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critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. loans receivable – identification of impairment indicators – refer to note 2 and note 3 in the consolidated financial statements critical audit matter description the company evaluates loans for possible indicators of impairment on a quarterly basis in order to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of loans receivable are no longer recoverable. the loans are typically collateralized by commercial real estate. as a result, the company regularly evaluates the extent and impact of any deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. possible indicators of impairment may include, but are not limited to, events or changes in circumstances affecting occupancy of an underlying property, market rental rates and physical condition of such property. the company’s evaluation involves a certain level of judgment and/or estimation related to whether the financial performance of the collateral or the existing market conditions results in an impairment indicator. changes in these judgements and/or estimates could have a significant impact on the loans identified for further analysis. for the year ended december 31, 2019, no impairment loss has been recognized on loans receivable. we identified the determination of impairment indicators for loans receivable as a critical audit matter because of the level of judgment involved in management’s assessment of whether events or changes in circumstances have occurred indicating that the carrying amounts of loans receivable may not be recoverable. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators, including period-over-period review of the borrower’s financial information and business plans, collateral performance and assessment of micro- and macro-economic factors. f-3 table of contents how the critical audit matter was addressed in the audit our audit procedures related to the factors evaluated by management to evaluate if impairment indicators existed on a loan by loan basis and a determination of whether those factors would indicate a potential impairment, included among others: •we tested the design and operating effectiveness of controls over identification of impairment indicators, including but not limited to, not making contractual debt service payments, deterioration in underlying property performance, and negative trends in micro- and macro-economic factors. •we evaluated a sample of loans for potential impairment by: •evaluating the accuracy and determining the relevance of the factors utilized during the company’s evaluation •analyzing period over period changes on items such as rental rates, physical conditions of the property, net operating income, debt service coverage ratio, occupancy, cash flow volatility, leasing and tenant profile, loan structure, exit plan, and project sponsorship, to determine impact on loan performance. •evaluating the financial performance of the collateral associated with each loan •reviewing the changes in budgets and the summaries of third-party reports, where applicable, for construction loans. •evaluating the impact of macroeconomic and microeconomic events on the borrower, sponsor, or asset type. •we reviewed the payment history for all loans in the company’s portfolio to ensure that the borrowers are making contractual payments in accordance with the loan agreements. /s/ deloitte & touche llp new york, new york february 11, 2020 we have served as the company’s auditor since 2013 | 2 |
critical audit matter the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.40 accrual for customer credits for defective product returns as disclosed in notes 1 and 11 to the consolidated financial statements, the company estimates customer credits for defective product returns and other items. the accrual for customer credits to be issued for defective product returns includes assumptions about the length of time between when a sale occurs and a credit is issued. the provision for customer credits is reflected in the consolidated financial statements as a reduction from gross sales and accruals for customer credits are a portion of accrued customer rebates and returns. at december 25, 2021, accrued customer rebates and returns were $188,080 thousand.we identified the evaluation of the accrual for customer credits for defective product returns as a critical audit matter. subjective auditor judgment was required to evaluate the company’s determination of the impact of market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s process to record the accrual for customer credits for defective product returns. this included a control related to the determination of the impact of market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. we assessed the company’s accrual for customer credits for defective product returns by evaluating (1) the historical relationship between sales and customer credits for defective product returns (2) the company’s internal data, (3) certain external market data, and (4) a sample of executed third-party contracts. we inquired of personnel within the company’s quality control department regarding the impact of current market conditions on the length of time between when a sale occurs and a credit is issued for defective product returns. we analyzed a sample of customer credits issued after year-end and evaluated their effect on the accrual. fair value of customer relationships intangible asset as discussed in note 2 to the consolidated financial statements, on august 10, 2021, the company acquired 100% of the equity interests of dayton parts (“dayton”), in a business combination. the company acquired a customer relationships intangible asset associated with the generation of future income from dayton’s existing customers. the estimated acquisition-date fair value for the customer relationships intangible asset was approximately $124,100 thousand. the company used a multiperiod excess earnings valuation methodology to determine the estimated fair value of the customer relationships intangible asset.we identified the evaluation of the estimated fair value of the customer relationships intangible asset acquired in the dayton business combination as a critical audit matter. there was a high degree of subjective auditor judgment related to certain assumptions used in the valuation model. these assumptions included the forecasted revenue growth rates, customer attrition rate, and the discount rate applied. in addition, valuation professionals with specialized skill and knowledge were also required to perform sensitivity analyses to assist us in determining the significant assumptions used to value the customer relationships intangible asset, assess certain assumptions, and evaluate evidence obtained.41 the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s acquisition-date valuation process, including controls related to the development of the above assumptions. we evaluated the amount and timing of forecasted revenue growth rates used by the company by comparing them to publicly available information for comparable companies, industry reports, and historical results. we involved valuation professionals with specialized skills and knowledge, who assisted in: • performing sensitivity analyses over the company’s assumptions used to determine the estimated fair value of the customer relationships intangible asset to assess the impact of changes in those assumptions on the company’s determination of fair value• evaluating the expected customer attrition rate used in the determination of fair value, by comparing it to an independently developed attrition rate using historical sales data• assessing the discount rate used in the determination of fair value, by comparing it to a discount rate that was independently developed using publicly available market data for comparable entities. /s/ kpmg llp we have served as the company’s auditor since 2002. | 2 |
