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Item 9A. Controls and Procedures

2024-03-11 compared with 2023-04-17 · 48 added, 51 removed, 128 unchanged (44% of the section changed)

1 unchanged sentence

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), which have been designed to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were not effective as of December 31, 2022, as a result of the material weaknesses in our internal control over financial reporting detailed below.

Notwithstanding our material weaknesses, we have concluded that the financial statements and other financial information included in this Form 10-K fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), which have been designed to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were not effective as of December 31, 2023, as a result of the material weaknesses in our internal control over financial reporting discussed below.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

We have excluded Sullivan Environmental Technologies, Inc ("Sullivan"), Cisco Air Systems, Inc.

("Cisco"), Drydon Equipment, Inc.

("Drydon"), and Burlingame Engineers, Inc.

("Burlingame") from our assessment of internal control over financial reporting as of December 31, 2022 because they were acquired by the Company in purchase business combinations during 2022.

The total assets and total sales of these wholly-owned subsidiaries collectively represent approximately 3 percent, respectively for each, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control – Integrated Framework (2013).

Based on this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2022 as a result of the material weaknesses detailed below.

Based on this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2023 as a result of the material weaknesses described below.

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

The Company did not design and maintain an effective control environment commensurate with its financial reporting requirements.

Specifically, the Company lacked a sufficient complement of resources with (i) an appropriate level of accounting knowledge, experience and training to appropriately analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level of knowledge and experience to establish effective processes and controls.

This material weakness contributed to the following additional material weaknesses:

• The Company did not design and maintain effective controls over the timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts.

Specifically, controls were not designed appropriately to ensure that aged items were properly cleared from the sub-ledger and ultimately accounts payable.

This material weakness resulted in a restatement of previously reported results related to periods including and prior to December 31, 2020, as previously reported in our Form 10-K for the year ended December 31, 2021.

Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Specifically, the Company lacked a sufficient complement of resources with an appropriate level of Company knowledge and experience to establish effective processes and controls.

This material weakness contributed to the following additional material weakness:

The Company did not design and maintain effective controls over the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue.

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Additionally, within the Company’s product sales and service revenue streams, controls were not designed and maintained to ensure the accuracy of the price and quantity, including the approval of credit memos, the existence of a customer contract, and appropriate cut-off during the revenue recognition process.

This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the years ended December 31, 2021 and 2022, and out-of-period adjustments related to revenue during the year ended December 31, 2022.

• The Company did not design and maintain effective controls to ensure appropriate segregation of duties and adequately review user access to transactions within business processes relevant to significant accounts and disclosures within the general ledger system across the Company.

Specifically, the Company did not design and maintain effective controls over user roles and segregation of duties for functional access to transactions.

As a result, there was a lack of segregation of duties within the Company's financial reporting function, specifically within the accounts payable, revenue, and journal entry processes.

This material weakness did not result in adjustments to the consolidated financial statements.

However, this material weakness could result in a material misstatement to the accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our Consolidated Financial Statements as of December 31, 2022 and for the year then ended and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 as stated in their reported which appears in Item 8 of this Form 10-K.

This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the years ended December 31, 2021 and 2022, and immaterial out-of-period adjustments related to revenue during the years ended December 31, 2022 and 2023.

The above material weaknesses could result in a misstatement of the Company’s accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 as stated in their report which appears in Item 8 of this Form 10-K.

REMEDIATION PLAN

In relation to the material weakness in our control environment, the Company has hired a total of seven CPAs in various positions and functions since December 31, 2022.

The Company has hired a Chief Accounting Officer, a Director of Technical Accounting, three assistant controllers, a Director of Tax, and established and expanded its technical accounting and SEC financial reporting groups.

In addition to that, the Company has continued to strengthen its tax, accounts payable and accounts receivable groups.

These are key individuals with the appropriate level of accounting knowledge, experience, and training to appropriately analyze, record, and disclose accounting matters timely and accurately as well as establish effective processes and controls.

These individuals are responsible for the implementation of processes and controls required to remediate the remaining material weakness.

At this point, management believes it has added the necessary talent and resources with the proper accounting knowledge to support the Company’s growth and to continue to strengthen its internal control over financial reporting, and the remediation of this material weakness is only dependent on additional time to remediate the remaining material weakness.

In relation to the material weakness related to revenue, the controls necessary to address the portion of the material weakness related to revenue recognized under the percentage of completion input method have been designed and implemented during the year ended December 31, 2023.

These controls are designed to ensure accuracy of the cost-to-date, estimates of the cost-to-complete and the determination of revenue recognized for certain project-based contracts.

Although these controls have been designed and implemented, we will continue to evaluate whether further enhancement or modification to these controls in future periods are needed.

This material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively.

Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over financial reporting.

