DAKTRONICS INC /SD/ 10-Q

Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as of October 29, 2022, which is the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of that date, our disclosure controls and procedures were not effective, at a reasonable assurance level, because of material weaknesses in internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures. In making this assessment, management used the criteria set forth in the “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. Remediation efforts to address the material weakness are described below under the section “Remediation Plan”. Background In conducting our assessment of our ability to continue as a going concern we failed to consider the income tax implications which resulted in us recording a material adjustment of $14.8 million. The specific deficiencies identified and the related components of the COSO framework impacted by these deficiencies are discussed below under the section “Material Weaknesses.” A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. Material Weaknesses Information and Communication We have identified a deficiency in a principle associated with the information and communication component of the COSO framework which individually constitutes a material weakness related to the following principle: “The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of other components of internal control.” We failed to timely communicate the result of our going concern assessment to all appropriate internal parties necessary which led to us not considering the impact of the going concern assessment on the valuation of our deferred tax assets. This deficiency contributed to the potential for there to have been material errors in our financial statements and therefore resulted in the following additional material weakness: Control Activities Management did not appropriately design its going concern policy control to contemplate evaluating the income tax implications when reaching a substantial doubt going concern conclusion. 29 Table of Contents These material weaknesses did not result in any uncorrected misstatements in the current period unaudited condensed consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by us, and there were no changes in previously released financial results. Remediation Plan The remediation plan includes, but is not limited to: 1. Implementing a policy that our going concern analysis should be communicated and provided to appropriate members of the organization, including our tax department so they can consider the impacts of our going concern conclusion. 2. Implementing a control activity that considers results of our going concern analysis when determining the valuation of deferred taxes and other reporting and disclosures when preparing our financial statements. Management can give no assurance that the measures it has undertaken have fully remediated the material weaknesses that it has identified or that additional material weaknesses will not arise in the future. Management will continue to monitor the effectiveness of these and other processes, procedures, and controls and will make any further changes that management determines to be appropriate. Changes in Internal Control Over Financial Reporting Except for the identification of the material weaknesses described above, there were no changes during the quarter ended October 29, 2022 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not applicable.