months ended December 31, 2024, we have undertaken an action plan to strengthen internal controls and procedures:
| ● | Establishing policies and procedures in the IT area to mitigate data breach, unauthorized access and address segregation of duties, as well as review key third party service provider SOC reports. |
We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
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