Navitas Semiconductor Corp 10-Q

Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the supervision and involvement of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that, as of September 30, 2024, as a result of the material weaknesses in our internal control over financial reporting discussed below and filed in our amended annual report on Form 10-K for the year ended December 31, 2023 on July 23, 2024 with the SEC, our disclosure controls and procedures were not effective. 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 Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified: • The Company did not fully maintain components of the COSO framework, including elements of the control environment, risk assessment, control activities, and monitoring activities components, relating to: (i) sufficiency of processes related to identifying and analyzing risks to the achievement of objectives across the entity, (ii) sufficiency of competent personnel with appropriate levels of knowledge, experience, and training in accounting for complex and non-routine transactions, and internal control matters to perform assigned responsibilities and have appropriate accountability for the design and operation of internal control over financial reporting; (iii) performing control activities in accordance with established policies in a timely manner, and (iv) performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning. The entity level material weaknesses contributed to other material weaknesses within the Company’s system of internal control over financial reporting as follows: 35 TABLE OF CONTENTS • The Company did not design and implement effective controls, such that, personnel within the Company have incompatible duties which allow for the creation, review and processing of journal entries without independent review and authorization, which affects substantially all financial statement account balances and disclosures. • The Company did not design and implement effective controls over the accounting for share-based payments, including the long-term incentive plan awards and earnout liability. • The Company did not design and implement effective controls over the accounting for its license and release agreement. • The Company did not design and implement effective controls over the inputs and assumptions used in the valuation of the earnout liability and information utilized to classify awards as either equity or liability. • The Company did not maintain effective controls over its determination of reportable segments for purposes of segment reporting and reporting units for purposes of goodwill. These material weaknesses did not result in a misstatement to the consolidated financial statements or disclosures. Based on additional procedures and post-closing review, management concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with principles generally accepted in the United States. Remediation Plan We have commenced developing a plan to enhance the design and operating effectiveness of our internal controls over financial reporting, including maintaining sufficient contemporaneous documentation of management review controls over accounting for share-based payments, including the long-term incentive plan awards, earnout liability, as well as the accounting for the Company’s license and release agreement, which we believe will address the material weakness described above. At least on an annual basis or as warranted due to organizational changes, we will perform a segment/reporting unit analysis. We expect our remediation will be complete prior to the end of the fourth quarter of fiscal 2024. We have hired a Director of Information Technology at the end of 2023 to, among other responsibilities, segregate financial accounting systems access and system changes between IT and accounting department. The Company will continue to review and modify system access for accounting personnel to ensure proper segregation of duties around manual journal entries. We have implemented enhanced workflows within our ERP system across key financial processes, including journal entry approvals, sales invoice approvals, expense payments, and cash application workflows, to strengthen control activities, ensure proper authorization, and maintain accurate documentation. Additionally, we improved the segregation of duties by refining access controls and reassigning responsibilities to prevent conflicts, reducing the risk of unauthorized transactions. We also expanded our analysis around the sensitivity of our long-term incentive plan awards and earnout liability. Specifically, for the earnout liability, we performed a more thorough review of the volatility component to improve the precision of our financial estimates and ensure compliance with applicable accounting standards. Changes in Internal Control Over Financial Reporting Other than the material weaknesses and remediation plan described above, there have been no significant changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 36 TABLE OF CONTENTS PART II —OTHER INFORMATION Item 1. Legal Proceedings. From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.