critical audit matters thecritical audit matter communicated below is a matter arising fromthe current period audit of the consolidated financial statementsthat was communicated or required to be communicated to the auditcommittee and that: (1) relates to accounts or disclosures that arematerial to the consolidated financial statements and (2) involvedour especially challenging, subjective, or complex judgments. thecommunication of critical audit matters does not alter in any wayour opinion on the consolidated financial statements, taken as awhole, and we are not, by communicating the critical audit mattersbelow, providing separate opinions on the critical audit matters oron the accounts or disclosures to which they relate. inventory allowance asdisclosed in note 2 of the notes to the company’sconsolidated financial statements, the company records an estimatedinventory allowance to state the company’s inventories at thelower of cost or net realizable value. the company relies on, amongother things, past usage, sales experience, recent order and quoteactivity, future sales forecasts, and its strategic business planto develop the estimate. as a result of management’sassessment, the company recorded an inventory allowance ofapproximately $1,200,000 as of june 30, 2021. auditingmanagement’s estimate of the inventory allowance involvedsubjective evaluation and high degree of auditor judgement due tosignificant assumptions involved in estimating future inventoryturnover and sales. addressingthe matter involved performing procedures and evaluating auditevidence in connection with forming our overall opinion on theconsolidated financial statements. we obtained an understanding andevaluated the design of internal controls that address the risks ofmaterial misstatement relating to recording inventory at the lowerof cost or net realizable value. we tested the accuracy andcompleteness of the underlying data used in calculating theinventory allowance, including testing of a sample of inventoryusage transactions, and recomputed the allowance calculation. wealso evaluated the company’s ability to accurately estimatethe assumptions used to develop the estimate by comparinghistorical allowance amounts to the history of actual inventorywrite-offs. furthermore, we reviewed management’s businessplan and forecasts of future sales. we haveserved as the company’s auditor since 2017. | 2 |
critical audit matters thecritical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical auditmatter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. asdiscussed in note 1, the company had a going concern due to net losses from operations for the year ended december 31, 2021 and had aworking capital deficit and a stockholders’ deficit as of december 31, 2021. auditing management’s evaluation of a goingconcern can be a significant judgment given the fact that the company uses management estimates on future revenues and expenses, whichare difficult to substantiate. to evaluate the appropriateness of the going concern, we examined and evaluated the financial informationalong with management’s plans to mitigate the going concern and management’s disclosure on going concern. /s/m&k cpas, pllc m&kcpas, pllc wehave served as the company’s auditor since 2015 | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of embedded derivatives associated with fixed index annuity products as described in notes 2 and 4 to the consolidated financial statements, the company issues fixed index annuity products, which provide a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the “participation rate”) of the amount of increase in the value of a particular index, such as the standard & poor’s 500 index, over a specified period. the company accounts for the options attributed to the policyholder for the estimated life of the contract as embedded derivatives. as of december 31, 2020, the value of embedded derivatives associated with fixed index annuity products is $1.6 billion, which is included in policyholder account liabilities. the accounting requirement is to record these embedded derivatives at estimated fair value. the value of the embedded derivatives is determined based on the present value of the estimated discounted future options costs. as described by management, in estimating the fair value of the embedded derivatives associated with fixed index annuity products, management used significant unobservable inputs with respect to projected portfolio yields, discount rates and surrender rates. the discount rate is based on risk-free rates adjusted for company’s non-performance risk and risk margins for non-capital market inputs. increases (decreases) in the discount rates would lead to a lower (higher) fair value measurement. the principal considerations for our determination that performing procedures relating to the valuation of embedded derivatives associated with fixed index annuity products is a critical audit matter are (i) the significant judgment by management in estimating the fair value of embedded derivatives, specifically the significant unobservable inputs to the discount rate, which included company’s non-performance risk and risk margins for non-capital market inputs; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s discount rate assumption; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.85addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s valuation of embedded derivatives associated with fixed index annuity products, including controls over the company’s development of the significant assumption. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the fair value of the embedded derivatives associated with fixed index annuities. this included testing the completeness and accuracy of the data provided by management, evaluating the appropriateness of the valuation method and the reasonableness of the discount rate assumption. evaluating the significant assumption related to the discount rate involved evaluating whether company’s non-performance risk and risk margins for non-capital market significant unobservable inputs were reasonable considering relevant macroeconomic conditions, consistency with external market and industry data, and current and past policyholder experience. /s/ pricewaterhouse coopers llp indianapolis, indiana february 24, 2021 we have served as the company’s auditor since 1983. