What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-03-31 compared with 2021-03-30 · 76 added, 85 removed, 188 unchanged (46% of the section changed)

15 unchanged sentences

These material weaknesses were previously reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and have been updated, as necessary, to reflect the control environment as of December 31, 2021.

Control Environment, Risk Assessment, Information and Communication, and Monitoring

The Company’s control environment, which is the responsibility of management and is subject to the oversight of the Audit Committee and the Board, establishes the tone of the organization, influences the control consciousness of its officers and employees and is the foundation for all other components of internal control over financial reporting.

In September 2020, the Company settled the investigations by the SEC and USAO into the Company’s past revenue recognition practices.

As part of the settlement, among other undertakings, the Company committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses by April 30, 2021.

On April 12, 2021 the SEC granted the Company’s request for an extension of time until March 31, 2022 in which to comply with the requirements of the administrative order to remediate the remaining material weaknesses.

Due to the progress achieved in remediating the material weaknesses as noted in Changes in Internal Control over Financial Reporting below, the Company formally requested an additional extension from the SEC to remediate the three remaining material weaknesses below.

As of December 31, 2021, the Company did not maintain an effective control environment, primarily attributable to the following identified material weaknesses:

Control Environment:

The Company was unable to demonstrate that it had maintained a corporate culture that (i) instilled an adequate enterprise-wide attitude of control consciousness supporting the Code of Business Conduct and Ethics, (ii) promoted accountability and timely communication across the organization and the Board and (iii) had sufficiently robust processes or focus to identify or address internal control weaknesses.

This weakness in the control environment likely contributed to many of the other material weaknesses disclosed herein.

Skillset and Competency:

IT general controls (“ITGC”) to support internal control over financial reporting, the oversight of the Company’s applications, systems and related training to the IT system user group.

Segregation of Duties:

The Company did not maintain effective policies, procedures or controls in aggregate to ensure adequate segregation of duties within its business processes, financial applications and IT systems.

Specifically, the Company did not have appropriate controls in place to adequately assess the segregation of job responsibilities and system user access for initiating, authorizing and recording transactions.

In addition, the Company did not have adequate mitigating or monitoring controls in place.

Control Activities

As of December 31, 2020, the material weaknesses described above contributed to the control activity level material weaknesses described below:

Revenue Accounting:

The Company did not maintain effective policies, procedures or controls to ensure that revenue recognition criteria were met prior to recognizing sales transactions.

Specifically, the Company did not do the following:

▪ timely or accurately communicate terms of newly entered contracts with customers to the accounting department and

▪ perform adequate review and approval controls for recording manual revenue entries, including revenue-related reserves (such as sales allowances).

Reserves and Accruals:

The Company did not have sufficiently defined procedures or controls to ensure consistent recognition of accrued liabilities and reserve balances, including, but not limited to, excess and obsolete inventory and warranty reserves.

Period-End Close/Accounting Documentation:

The Company did not maintain effective procedures or controls in aggregate over the period-end financial close and reporting process to enable timely reporting of complete and accurate financial information.

Specifically, it lacked controls to define financial statement review thresholds, consistently review journal entries prior to posting, review procedures related to taxes and inventory in-transit, and consistently prepare, approve and retain adequate supporting documentation for balance sheet account reconciliations.

Information Technology Skillset and Competency:

The Company did not have sufficient resources with appropriate levels of information technology (“IT”) knowledge to adequately support the organization including, but not limited to, the design and implementation of robust IT general controls (“ITGC”) to support internal control over financial reporting, the oversight of the Company’s applications, systems and related training to the IT system user group.

Information Technology:

The Company’s ITGC framework was not adequately designed and implemented to support the effective operation of internal control over financial reporting.

Specifically, ITGCs were not designed to ensure that logical access was appropriately segregated and restricted based on business needs, and controls were not consistently implemented to support timely and effective changes to financial systems and applications.

The aggregated IT deficiencies impact each ITGC domain and in-scope application, and the pervasive nature and lack of adequate compensating controls limited management’s ability to rely on the completeness and accuracy of data processed by and reports generated from financial applications.

Data Maintenance:

The Company did not have defined procedures or controls, in aggregate, to validate the completeness and accuracy of information maintained, input or edited within master and transaction files, including, but not limited to, customer and vendor master files, employee data files, perpetual inventory records, and stock compensation agreements.

Additionally, the Company did not have compensating controls to review and validate the underlying data maintained.

The Company continues to make progress on the design of ITGCs.

However, IT General Controls were not consistently operating effectively.

Warranty Reserves:

The Company did not have sufficiently defined and implemented procedures or controls to ensure the completeness and accuracy of the warranty accrual.

