TWIN DISC INC 10-Q

Item 4. Controls and Procedures   (a) Evaluation of Disclosure Controls and Procedures     The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”) which are controls and other procedures that are designed to ensure that information required to be disclosed in our 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 information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs.  The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.   As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective due to the material weakness described below and discussed in the Company’s Form 10-K for the year ended June 30, 2021.   In the fourth quarter of fiscal 2021, management identified a material weakness in internal control over financial reporting due to a misstatement in income taxes.  The misstatement related to a deficiency in the Company’s review controls over significant, infrequent transactions that did not detect an error in the recording of a valuation allowance on deferred income tax assets.  Specifically, the misstatement was attributed to the presentation of the tax effects of a pension plan and the adjusting journal entry to income tax expense.  Due to the isolated, non-recurring nature of this transaction, management had not anticipated the complexity of this process.  This misstatement resulted in the Company filing a Form 8-K/A on August 23, 2021, amending its previously released financial results for the quarter and year ended June 30, 2021.   The amendment was filed to disclose that final income tax expense adjustments related to the domestic deferred tax asset valuation allowance have been recorded by the Company, which resulted in increasing the amount of net loss for the year ended June 30, 2021 by $8.8 million.  This had the effect of increasing the net loss of $20.9 million to $29.7 million for the year ended June 30, 2021.  While this late adjustment was a non-cash adjustment, the Company concluded that it constituted a material weakness in its internal control over financial reporting due to the deficiency in certain review controls described above.   To remediate the material weakness, the Company is continuing to take steps to enhance the controls within the tax reporting process, including improving the review precision of adjusting journal entries and to proactively reach out to outside consultants on technical and complex one-off issues such as these, should the need arise.  To allow for adequate time to manage the recording and reviewing of infrequent and complex transactions, the Company also intends to postpone the earnings release date to a date closer to the filing of the Company’s Form 10-K or Form 10-Q. The Company believes that these steps will mitigate the occurrence of similar events in the future.   Notwithstanding the identified material weakness, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our consolidated financial position, results of operations and cash flows for the period presented.         (b) Changes in Internal Control Over Financial Reporting     As discussed above, we are designing and implementing certain measures to remediate the material weakness identified in the design and operation of our internal control over financial reporting. There were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 24, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.       Part II.                   OTHER INFORMATION   Item 1. Legal Proceedings   The Company is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.   24     Item 1A. Risk Factors   There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2021 Annual Report on Form 10-K.