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. goodwill – impairment assessment for the black oak gallery reporting unit as described in note 8 to the financial statements, the company performed its annual evaluation of goodwill for the black oak gallery reporting unit for impairment by comparing the estimated fair value of the black oak gallery reporting unit to its carrying value. the company used a market approach to determine the estimated fair value of the black oak gallery reporting unit, whereby the company applied a market multiple against the forecasted revenue for the black oak gallery reporting unit, before applying a control premium. the principal considerations for our determination that performing procedures relating to evaluating the recoverability of the carrying value of goodwill is a critical audit matter, are that there is significant judgment by management in the estimation of forecasted revenue, the market multiple to apply and the control premium to use. this in turn led to high degree of auditor judgment, subjectivity and effort in performing audit procedures in evaluating audit evidence related to management’s estimates and assumptions used in the forecasted revenue and model. also, the evaluation of audit evidence related to goodwill impairment required significant auditor judgment as the nature of the evidence is often subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating evidence in connection with forming our overall audit opinion on the consolidated financial statements. these procedures included, among others, (i) evaluating management’s selection of comparable peer companies used in determining the revenue growth rate; (ii) evaluating management’s determination of the market multiple; (iii) evaluating the control premium used by management; and (iv) corroborating the inputs used in management’s model. professionals with specialized skill and knowledge were used to assist in the evaluation of the measurement of the company’s estimated fair value of the black oak gallery reporting unit. income taxes – uncertain tax positions as described in note 12 to the financial statements, the company’s subsidiaries that produced and sold cannabis or cannabis pure concentrates are subject to the limits of internal revenue code section 280e, which only allows the company to deduct expenses directly related to sales of product for federal tax purposes. this requires management to make estimates and judgments relating to the bifurcation of expenses between direct costs of sales versus other operating expenses for such subsidiaries. this also requires management to make judgments as to whether the deduction of operating expenses at the parent company that provides corporate oversight and other services to such subsidiaries, which is an uncertain tax position, met the “more-likely-than-not” recognition threshold the principal considerations for our determination that performing procedures relating to the uncertain tax position was a critical audit matter, are that there is significant judgment by management in estimating the operating expenses at the parent company that are unrelated to the business activity of trafficking cannabis related products, including a high degree of estimation uncertainty due to the complexity of tax laws, lack of guidance from the internal revenue service (“irs”) and potential for adjustments which could have a material impact on the company’s results of operations for the year as a result of any irs audit. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate measurement of provisions for tax uncertainties. also, the evaluation of audit evidence related to the provisions for tax uncertainties required significant auditor judgment as the nature of the evidence is often subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others, (i) testing the information used in the allocation of operating expenses of the parent company to business activities unrelated to trafficking cannabis related products; (ii) evaluating management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; and (iv) evaluating the status and results of tax audits with the relevant tax authorities for companies within the industry. professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained, the application of relevant tax laws, and estimated interest and penalties. /s/ marcum llp marcum llp we have served as the company’s auditor since 2018. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.94part ii item 8 revenue recognition – refer to note 1 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.significant judgment is exercised by the company in determining revenue recognition for these customer agreements, and includes the following: •determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. •the pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. •identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). •determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.how the critical audit matter was addressed in the audit our principal audit procedures related to the company's revenue recognition for these customer agreements included the following: •we tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. •we evaluated management's significant accounting policies related to these customer agreements for reasonableness. •we selected a sample of customer agreements and performed the following procedures: –obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. –tested management's identification and treatment of contract terms. –assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. •we evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. •we tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. 95part ii item 8 income taxes – uncertain tax positions – refer to note 12 to the financial statements critical audit matter description the company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the internal revenue service ("irs"). the company remains under irs audit, or subject to irs audit, for tax years subsequent to 2003. while the company has settled a portion of the irs audits, resolution of the remaining matters could have a material impact on the company's financial statements. conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the internal revenue code, related regulations, tax case laws, and prior-year audit settlements. given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the irs, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.how the critical audit matter was addressed in the audit our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: •we evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. •we read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. •we tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. •for those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. •we evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments. /s/ deloitte & touche llp seattle, washington july 30, 2020 we have served as the company's auditor since 1983. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue from collaboration and licensing agreements as described in note 5 to the consolidated financial statements, the company recognizes revenue when control of the promised products or services is transferred to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company recognized approximately $6.8 million related to collaboration arrangements with customers for the year ended december 31, 2021. the nature of the activities performed, and consideration exchanged through the company’s collaborative agreements, varies such that certain agreements meet the definition of customer relationships for which revenue is recorded, while others do not meet this definition. the company’s collaborative f-2revenue contracts may contain multiple performance obligations and may contain fees for licensing, research and development services, contingent milestone payments upon achievement of developmental contractual criteria, and/or royalty fees based on the licensees' product revenue. we identified revenue recognition from collaborative agreements with customers as a critical audit matter. management makes significant judgments in identifying customer relationships and in determining revenue recognition for its collaborative agreements with customers, including the evaluation of distinct performance obligations, the identification and evaluation of material rights, the estimation of variable consideration, and the determination of the pattern of transfer of control for each distinct performance obligation. auditing management’s judgments and estimates required significant audit effort and auditor subjectivity and in addition, as described in the “opinion on internal control over financial reporting” section above, a material weakness was identified that encompasses this matter.the primary procedures we performed to address this critical audit matter included:•assessing the completeness of collaboration arrangements that require assessment for proper accounting treatment by inspecting company press releases, committee meeting minutes, and credits within research & development expense general ledger accounts.•evaluating the reasonableness of management’s judgments to determine whether customer relationships exist in its collaborative arrangements.•examining a sample of revenue contracts and other source documents to test management's identification of significant terms for completeness and assessing the appropriateness of the treatment for such terms, including the identification of distinct performance obligations, material rights, and variable consideration. •evaluating the reasonableness of management’s judgments and estimates to calculate variable consideration, and the timing of recognizing the related revenue subject to any constraints. •evaluating the appropriateness of management’s determination of whether identified performance obligations meet the criteria for over-time revenue recognition.•evaluating the appropriateness of the method used to recognize revenue and testing the relevant inputs and assumptions to the revenue recognition calculations.we have served as the company's auditor since 2003. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-4 valuation of environmental remediation reserves description of the matter at september 30, 2019, the reserves for environmental remediation amounted to $186 million. as discussed within note o of the consolidated financial statements, the reserves for environmental remediation reflect ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable and probable of being incurred, without regard to any third-party recoveries. the company uses engineering studies, historical experience and other factors to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. ashland regularly adjusts its reserves as environmental remediation continues. auditing the environmental remediation reserve was complex due to inherent uncertainties that affect ashland’s ability to estimate its share of the probable costs. such uncertainties involve assumptions regarding the nature and extent of contamination at each site, the nature and extent of required cleanup efforts under existing environmental regulations, the duration and effectiveness of the chosen remedial strategy, and changes in environmental regulations. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of relevant controls over ashland’s environmental remediation process. for example, we tested controls over the company’s annual training process for the setting of reserves, management’s review of the assumptions used in determining the probability and the development of the environmental reserve estimates. we also tested management’s controls over the completeness and accuracy of the underlying data used in the reserve estimates.to test the environmental reserves, we performed audit procedures that included, among others: assessing the appropriateness of ashland’s policies and procedures and testing the significant assumptions discussed above and the underlying data used by ashland in its analysis. we obtained an understanding of the assumptions underlying the reserves through discussions with ashland’s remediation project managers. we also involved our environmental reserve subject matter specialists to evaluate the reasonableness of management’s estimates, including consideration of information available on regulatory databases in the public domain that was assessed for possible contrary evidence. with the support of our environmental reserve subject matter specialists, we evaluated whether the method, models and assumptions utilized in estimating the reserve balances were appropriate based on testing of engineering studies and historical experience. f-5 valuation of asbestos litigation reserve description of the matter at september 30, 2019, the reserves for asbestos litigation amounted to $604 million. as discussed within note o of the consolidated financial statements, ashland has liabilities from claims alleging personal injury caused by exposure to asbestos. ashland retained third party actuarial experts to assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions. the methodology used by the actuarial experts to project future asbestos costs is based largely on recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims and litigation defense. further, the claim experience identified is compared to the results of previously conducted third party epidemiological studies estimating the number of people likely to develop asbestos-related diseases. using that information, the company estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims. from the range of estimates, ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs, which generally approximates the mid-point of the estimated range of exposure from model results. ashland reviews this estimate and related assumptions quarterly and annually updates the results of a non-inflated, non-discounted approximate 50-year model developed with the assistance of the company’s third party actuarial experts.auditing the company’s asbestos litigation reserve is complex and highly judgmental due to uncertainty associated with the estimate of projected future asbestos costs. the methodology employed by management to develop the estimate of projected future asbestos costs is subject to assumptions such as the number of claims that may be received in the future, the type and severity of disease alleged by claimant, the related costs incurred in resolving those claims, the mortality rates, and the dismissal rates. these assumptions have a significant effect on the asbestos litigation reserve.