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Item 9A. Controls and Procedures

2023-04-14 compared with 2022-03-31 · 51 added, 88 removed, 176 unchanged (44% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act, as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act are recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures as of December 31, 2021.

Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2021, because of the previously reported material weaknesses in internal control over financial reporting described below.

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act, as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Interim Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The Company’s management, with the participation of its Interim Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures as of December 31, 2022.

Based upon that evaluation, the Company’s Interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022, to provide reasonable assurance 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 by the rules and forms of the Exchange Act, and that such information is accumulated and communicated to management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Management’s Report on Internal Control over Financial Reporting

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Effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company had previously identified and reported material weaknesses in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

A material weakness is a control deficiency, or a combination of control 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.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria established by the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”).

As a result of management’s review of the Company’s financial and accounting records and the other work completed by the management team and its advisers, management concluded that, as of December 31, 2021, the Company had material weaknesses relating to certain internal controls.

These material weaknesses are summarized below, and remediation efforts completed or underway are outlined in the “Ongoing Remediation of Material Weaknesses in Internal Control over Financial Reporting” section below.

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.

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

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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:

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 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 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 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:

• The Company has reconstructed its ITGC framework to focus on controls that mitigate key financial reporting risks.

• 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 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.

The Company is committed to continuing to improve its internal control processes and it will continue to review its financial reporting controls and procedures.

As the Company continues to evaluate and work to improve its internal control over financial reporting, it may determine that a need exists to take additional measures to address control deficiencies or modify certain remediation measures described above.

As a result of the material weaknesses described above, management has concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was ineffective.

In light of the material weaknesses in internal control over financial reporting, prior to filing this Annual Report on Form 10-K, the Company completed substantive procedures, including extensive temporary manual procedures and other measures as needed, to assist with meeting the objectives otherwise fulfilled by effective internal control over financial reporting.

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

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.

In April 2022, the SEC granted a further extension of time until March 31, 2023 to fully comply with the administrative order.

Subsequent to the filing of this Form 10-K, the Company will submit documentation to the SEC for its review to assess the Company’s compliance with the administrative order.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the criteria established by the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”).

As a result of management’s review of the Company’s financial and accounting records and the other work completed by the management team and its advisers, management concluded that, as of December 31, 2022, the Company had remediated the material weaknesses relating to certain internal controls and that the Company’s internal control over financial reporting was operating effectively.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

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As of December 31, 2022, 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:

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 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.

(i) IT Skillset and Competency, (ii) Information Technology, and (iii) Warranty Reserves:

IT Skillset and Competency:

The Company determined the level of technical skills and control-related training in its information technology (“IT”) function was adequate to support the design and implementation of IT general controls (“ITGCs”).

The IT function was reorganized under the leadership of a Chief Information Officer who reports to the Interim Chief Executive Officer.

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

As a result, the Company is continuing to build out the organizational structure and will continue to use contractors until full time employees are in place.

Information Technology:

• The Company has reconstructed its ITGC framework to focus on controls that mitigate key financial reporting risks.

• The Company has designed and implemented 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 over the transfer of data between systems.

• The Company enhanced procedures to validate the information produced by the entity and end user computing.

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

Warranty Reserves:

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

The Company also implemented additional controls during the year to provide additional assurance around completeness and accuracy of the warranty data used in the calculation of the warranty reserve.

The Company believes the measures described above have remediated the control deficiencies that led to the previously-identified material weaknesses and have strengthened its internal control over financial reporting.

While the Company has remediated its material weaknesses, it remains committed to maintaining its internal control processes and will continue to monitor and review its financial reporting controls and procedures.

Other than the remediation of the material weaknesses and the remediation efforts described above, there have been no further changes in the Company’s internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Other Information.

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

10.32 Addendum # 11, dated as of July 1, 2022 to Supply Agreement, dated as of December 11, 2007, by and between Power Solutions International, Inc.

and Doosan Infracore Co., Ltd., as amended.

8-K 10.4 07/25/2022 001-35944

Incorporated by Reference Herein

Exhibit Description Form Exhibit Filing Date File No.

10.33 Employment Agreement, effective as of August 29, 2022, by and between Kenneth Li and Power Solutions International, Inc.

8-K 10.1 08/29/2022 001-35944

10.34 Employment Agreement, effective as of September 16, 2022, between PSI and Sidong Shao

8-K 10.1 09/22/2022 001-35944

Description of Long-Term Incentive Plan

10.36 First Amended and Restated Shareholder’s Loan Agreement, dated as of November 29, 2022, between the Company and Weichai America Corp.

8-K 10.1 12/02/2022 001-35944

21.1 * Subsidiaries of Power Solutions International, Inc.

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.

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

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

32.1 ** Certification of Chief Executive Officer, pursuant to 18 U.S.C.

32.1 ** Certification of Interim Chief Executive Officer, pursuant to 18 U.S.C.

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

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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 31st day of March, 2021.

POWER SOLUTIONS INTERNATIONAL, INC.

/s/ Donald P.

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 31st day of March, 2021.

Signature Title

/s/ Lance Arnett Chief Executive Officer

Lance Arnett (Principal Executive Officer)

/s/ Donald P.

Klein Chief Financial Officer

Klein (Principal Financial and Accounting Officer)

/s/ Fabrizio Mozzi Chairman of the Board and Director

Fabrizio Mozzi

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

/s/ Dino Xykis Interim Chief Executive Officer

Dino Xykis (Principal Executive Officer)

/s/ Xun Li Chief Financial Officer

Xun Li (Principal Financial and Accounting Officer)

/s/ Jiwen Zhang Chairman of the Board and Director

/s/ Shaojun Sun Director

/s/ Lei Lei Director

/s/ Sidong Shao Director

/s/ Gengsheng Zhang Director

Gengsheng Zhang

/s/ Kenneth W.

3 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