Our planned remediation efforts related to the above identified material weaknesses include, but are not limited to:

• engaging external resources to assist with remediation efforts and internal control execution, as well as to provide additional training to existing personnel;

• hiring additional and retaining key internal resources with the appropriate knowledge and technical expertise to effectively operate financial close and reporting processes and controls over complex technical accounting matters;

• reviewing existing systems and capabilities to determine their adequacy for operations, accounting and IT;

• implementing improved accounting, operations and IT policies, procedures and control activities for key processes and systems which impact our financial reporting;

• performing additional training to ensure a clear understanding of risk assessment, controls and monitoring activities related to processes and systems related to financial reporting.

We began implementing certain of these measures in the second quarter of 2022 and continued to develop remediation plans and implemented additional measures throughout 2022.

These measures included:

• hiring a new Director of Accounts Payable and designing and implementing new processes to ensure that the Company does not have any untimely balances in accounts payable;

• designing and implementing processes and controls to ensure that the costs-to-date and estimates of the cost-to-complete for certain project-based contracts were improved and supported by automated processes and reporting.

While the Company has begun to implement the remediation steps detailed above, the Company has further steps to consider before remediation is complete.

Material weaknesses cannot be considered fully remediated until the improved controls have been in place and operate for a sufficient period of time.

We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify.

See the section titled “Risk Factors"—we identified material weaknesses in our internal control over financial reporting.

If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and stock price.

Changes in Internal Control Over Financial Reporting

Our planned remediation efforts related to the above identified material weaknesses include a continuous effort to further enhance our revenue recognition controls and procedures.

Management expects these material weaknesses will be remediated during the year ended December 31, 2024.

REMEDIATION OF PREVIOUSLY IDENTIFIED MATERIAL WEAKNESSES

As of December 31, 2023, management has concluded that the previously reported material weaknesses related to the following matters have been remediated:

(i) timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts, and (ii) segregation of duties and user access.

In relation to the previously existing material weakness identified related to the timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts, as of December 31, 2023, management has remediated this material weakness by effectively designing, implementing, and operating the necessary controls to ensure a timely clearing of discrepancies arising from the three-way match process of matching purchase orders, invoices, and item receipts.

In relation to the previously existing material weakness identified related to the lack of segregation of duties and controls related to user access, as of December 31, 2023, management has remediated this material weakness by effectively designing, implementing, and operating the necessary controls to ensure appropriate segregation of duties and adequately review user access to transactions within business processes relevant to significant accounts and disclosures within the general ledger system across the Company.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three months ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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221432621) filed with the Commission on November 29, 2022).

10.15 Amendment No.

2 and Joinder Agreement to Term Loan and Security Agreement, dated as of October 13, 2023, among the Company, certain subsidiaries of the Company, as guarantors, the incremental lenders party thereto and Goldman Sachs Bank USA, as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

231329097) filed with the Commission on October 17, 2023).

10.16 Second Amendment to Amended and Restated Loan and Security Agreement, dated as of October 13, 2023, among the Company, certain of the Company’s US subsidiaries, a borrowers, certain of the Company’s US subsidiaries, as guarantors, certain of the Company’s Canadian Subsidiaries, as borrowers, the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No.

231329097) filed with the Commission on October 17, 2023).

*21.1 Subsidiaries of the Company.

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*23.2 Consent of McConnell & Jones LLP, Independent Registered Public Accounting Firm.

*23.3 Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.

*31.1 Certification of Principal Executive Officer Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

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1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

*97 DXP Enterprises , Inc.

Exec utive Compensation Clawback Policy

*101 The following materials from the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023, formatted in Inline XBRL (Inline eXtensible Business Reporting Language):

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President and Chief Executive Officer

April 17, 2023

Each person whose signature appears below appoints David R.

Little, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, with full power and authority to said attorney-in-fact and agent to do and perform each and every act whatsoever that is necessary, appropriate or advisable in connection with any or all of the above-described matters and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue thereof.

March 11, 2024

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

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Little Chairman of the Board, President

Little Chief Executive Officer and Director April 17, 2023

Little Chief Executive Officer and Director March 11, 2024

(Principal Executive Officer)

/s/Kent Yee Senior Vice President Corporate Development April 17, 2023

/s/Kent Yee Senior Vice President Corporate Development March 11, 2024

Kent Yee Chief Financial Officer, Secretary and Director

(Principal Financial Officer and Principal Accounting Officer)

(Principal Financial Officer)

/s/David Molero Santos

Vice President and Chief Accounting Officer

March 11, 2024

David Molero Santos

(Principal Accounting Officer)

/s/Timothy P.

Halter Director April 17, 2023

/s/David Patton Director April 17, 2023

/s/Joseph Mannes Director April 17, 2023

Halter Director March 11, 2024

/s/David Patton Director March 11, 2024

/s/Joseph Mannes Director March 11, 2024

Joseph Mannes

/s/Karen Hoffman Director April 17, 2023

Karen Hoffman

/s/Karen Hoffman Morris

Director March 11, 2024

Karen Hoffman Morris

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-K

Item 9A. Controls and Procedures