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the asbestos litigation reserves process. these include controls over management's assessment of the assumptions utilized within the estimate, management’s oversight of asbestos trends including claims movement and costs incurred, and the completeness and accuracy of the underlying data utilized to project future costs.to evaluate the reasonableness of the reserve for asbestos litigation, our audit procedures included testing the completeness and accuracy of the underlying claims data provided to management's actuarial specialist utilized to project future costs. additionally, we evaluated the claims and spend activity from legal letters obtained from internal and external legal counsel. furthermore, we involved our actuarial subject matter specialists to assist in the evaluation of the methodologies and assumptions applied by management's experts as described above to determine the appropriateness of the asbestos litigation reserve, to independently prepare an estimated range of the liability. we then assessed the reasonableness of the company's recorded reserve against our independently calculated range. /s/ ernst & young llp we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.74revenue recognition – identifying and evaluating terms and conditions in contracts description of the matter as explained in note 2 to the consolidated financial statements, the company derives revenue from subscription fees and professional services fees. the company’s arrangements are generally non-cancelable and non-refundable. in addition, the arrangements do not provide customers with the right to take possession of the software and, as a result, are accounted for as service arrangements. subscription revenue, which includes support, is recognized on a straight-line basis over the non-cancelable contractual term of the arrangement, generally beginning on the date that the company’s service is made available to the customer. revenue for the company’s professional services is recognized as services are performed in proportion to their pattern of transfer. auditing the company’s accounting for revenue recognition was challenging, specifically related to the appropriate identification and evaluation of non-standard terms and conditions. for example, certain non-standard terms and conditions required judgment to identify the distinct performance obligations and determine the timing of revenue recognition.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s internal controls over the identification and evaluation of terms and conditions in contracts that impact revenue recognition, including the identification of performance obligations and the determination of the timing of revenue recognition. this included testing relevant controls over the information systems that are used in the initiation, billing and recording of revenue transactions. among other procedures, on a sample basis, we tested the completeness and accuracy of management’s identification and evaluation of the non-standard terms and conditions in contracts. we also tested amounts recognized pursuant to contractual terms and conditions by examining the relationship between revenue recognized and accounts receivable and related cash collections. further, we selected a sample of contractual arrangements to test that management had properly assessed the impact of any non-standard terms on the identified performance obligations and timing of revenue recognition. additionally, to verify completeness of non-standard terms and conditions, we obtained confirmations of terms and conditions for a sample of arrangements with customers.75acquisition of auth0 – fair value of technology and customer-related intangible assets description of the matter as explained in note 3 to the consolidated financial statements, the company completed the acquisition of auth0, a privately-held, identity-as-a-service company during fiscal 2022 for total consideration of $5.7 billion, which was accounted for as a business combination.auditing the company's accounting for its acquisition of auth0 was complex due to the significant estimation required in determining the fair value of developed technology and customer relationship intangible assets, which were valued and recorded at $172.0 million and $140.9 million, respectively. the company used discounted cash flow models to determine the value of developed technology and customer relationship intangible assets. the significant estimation was primarily due to the judgmental nature of the inputs to the valuation model and the sensitivity of the fair value to certain significant underlying assumptions, in particular, the projections of future revenue, including the impact of obsolescence curves for developed technology assets, expected customer attrition rates and anticipated growth in revenue from acquired customers.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company's controls over its accounting for acquisitions, such as controls over the recognition and measurement of developed technology and customer relationships intangible assets, including the valuation model and underlying assumptions used to develop such estimates.to test the estimated fair value of the developed technology and customer relationship intangible assets, our audit procedures included, among others, involvement of our valuation specialists to assist us in the evaluation of the valuation methodology used by the company and procedures to test the assumptions used in the valuation, including the completeness and accuracy of the underlying data. we compared the revenue forecast assumptions, including the impact of technology obsolescence curves, expected customer attrition rates and anticipated growth in revenue from acquired customers, to current industry, market and economic trends, and to historical results of the acquired business and the company./s/ ernst & young llp we have served as the company’s auditor since 2013. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan losses - refer to notes 1 and 4 to the financial statements critical audit matter description the company’s allowance for loan losses is a valuation allowance that reflects an estimate of incurred credit losses related to its recorded investment in held for investment loans. the allowance for loan losses consists of a specific loss reserve for fannie mae 2019 form 10-k f-2 report of independent registered public accounting firmindividually impaired loans and a collective loss reserve for all other loans. the allowance for loan losses is determined based on internal models and management assumptions. the company’s internal models incorporate both historical loan performance data and market data to estimate incurred credit losses. in determining the collective reserve, the company develops estimates such as default rates and loss severity in the event of default. to estimate the specific loss reserve, the company primarily measures impairment using a discounted cash flow analysis. the cash flow analysis incorporates estimates produced by the company’s internal models which include the probability of prepayment, default rates and loss severity in the event of default.we identified the allowance for loan losses as a critical audit matter because of the complexity of the company’s internal models and the significant assumptions used by management. auditing the allowance for loan losses required a high degree of auditor judgment and an increased extent of effort, including the need to involve credit specialists when performing audit procedures to evaluate the reasonableness of management’s models and assumptions. how the critical audit matter was addressed in the audit our audit procedures related to the internal models and assumptions used by management to estimate the allowance for loan losses included the following, among others:•we tested the effectiveness of controls over the allowance for loan losses, including those related to the internal models and significant management assumptions.