Item 4. Controls and Procedures
ITEM 4. CONTROLS AND PROCEDURES
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, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this interim report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022 as a result of the significant deficiency in our internal control over financial reporting described below.
Severity of Deficiency
A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The term material weakness means 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 company’s annual or interim financial statements will not be prevented or detected on a timely basis. The term significant deficiency means a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
Background – EMCORE Transaction
In the third quarter of 2022, we consummated the sale of our inertial navigation business to EMCORE Corporation (“EMCORE”). The consummation of the transaction necessitated the preparation of various historical and pro forma financial statements in addition to our usual quarterly reporting requirements.
Applicable accounting rules required that we disaggregate the inertial navigation business from our remaining business for purposes of these financial statements. This disaggregation included the separation of the assets and liabilities of the inertial
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navigation business from those of our remaining business, a process we are not required to perform for segment reporting or for any other ordinary course financial reporting. Our accounting system has no functionality for this purpose. As a result, we had to rely in part upon manual procedures to perform the disaggregation. These procedures were time-consuming and prevented us from filing this quarterly report on a timely basis.
Management’s Assessment of Deficiency
In assessing the effectiveness of our disclosure controls and procedures, management determined that the failure to file this quarterly report on a timely basis arose because management did not properly plan and prepare for the additional work necessitated by the disposition of the inertial navigation business. In assessing the severity of this control deficiency, management considered, among other factors, that there was no indication of a deficiency in the design or operation of any controls that would prevent or detect a material misstatement of our financial statements. Management concluded that the control deficiency constituted a significant deficiency because it resulted in a delay in the filing of this quarterly report, which merited attention by the Audit Committee of our Board of Directors and our full Board of Directors.
Remediation Efforts
To remediate this significant deficiency, management has determined that, in the event of a future, non-operating, unusual, material transaction, management will (a) determine the financial information necessary to prepare required financial statements, (b) evaluate, at the outset of such transaction, the extent of the effort required to produce that financial information, (c) further supplement its resources as necessary and (d) develop a timeline for meeting its future reporting obligations.
Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated changes in our internal control over financial reporting that occurred during the third quarter of 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer did not identify any change in our internal control over financial reporting during the third quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The remediation procedures described above are being implemented after the end of the third quarter of 2022.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are a party to inquiries, legal proceedings and claims including, from time to time, disagreements with vendors and customers. We are not a party to any lawsuit or proceeding that, in our opinion, is likely to materially harm our business, results of operations, financial condition, or cash flows.