What changed in this filing

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Item 4. Controls and Procedures

2023-05-10 compared with 2022-11-09 · 44 added, 43 removed, 13 unchanged (87% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

principal financial officer, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022.

Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weaknesses identified during the three months ended June 30, 2022, in addition to those previously identified and disclosed in our 2021 Annual Report.

A material weakness is a deficiency, or 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 determined that the previously disclosed material weaknesses in its internal control over financial reporting continue to exist at September 30, 2022.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023.

Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weaknesses previously identified and disclosed in our 2022 Annual Report and listed below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management determined that the previously disclosed material weaknesses in its internal control over financial reporting continue to exist at March 31, 2023.

Specifically:

Control Environment and Monitoring Activities – We did not maintain appropriately designed entity-level controls impacting the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements.

These deficiencies were attributed to (i) a lack of a sufficient number of qualified resources and inadequate oversight and accountability over the performance of control activities, and (ii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.

Control Environment, Risk Assessment and Monitoring Activities – We did not maintain appropriately designed entity-level controls impacting the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements.

These deficiencies were attributed to (i) a lack of a sufficient number of qualified resources and inadequate oversight and accountability over the performance of control activities, (ii) ineffective identification and assessment of risks to properly design and implement relevant controls, and (iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.

Control Activities – These material weaknesses contributed to the following additional material weaknesses within certain business processes:

• Inventory – We did not appropriately design and implement controls over the existence, accuracy, and cutoff of inventory.

As previously reported, we identified a material weakness relating to inventory cut-off and in-transit inventory.

• Revenue Recognition – (i) We did not design, implement and maintain effective controls over revenue recognized for certain contracts relating to the proper application of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.

Specifically, we did not maintain effective controls relating to the (1) identification and recognition of performance obligations for customer contracts and (2) evaluation of customer contracts for potential combination.

• Accounts Receivable – We did not fully design, implement and maintain effective controls over the existence of accounts receivable.

Specifically, we did not design certain controls at an appropriate precision level to identify material misstatements.

• Sales Order Entry – We did not design, implement and maintain effective controls over the accuracy of revenue, specifically related to the sales order entry process.

We did not maintain effective controls over contract entry to ensure accurate recording in our information systems.

• Consolidation - We did not design, implement and maintain effective controls over the consolidation of our foreign subsidiaries which resulted in a classification error of certain personnel costs in the consolidated Company financial statements.

• Inventory – We did not appropriately design, implement, and execute controls over the existence, accuracy, and cutoff of inventory.

• Revenue Recognition – We did not appropriately design, implement and maintain effective controls over revenue recognition, relating to the proper application of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.

• Accounts Receivable – We did not appropriately design, implement and maintain effective controls over the existence of accounts receivable.

Specifically, we did not design certain controls at an appropriate precision level to ensure the identification of material misstatements.

• Financial Reporting, Consolidation and Business Combination – We did not appropriately design, implement and maintain effective controls over the financial reporting process.

Specifically, we did not maintain effective controls related to (i) preparation of consolidated financial statements, (ii) the accounting for the business combination, including management review controls over the valuation and purchase price allocation, at an appropriate level of precision to detect a material misstatement, and (iii) consolidation of our subsidiaries.

In addition, we did not maintain sufficient appropriate audit evidence to demonstrate execution of the related controls.

• Foreign Currency – We did not appropriately design, implement, and execute controls over foreign currency, including (i) lack of identifying and recording our foreign subsidiaries’ goodwill and intangibles balances in the proper functional currency in our consolidated financial statements, and (ii) performing proper foreign currency translations.

This resulted in the restatement of the Company’s interim unaudited condensed consolidated financial statements.

• STI - Although management did not conduct a formal assessment of internal controls over financial reporting of STI as of March 31, 2023, management has identified material weaknesses in internal controls over financial reporting relating to STI as follows:

◦ We did not design, implement and monitor general information technology controls in the areas of program change management, user access, and segregation of duties for systems supporting substantially all of STI’s internal control processes.

◦ We did not design and implement formal accounting policies, procedures and controls across substantially all of STI’s business processes to achieve timely, complete and accurate financial accounting, reporting, and disclosures.

After giving full consideration to these material weaknesses, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S.

1 unchanged sentence

Remediation Plan for Existing Material Weaknesses

We are in the process of, and continue to focus on, designing and implementing effective measures to strengthen our internal controls over financial reporting and remediate the material weaknesses.

We are in the process of, and continue to focus on, designing and implementing effective measures to strengthen our internal controls over financial reporting (“ICFR”) and remediate the material weaknesses.

Our planned remediation efforts include the following:

Control Environment and Monitoring – Consistent with the Committee of Sponsoring Organizations of the Treadway Commission’s 2013 Internal Control — Integrated Framework (COSO 2013 Framework), Principle 4, attracting, developing, and retaining competent personnel, we hired a Chief Accounting Officer (“CAO”) who is providing an additional level of technical accounting expertise, oversight, and monitoring of the design and performance of both existing and newly implemented controls as noted below.

Subsequent to the addition of the new CAO, we have hired and will continue to hire additional resources throughout the remainder of 2022 in accounting and IT to supplement our existing capabilities and capacity, and we will concentrate on retaining key accounting, IT, and operational personnel.

These actions will further serve to remediate the material weakness under the COSO 2013 Framework, Principle 16, by enhancing the efforts towards separate evaluations regarding the presence and functionality of the components of internal control, specifically in the areas of inventory, revenue recognition, accounts receivable, sales order entry, and the consolidation process as noted below.