•with the assistance of our credit specialists, we evaluated the internal models and management’s assumptions including inputs into and the resulting estimates of:–default rates and loss severity in the event of default for collectively assessed loans–the expected future cash flows for individually impaired loans, including estimates of the probability of prepayment, default rates and loss severity in the event of default•we analyzed macroeconomic trends and changes in the company’s book of business in order to evaluate the appropriateness of management’s assumptions.•we compared model-produced estimates of prepayment, default rates and loss severity in the event of default to actual results over historical periods in order to evaluate key assumptions.new accounting guidance - accounting standard update 2016-13, financial instruments - credit losses (topic 326), measurement of credit losses on financial instruments (“asc 326”) - refer to note 1 to the financial statements critical audit matter description the company adopted asc 326 on january 1, 2020. in accordance with securities and exchange commission requirements, the company has disclosed the impact that the adoption of the new accounting standard will have on its financial statements.asc 326 replaces the incurred loss impairment methodology for loans that are collectively evaluated for impairment with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable forecast information to develop credit loss estimates. to calculate the impact of the adoption of asc 326, the company used a discounted cash flow method to measure expected credit losses on its single-family mortgage loans and an undiscounted loss method to measure expected credit losses on its multifamily mortgage loans. the internal models used to estimate credit losses incorporate historical loan performance data, adjusted for current economic forecasts and the current credit profile of the company’s loan book of business. the models use reasonable and supportable forecasts for key economic drivers, such as home prices (single-family), rental income (multifamily) and capitalization rates (multifamily). the cash flow analysis incorporates estimates produced by the company’s internal models which include the probability of prepayment, default rates and loss severity in the event of default. accordingly, the estimate of lifetime expected credit losses requires significant management judgment. we identified the disclosure of the impact of the adoption of asc 326 as a critical audit matter because of the complexity of the company’s internal models and the significant assumptions used by management to estimate the allowance for loan losses. testing the impact of the adoption of asc 326 required a high degree of auditor judgment and an increased extent of effort, including the need to involve credit specialists when performing audit procedures to evaluate the reasonableness of management’s models and estimates.how the critical audit matter was addressed in the audit our audit procedures related to the internal models and assumptions used by management to estimate the impact of the adoption of asc 326 included the following, among others:fannie mae 2019 form 10-k f-3 report of independent registered public accounting firm•we tested the effectiveness of internal controls, including those related to the internal models and significant management assumptions.•with the assistance of our credit specialists, we evaluated the internal models and management’s assumptions, including inputs into and the resulting estimates of the expected future cash flows, including the probability of prepayment, default rates and loss severity in the event of default.•we tested the accuracy of historical loan performance data and current economic data consumed by the internal models used to calculate expected credit losses.•we evaluated the appropriateness of economic and other forecasts used in internal models, including the reversion period applied for periods beyond the reasonable and supportable forecast period./s/ deloitte & touche llp mclean, virginia february 13, 2020we have served as the company's auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. goodwill impairment assessment as described further in the footnotes to the consolidated financial statements, management evaluates goodwill on an annual basis as of june 30, or more frequently if impairment indicators exist, at the reporting unit level. management estimates the fair values of its reporting units using a combination of the income and market approaches. the determination of the fair value of the reporting units requires management to make significant estimates and assumptions related to forecasts of future revenues and operating expenses and discount rates. changes in these assumptions could materially affect the determination of the fair value of the reporting units, the amount of any goodwill impairment charge, or both.we identified the goodwill impairment assessment of certain reporting units as a critical audit matter. the principal consideration for this determination is that management utilized significant judgment when estimating the fair value of these reporting units. in turn, auditing management’s judgments regarding forecasts of future revenues and 67operating expenses, and the discount rates applied, involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgments. our audit procedures related to the goodwill impairment assessment included the following, among others: •we tested the operating effectiveness of controls relating to the goodwill impairment assessment, including the determination of the fair value of the reporting units. •we tested management’s process for determining the fair value of the reporting units. this included evaluating the appropriateness of the valuation methods and testing the completeness, accuracy and relevance of data used by management. •we evaluated the reasonableness of management’s significant assumptions, which included forecasted revenues and operating expenses. we tested whether these forecasts were reasonable and consistent with historical performance, third-party market data, and other evidence obtained in other areas of the audit.