Specifically, during 2021, the Company identified an issue where certain warranty claims were not processed timely which impacted the estimation of the Company’s warranty reserve.

Warranty reserves have been included in the previously reported Reserves and Accruals material weakness.

Ongoing Remediation of Material Weaknesses in Internal Control over Financial Reporting

Management is committed to the continued implementation of remediation efforts to address the material weaknesses.

The remediation efforts summarized below, which have been or will be implemented, are intended both to address the identified material weaknesses and to enhance the Company’s overall internal control environment.

Control Environment, Risk Assessment, Information and Communication, and Monitoring

Control Environment:

Since 2017, the Company has either replaced or appointed new Board and Audit Committee members, a Chief Executive Officer, a Chief Financial Officer, a Chief Commercial Officer, a Chief Information Officer and a Vice President, Internal Audit.

These changes, along with the actions of these individuals and other senior management, have collectively improved the tone of integrity, transparency and support of the Company’s updated Code of Business Conduct and Ethics.

The Company has updated its Code of Business Conduct and Ethics and has initiated an ongoing training program to help ensure employees understand and comply with the Code.

The Company continues to enhance the program to provide extensive communications and training to employees across the entire organization regarding the importance of integrity and accountability.

The Company has established a process to identify and address internal control weaknesses throughout the control environment.

The remediation efforts summarized below, which have been or will be implemented, are intended to both address the identified material weaknesses and to enhance the Company’s overall internal control environment.

Skillset and Competency:

The Company continues to assess the level of and technical skills in the IT function to support the design and implementation of ITGCs.

The IT function has been reorganized under the leadership of a new Chief Information Officer who reports to the Chief Executive Officer.

The Company has recently hired an IT Security lead and is actively recruiting for certain technical IT positions.

The Company has continued to supplement a portion of the IT resources with temporary resources to assist with performing certain technical IT activities and controls.

Segregation of Duties:

• The Company has established standards governing the segregation of incompatible duties across the organization.

• The Company has implemented a technical upgrade to its Enterprise Resource Planning System (“ERP System”) and is redesigning system access roles across the Company to improve the segregation of incompatible duties.

• The Company is designing various processes and controls to adequately segregate job responsibilities and system access throughout the organization and to implement applicable mitigating internal controls.

Control Activities

As part of the overall remediation plan, the Company is designing and implementing review and approval controls over data utilized in various accounting processes.

These controls will address the accuracy, timely recording and completeness of data used in the determination of significant accounting estimates, reserves and valuations as well as impacted presentation and disclosures in accordance with U.S.

Revenue Accounting:

• The Company is designing and implementing policies and procedures to ensure that critical inputs affecting the accuracy and timeliness of revenue recognition and related reserves and sales allowances are communicated to the accounting department on a timely basis.

• The Company has established and has begun implementing improved review and approval controls across the Company to ensure that revenue, including that of nonroutine revenue transactions, is recognized consistently in accordance with the terms of the contracts with customers and U.S.

• The Company has developed and is in the process of implementing sales transaction review procedures to review certain key transaction attributes.

Reserves and Accruals:

The Company is in the process of enhancing controls over the review and approval of key reserves and accruals, including, warranty reserves, sales allowances and excess and obsolete inventory.

Period-End Close/Accounting Documentation:

• The Company has designed and is implementing procedures and controls over the period-end close process and related documentation including, but not limited to, period-end checklists, review and approval of journal entries, taxes, inventory in-transit, account roll forwards and reconciliations, general-ledger account maintenance and financial statement analysis / thresholds.

The Company continues to assess the level of and technical skills in its IT function to support the design and implementation of ITGCs.

The IT function has been reorganized under the leadership of the Chief Information Officer who reports to the Chief Executive Officer.

The Company also hired an IT Security lead and is actively recruiting for certain technical IT positions.

The Company has continued to experience turnover in its IT function.

The IT function will continue to receive control related training, consider additional hiring, and supplement with temporary resources.

The Company will continue to assess IT skillset and competency during 2022.

Information Technology:

1 unchanged sentence

• The Company has designed and is implementing controls over access, change management and IT operations to ensure that access rights are restricted to appropriate individuals, and that data integrity is maintained via effective change management controls over system updates and the transfer of data between systems.

• The Company is re-designing its ERP System to further improve and automate ITGC’s as well as other business process application controls.

Data Maintenance:

• The Company is designing and implementing procedures and controls to appropriately identify and assess changes made to data repositories that could significantly impact data integrity and the internal control framework, including, but not limited to, (i) creating centralized, complete and accurate data repositories, (ii) maintaining customer and vendor master files, employee data files, perpetual inventory records, inventory physical and cycle counts, and stock compensation agreements (iii) communicating an enterprise data management policy and record retention policy.

