Item
4.02(a). Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
.
As noted above under Item 2.02, the Company implemented a new ERP system for its Sypris Electronics segment effective January 1, 2019. Due to data entry processing errors that were made following this transition to the new ERP system, certain vendor invoices related to raw material inventory receipts in the first quarter of 2019 for the Sypris Electronics segment were incorrectly recorded in the second quarter of 2019. These errors resulted in an understatement of accounts payable and cost of sales of approximately $790,000 as of and for the quarter ended March 31, 2019.
On June 21, 2019, the Audit and Finance Committee of the Board of Directors (the “Audit Committee”) of the Company, after considering the recommendation of management, concluded that the unaudited consolidated interim financial statements as of and for the quarter ended March 31, 2019 which are included in the Company’s Quarterly Report on Form 10-Q for such period, filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2019, should no longer be relied upon and will be restated.
The Company will restate its previously issued unaudited consolidated interim financial statements as of and for the quarter ended March 31, 2019 through the filing of an amended Quarterly Report on Form 10-Q for such period (the “Restatement”). This amended Quarterly Report on Form 10-Q will be filed with the SEC as soon as administratively possible. The Restatement does not impact the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2018 or any other prior period.
Background
Sypris Electronics transitioned to the new ERP system in the first quarter of 2019. The same ERP system was implemented for the Mexico operation of the Sypris Technologies segment in 2014 and has been operating effectively since its implementation. As a result of data entry processing errors that were made following Sypris Electronics’ transition to the new ERP system, certain raw materials received in the Sypris Electronics segment during the first quarter of 2019 were properly recorded as new inventories on the Company’s balance sheet as of March 31, 2019, but the corresponding liabilities were inadvertently recorded as accounts payable in the second quarter of 2019.
Raw material receipts are recorded in the ERP system through a debit to inventories and a credit to a purchase price variance (“PPV”) account included in cost of sales. Vendor invoices for raw material receipts are recorded in the ERP system through a debit to the PPV account and a credit to accounts payable. A manual change of the accounting period for certain vendor invoices processed in the new Sypris Electronics ERP system to correspond to actual invoice dates resulted in an understatement of accounts payable and cost of sales as of and for the quarter ended March 31, 2019.
The Company identified the error after the Form 10-Q for the first quarter of 2019 was filed with the SEC. Promptly upon identifying the error, the Company undertook a review of its systems and processes related to the transition to the new ERP system, as well as a review of certain accounting entries in the first quarter. The Company also plans to correct other immaterial accounting errors affecting the first quarter of 2019 discovered through this review related to the ERP system transition. This review is ongoing. Based on our preliminary information, the Company believes net revenue and net cash flows used in operating, investing, and financing activities have not been impacted, with the exception of certain balance sheet classification errors that have been determined to have an immaterial effect on cash and net cash flows used in operating activities.
The Audit Committee has discussed the foregoing matters with Crowe LLP, the Company’s independent registered public accounting firm. Crowe LLP has not completed its procedures related to the Restatement, and, accordingly, has not reached any conclusions on this matter as of the date of this filing.
The following tables present the estimated effects of the corrections on the Company’s consolidated statements of operations for the quarter ended March 31, 2019 (in thousands except per share amounts):
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Quarter Ended March 31, 2019
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As Reported
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Expected Adjustment
Range
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Expected as Adjusted
Range
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|
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|
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Cost of sales
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$17,973
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|
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$700
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-
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$900
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|
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$18,673
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-
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$18,873
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Net loss
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($2,305)
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|
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($700)
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-
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($900)
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|
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($3,005)
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-
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($3,205)
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Diluted loss per share
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($0.11)
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|
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($0.03)
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-
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($0.04)
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|
|
($0.14)
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-
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($0.15)
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The preliminary revisions set forth in the table above are based on currently available information and are subject to change during the course of the Company’s ongoing review and the process to restate the unaudited consolidated interim financial statements for the first quarter of 2019. Until the Restatement is complete, additional information may become available that could cause the Company’s preliminary revisions to change.
Controls and Procedures
The Company believes that the misstatements that caused the Restatement indicate the existence of one or more material weaknesses in its internal control over financial reporting as of March 31, 2019. The Company will report the material weakness(es) in its amended Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. The Company’s management has already implemented certain enhancements and remedial measures to its internal control over financial reporting to ensure that invoices in the Sypris Electronics segment are correctly assigned to the proper period. Management will continue to monitor the effectiveness of these processes, procedures and controls and will make any further changes deemed appropriate. A material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The required testing for remediation is expected to occur prior to the Company completing its internal control over financial reporting assessment for the year ended December 31, 2019.