Control Environment, Risk Assessment and Monitoring – We have hired and will continue to hire additional resources throughout 2023 in accounting and IT to supplement our existing capabilities and capacity;

and we will concentrate on retaining key accounting, IT, and operational personnel.

Additionally, we will continue to engage additional resources with specific focus on STI internal controls as well as future business combinations.

Finally, we will continue to enhance the design and operation of monitoring controls and other activities that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting.

Control Activities:

• Inventory – We are enhancing the design of existing controls and are implementing new controls over the accounting, processing, and recording of inventory.

Specifically, we have strengthened the design of the management review control over inventory-in-transit.

Additionally, we have implemented processes to ensure timely identification and evaluation of inventory cut-off and are requiring additional accountability from counterparties on the accuracy of incoming and outgoing shipment documentation.

We have deployed information system enhancements and improved the use of current system capabilities in order to improve the accuracy of inventory cut-off, reporting, and reconciliation.

• Revenue Recognition – We have enhanced the design of existing controls and have implemented new controls over the review of the application and recording of revenue for customer contracts under the guidance outlined in ASC 606.

We have also designed and implemented more precise reviews and documentation regarding evaluation of contract terms and whether contracts should be combined.

These reviews include increased contract analysis from our legal team as well as ensuring qualified

resources are involved and adequate oversight is performed during the internal technical accounting review process.

• Accounts Receivable – We have enhanced the design of existing controls and implemented new controls over the processing and review of accounts receivable billings.

We are supplementing our accounting staff with more experienced personnel.

In addition, we will continue to evaluate information system capabilities in order to reduce the manual calculations within this business process.

• Sales Order Entry Process – We are enhancing the design of our existing controls over contract value adjustments.

Specifically, we have implemented additional procedures for our accounting staff to obtain and review documentation to confirm that contract value changes completed by the sales order entry process are accurate.

In addition, we will evaluate information system capabilities to reduce the manual calculations within this business process.

• Consolidation Process – We are enhancing the design of existing controls over the consolidation of foreign entities into the Company’s consolidated financial statements.

Additionally, we will strengthen the design of the management review control over the consolidation process include better-documented review criteria, review responsibilities and review expectations.

In addition, we will evaluate information system capabilities to further automate the partially manual consolidation process.

While these actions taken and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to review our internal control over financial reporting.

• Inventory – We are in the process of implementing planned information system enhancements and the expansion of current information system capabilities, which will result in more reliance on a combination of manual and automated controls.

Additionally, we will enhance existing controls and will implement new controls over the accounting, processing and recording of inventory.

Specifically, we have strengthened the operation of control activities over inventory-in-transit, deploying multiple levels of review and validation of information and supporting documentation.

We expect to deploy final phases of information system enhancements in 2023.

• Revenue Recognition – We have begun to evaluate information system capabilities in order to reduce the manual calculations within this business process.

Additionally, we will continue to enhance the design of existing controls to ensure completeness and accuracy of underlying source data for revenue recognition and customer billing.

Lastly, we will continue to supplement our accounting staff with more experienced personnel which will enable us to incorporate an additional level of review.

• F oreign Currency – We have begun information system enhancements which will automate this currently manual process.

In the interim, we continue to enhance the design of existing controls and processes related to the foreign currency translation process and over the consolidation of foreign entities into the Company’s condensed consolidated financial statements.

• Other Areas – We have begun remediation activities, which include enhancing the design and operating effectiveness of controls around our ICFR.

We are actively working with an outside firm to assist management with (i) reviewing our current processes, procedures, and systems to assess our ICFR to identify opportunities to enhance the design of controls to address relevant risks identified by management, and (ii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls.

Additional activities in process include the following:

◦ Continuing to enhance and formalize our accounting and business operations policies, procedures, and controls to achieve complete, accurate, and timely financial accounting, reporting and necessary disclosures;

◦ Enhancing policies and procedures to retain adequate documentary evidence for relevant management review controls over certain business processes including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls;

◦ Developing monitoring controls and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.

While these actions currently in process are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to review our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

We acquired STI on January 11, 2022.

As a result, we are reviewing the impact of the acquisition to our overall control environment and are making appropriate changes as deemed necessary to our control structure.

The scope of management’s assessment of the effectiveness of the Company’s disclosure controls and procedures for fiscal year end 2022 will not include the internal control over the financial reporting of STI, in accordance with the SEC’s staff guidance that permits exclusion of acquisitions from their final assessment of internal control over financial reporting for the fiscal year in which the acquisition occurred.

Due to the size, breadth and complexity of STI’s global operation, management’s evaluation of internal control over financial reporting for the fiscal year ended December 31, 2022 will exclude the internal control activities of STI.

STI represented 15% of total consolidated assets of the Company at September 30, 2022, excluding goodwill and intangible assets which are included within the scope of management’s assessment, and approximately 24% and 20% of total consolidated revenues of the Company for the three and nine months ended September 30, 2022, respectively.

Except for the changes in internal control related to the acquisition of STI, there have been no changes to our internal control over financial reporting during the three months ended September 30, 2022, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

The scope of management’s assessment of the effectiveness of the Company’s disclosure controls and procedures for fiscal year end 2022 did not include the internal control over the financial reporting of STI, in accordance with the SEC’s staff guidance that permits exclusion of acquisitions from their final assessment of internal control over financial reporting for the fiscal year in which the acquisition occurred.

STI will be included in management’s final assessment of internal control over financial reporting for fiscal year end 2023.

Other than as discussed above, there were no other changes to our internal control over financial reporting during the three months ended March 31, 2023, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 4. Controls and Procedures