• The Company is developing procedures to ensure the completeness and accuracy of the data used in the design and operation of internal controls.

• The Company continues to adjust its Enterprise Resource Planning (“ERP”) System to work towards improvement and automation of ITGC’s as well as other business process application controls.

• The Company also continues to enhance procedures to validate the information produced by the entity and end user computing to compensate while the ITGC controls are being improved.

Warranty Reserves:

To reduce the risk of untimely warranty claims processing, the Company is implementing improvements to centrally receive and monitor incoming claims including transitioning customers to the use of a warranty claims submission portal.

The organization is in the process of onboarding customers on the portal platform.

When fully implemented and operational, the Company believes the measures described above will remediate the control deficiencies that have led to the material weaknesses it has identified and will strengthen its internal control over financial reporting.

4 unchanged sentences

These procedures included, but were not limited to, conducting additional analysis and substantive procedures.

The Company also hired additional resources and retained outside consultants with relevant accounting experience, skills and knowledge, working under the Company’s supervision and direction to assist with the account closing and financial statement preparation process.

These additional procedures have allowed the Company to conclude that, notwithstanding the material weaknesses in its internal control over financial reporting described above, the consolidated financial statements included herein fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with U.S.

1 unchanged sentence

As previously disclosed under “Item 9A – Controls and Procedures” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, management concluded that its internal control over financial reporting was not effective based on the material weaknesses identified.

As of December 31, 2020, the Company has completed remediation of its previously reported Policies and Procedures, Complex and Nonroutine Transactions, and Capitalization material weaknesses:

Policies and Procedures:

▪ The Company has issued a revised delegation of authority policy that appoints tiered approvers based upon risk and materiality of the transaction and trained employees on the revised policy.

▪ The Company has identified a central repository to maintain all the Company’s policies, is providing training to users and is developing a framework to establish responsibility and accountability for executing and monitoring policies and procedures, including updating policies for new accounting pronouncements and guidance.

▪ The Company has issued critical accounting policies, a policy for record retention, and IT policies.

Additionally, the Company continues to update and reissue its IT policies and procedures.

▪ The Company continues to create a culture of continuous improvement and design a framework for management to proactively and openly self-identify, document, reassess, report and remediate policies, procedures and control issues.

Complex and Nonroutine Transactions:

The Company defined policies, procedures and controls to identify and determine the appropriate accounting treatment for certain complex and nonroutine transactions, including, but not limited to, identification of reporting units and triggering events that could impact the assessment of potential impairments of property, plant and equipment, intangibles and goodwill, accounting for debt transactions, purchase accounting for business combinations and lease classification.

Capitalization:

The Company has implemented a policy over fixed assets and capitalization.

Considering the materiality of capitalized assets, and continuing control improvements, management has determined that this area no longer constitutes a material weakness.

Other than the ongoing remediation efforts described above and the remediation of the material weaknesses described above, there have been no changes in the Company’s internal control over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

As of December 31, 2021, the Company has completed remediation of the following previously reported material weaknesses:

(i) Control Environment, (ii) Segregation of Duties, (iii) Revenue Accounting, (iv) Reserves and Accruals (other than Warranty Reserves), (v) Period-End Close/Accounting Documentation, and (vi)Data Maintenance:

Control Environment:

The Company updates its Code of Business Conduct and Ethics annually and implemented an ongoing training and certification program to help ensure employees understand and comply with the Code.

The Company has also implemented a new case management application and formally documented its complaint reporting and investigative protocols.

The Company continues to enhance the program to provide communications and training to employees across the entire organization regarding the importance of integrity and accountability.

The Company has established a process to timely identify and address internal control weaknesses throughout the control environment.

Segregation of Duties:

• The Company has established standards governing the segregation of incompatible duties across the organization.

• The Company has implemented a technical upgrade to its ERP and revised system access across the Company to improve the segregation of incompatible duties.

• The Company has designed various processes and controls to adequately segregate job responsibilities and system access throughout the organization and implemented applicable mitigating internal controls.

Revenue Accounting:

• The Company has designed and implemented policies and procedures to ensure that critical inputs affecting the accuracy and timeliness of revenue recognition and related reserves and sales allowances are communicated to the accounting department on a timely basis.

• The Company has established and implemented improved review and approval controls across the Company to ensure that revenue, including that of nonroutine revenue transactions, is recognized consistently in accordance with the terms of the contracts with customers and U.S.

• The Company has developed and implemented sales transaction review procedures to ensure key transactions are appropriately reviewed and evaluated by the accounting department.

Reserves and Accruals:

The Company has enhanced controls over the review and approval of key reserves and accruals, including sales allowances and excess and obsolete inventory.

While the Company has also enhanced controls over warranty reserves (which were included in the previously reported Reserves and Accruals material weakness), it is still in the process of improving the warranty claim processing process.

The Company has disclosed a separate Warranty Reserves material weakness in the current filing.

Period-End Close/Accounting Documentation:

The Company has designed and implemented procedures and controls over the period-end close process and related documentation including, but not limited to, period-end checklists, review and approval of journal entries, taxes, inventory in-transit, account roll forwards and reconciliations, general-ledger account maintenance and financial statement analysis / thresholds.

Data Maintenance:

• The Company has designed and implemented procedures and controls to appropriately identify and assess changes made to data repositories that could significantly impact data integrity and the internal control framework, including, but not limited to, (i) creating centralized, complete and accurate data repositories, (ii) maintaining customer and vendor master files, employee data files, perpetual inventory records, inventory physical and cycle counts, and stock compensation agreements, and (iii) communicating an enterprise data management policy and record retention policy.

• The Company has developed procedures to ensure the completeness and accuracy of the data used in the design and operation of internal controls.

As part of the overall remediation plan, the Company designed and implemented review and approval controls over data utilized in various accounting processes.

These controls address the accuracy, timely recording and completeness of data used in the determination of significant accounting estimates, reserves and valuations as well as impacted presentation and disclosures in accordance with U.S.

Other than the remediation of the material weaknesses and ongoing remediation efforts described above, there have been no further changes in the Company’s internal control over financial reporting during the year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

Directors, Executive Officers and Corporate Governance.

21 unchanged sentences

Consolidated Statements of Operations for 2021 and 2020 44

Consolidated Statements of Stockholders’ Equity for 2020 and 2019 45

Consolidated Statements of Stockholders’ Equity (Deficit) for 2021 and 2020 45

Consolidated Statements of Cash Flows for 2021 and 2020 46

83 unchanged sentences

8-K 10.1 04/06/2020 001-35944

10.22 †† Confidential Consulting Agreeme nt

10.22 †† Confidential Consulting Agreement

10-Q 10.1 05/04/2019 001-35944

7 unchanged sentences

8-K 10.2 02/16/2021 001-35944

10.27 Retirement Agreement and Release, dated as of December 14, 2021, between the Company and Kenneth Winemaster

8-K 10.1 12/17/2021 001-35944

10.28 Shareholder’s Loan Agreement, dated as of December 10, 2021, between the Company and Weichai America Corp.

8-K 10.1 12/16/2021 001-35944

10.29 Second Amended and Restated Uncommitted Revolving Credit Agreement, dated as of March 25, 2022, among the Company, certain subsidiaries of the Company party thereto, the lenders party thereto and Standard Chartered Bank, as administrative agent.

8-K 10.1 03/28/2022 001-35944

10.30 Second Amended and Restated Shareholder’s Loan Agreement, dated as of March 25, 2022, between the Company and Weichai America Corp.

8-K 10.2 03/28/2022 001-35944

10.31 First Amended and Restated Shareholder’s Loan Agreement, dated as of March 25, 2022, between the Company and Weichai America Corp.

8-K 10.3 03/28/2022 001-35944

Description of Long-Term Incentive Plan

21.1 * Subsidiaries of Power Solutions International, Inc.

23.1 * C onsent of BDO USA, LLP

23.1 * Consent of BDO USA, LLP

Incorporated by Reference Herein

Exhibit Description Form Exhibit Filing Date File No.

31.1 * Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

5 unchanged sentences

101.INS * XBRL Instance Document.

Incorporated by Reference Herein

Exhibit Description Form Exhibit Filing Date File No.

101.SCH * XBRL Taxonomy Extension Schema Document.

12 unchanged sentences

Form 10-K Summary.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 2021.

POWER SOLUTIONS INTERNATIONAL, INC.

1 unchanged sentence

Chief Financial Officer (Principal Financial Officer)

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 indicated on the 30th day of March, 2021.

Signature Title

4 unchanged sentences

Klein (Principal Financial and Accounting Officer)

/s/ Shaojun Sun Chairman of the Board and Director

/s/ Xinghao Li Director

/s/ Guogang Wu Director

/s/ Fabrizio Mozzi Chairman of the Board and Director

Fabrizio Mozzi

/s/ Shaojun Sun Vice Chairman of the Board and Director

/s/ Lei Lei Director

/s/ Sidong Shao Director

4 unchanged sentences

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