•we tested the company’s discounted cash flow models for the reporting units with the assistance of valuation specialists, including the reasonableness of the utilized discount rates. •we tested the company’s use of the market approach with the assistance of valuation specialists, including the reasonableness of selected multiples.indefinite-lived intangible asset impairment assessment – trade name as described further in the footnotes to the consolidated financial statements, management evaluates the trade names for impairment on an annual basis, or more frequently if impairment indictors exist. the impairment test consists of a comparison of the carrying amount with the projected discounted cash flows from the use and eventual disposition of the asset group. the determination of the fair value of the trade names requires management to make significant estimates and assumptions related to forecasts of future revenues, discount rates, and royalty rates. changes in these assumptions could materially affect the determination of the fair value of the trade names, the amount of any trade names impairment charge, or both.we identified the trade name impairment assessment of a certain trade name as a critical audit matter. the principal consideration for this determination is that management used significant judgment when estimating the fair value of the trade name. in turn, auditing management’s judgments regarding forecasts of future revenue, the discount rate applied, and the royalty rate, involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgments.our audit procedures related to the trade name indefinite-lived intangible asset impairment assessment included the following, among others: •we tested the operating effectiveness of controls relating to the trade name impairment assessment, including the determination of the fair value of the trade name. •we tested management’s process for determining the fair value of the trade name. this included evaluating the appropriateness of the valuation method, testing the completeness, accuracy and relevance of data used by management. •we evaluated the reasonableness of management’s significant assumptions, which included forecasted revenues. we tested whether these forecasts were reasonable and consistent with historical performance, third-party market data, and other evidence obtained in other areas of the audit. •we tested the reasonableness of the company’s discount rate and royalty rate with the assistance of valuation specialists.swift auto liability and workers’ compensation claims reserve accrual as described in the footnotes to the consolidated financial statements, the company is self-insured for a portion of its risk related to auto liability and workers’ compensation. the company accrues for the cost of the uninsured portion of pending claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends. the actual cost to settle self-insured claim liabilities may differ from the company’s reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties, including the inherent difficulty in estimating the severity of the claims and the potential judgment or settlement amount to dispose of the claim. 68we identified the estimation of swift’s auto liability and workers’ compensation claims accruals, subject to certain self-insured retention, as a critical audit matter. auto liability and workers’ compensation unpaid claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date. these estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid. the principal considerations for assessing auto liability and workers’ compensation claims as a critical audit matter are the high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims. our audit procedures related to this critical audit matter included the following, among others: •we tested the operating effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments.•we tested management’s process for determining the auto liability and workers’ compensation accrual, including evaluating the reasonableness of the methods and assumptions used in estimating the ultimate claim losses with the assistance of an actuarial specialist.•we tested the claims data used in the claims liability calculation by inspecting source documents to test key attributes of the claims data. customer relationships acquired with the aaa cooper transportation acquisition as described further in the footnotes to the consolidated financial statements, on july 5, 2021, the company acquired 100% of aaa cooper transportation. the total purchase price consideration was $1.31 billion, which allocated $406.2 million to separately identified intangible assets, including customer relationships of $250.8 million. the determination of the fair value of the customer relationships requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses and the discount rate applied. changes in these assumptions could materially affect the determination of the fair value of the customer relationships. we identified the fair value assigned to the customer relationships included on the opening balance sheet as a critical audit matter. the principal considerations for our determination that the acquired customer relationships are a critical audit matter is that management utilized significant judgment when estimating the fair value assigned to the customer relationships. in turn, auditing management’s judgments regarding the assigned fair value involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgments. our audit procedures related to the estimated fair value assigned to acquired customer relationships included the following, among others. •we tested the operating effectiveness of controls relating to the identification of the acquired customer relationships, including the determination of the fair value. •we tested management’s process for determining the fair value of the acquired customer relationships. this included evaluating the appropriateness of the valuation method and testing the completeness, accuracy, and relevance of data used by management. •we evaluated the reasonableness of management’s significant assumptions, which included forecasted revenues and operating expenses. we tested whether these forecasts were reasonable and consistent with historical performance and third-party market data. •we tested the reasonableness of the company’s discount rate applied to the present value of the estimated future cash flows model with the assistance of valuation specialists./s/ grant thornton llp we have served as the company’s auditor since 2011. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.uncertain tax positions related to intercompany transfer pricing as described in notes 2 and 17 to the consolidated financial statements, the company had a gross uncertain tax position liability balance of $281.8 million as of december 31, 2020, primarily related to transfer pricing. the company is subject to income taxes in the united states and numerous foreign jurisdictions. as disclosed by management, the company’s income tax returns in these jurisdictions are periodically audited by domestic and foreign tax authorities. these audits include questions regarding the company’s tax filing positions, including the timing and amount of deductions and the allocation of income amongst various tax jurisdictions. significant judgment is required by management in evaluating uncertain tax positions, including estimating the ultimate resolution to intercompany pricing controversies between countries when there are numerous possible outcomes. the principal considerations for our determination that performing procedures relating to uncertain tax positions related to intercompany transfer pricing is a critical audit matter are the significant judgment by management when determining uncertain tax positions related to intercompany transfer pricing, including a high degree of estimation uncertainty in evaluating whether certain tax filing positions taken by management will be upheld by the related local tax authority. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate the accurate measurement of uncertain tax positions related to intercompany transfer pricing. also, the evaluation of audit evidence available to support the tax liabilities for uncertain tax positions related to intercompany transfer pricing is complex and required significant auditor judgment as the nature of the evidence is highly subjective and the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to recognition of the liability for uncertain tax positions related to intercompany transfer pricing and controls over measurement of the liability. these procedures also included, among others, (i) testing the information used in the calculation of the liability for uncertain tax positions, including u.s. federal filing positions and the related final tax returns; (ii) testing the calculation of the liability for uncertain tax positions related to intercompany transfer pricing, by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing of management’s assessment of possible outcomes of uncertain tax positions related to intercompany transfer pricing; and (iv) evaluating the status and results of income tax audits with the relevant tax authorities. professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the company’s uncertain tax positions related to intercompany transfer pricing, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not to be sustained and the amount of potential benefit to be realized, and the application of relevant tax laws.fair value of contingent consideration liabilities as described in note 11 to the consolidated financial statements, certain of the company’s acquisitions involve contingent consideration arrangements. as of december 31, 2020, the company had a contingent consideration liability of $186.1 million. as disclosed by management, payment of additional consideration is contingent upon the acquired company reaching certain performance milestones, such as attaining specified revenue levels or obtaining regulatory approvals. these contingent consideration liabilities are measured by management at estimated fair value using either a probability weighted discounted cash flow analysis or a monte carlo simulation model, both of which consider significant unobservable inputs. these inputs 40table of contentsinclude (1) the discount rate used to present value the projected cash flows, (2) the probability of milestone achievement, (3) the projected payment dates, and (4) the volatility of future revenue. the principal considerations for our determination that performing procedures relating to the fair value of contingent consideration liabilities is a critical audit matter are the significant judgment by management when estimating the fair value of these contingent consideration liabilities, including a high degree of estimation uncertainty in evaluating the discount rate, the probability of milestone achievement, the projected payment dates, and the volatility of future revenue. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate the fair value of contingent consideration liabilities. also, the evaluation of audit evidence available to support the fair value of the contingent consideration liabilities is complex and resulted in significant auditor judgment as the nature of the evidence is highly subjective and the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s process for estimating the fair value of contingent consideration liabilities, including controls over the determination of the significant unobservable inputs selected by management. these procedures also included, among others, (i) testing management’s process for estimating the fair value of contingent consideration liabilities and (ii) testing management’s probability weighted discounted cash flow analysis or a monte carlo simulation used to estimate the fair value of the contingent consideration liabilities. testing management’s process included evaluating the appropriateness of the valuation methods used and the reasonableness of the significant assumptions related to the discount rate, the probability of milestone achievement, the projected payment dates, and the volatility of future revenue. evaluating the reasonableness of the probability of milestone achievement and projected payment date of each milestone involved consideration of information obtained from the company’s product engineers, clinical trial data, and third-party industry data. the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rate and volatility of future revenue. /s/ pricewaterhouse coopers llp irvine, california february 12, 2021 we have served as the company’s auditor since 1999 | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that werecommunicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts ordisclosures to which they relate. valuationof stock options asdescribed in note 11 to the consolidated financial statements, the company measures fair value of stock options at fair valueusing level three inputs. to determine fair value of stock options, the company determines the appropriate valuation methodologyand assumptions, including unobservable inputs. stock options are measured at fair value using a black-scholes valuation modelthat uses significant assumptions, including the company’s stock price, volatility, risk-free interest rate, probabilityof vesting and probability of exercise occurrence through expiration date. auditingmanagement’s estimate for the fair value of stock options was highly judgmental as it involved our assessment of the significantassumptions used by the company because the fair value calculations were sensitive to changes in assumptions described above,and certain inputs used in the determination of fair values were based on unobservable data, including, but not limited to, thevolatility, probability of vesting and probability of exercise. totest the fair value of stock options, we performed audit procedures that included, among others, evaluating the methodologiesused in the valuation model and the significant assumptions used by the company. /s/liggett & webb, p.a.liggett& webb, p.a.certified public accountants wehave served as the company’s auditor since 2018 | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition - standalone selling price estimations on turnkey contracts as described in note 3 to the consolidated financial statements, the company generates revenue by selling commercial lighting fixtures and components and by installing these fixtures. for contracts that contain multiple performance obligations, the contract’s transaction price is allocated to the performance obligations based on their relative standalone selling prices. for turnkey contracts, the standalone selling price for installation service is estimated using an expected cost-plus a margin approach. 52 we identified the estimation of the standalone selling price of installation service in turnkey contracts as a critical audit matter. under the expected cost-plus a margin approach, management estimates the cost of services and applies an estimated margin. the margin estimate requires significant management judgment and is based on a variety of factors such as geographical location, quantity and type of product to be removed and/or installed, and average historical installation margins. auditing this estimate involved subjective and complex auditor judgment.the primary procedures we performed to address this critical audit matter included: • testing the design and operating effectiveness of internal controls over revenue recognition; specifically, inspecting the company’s controls over estimation of the margin, including their review of a sample of completed turnkey contracts to compare the actual margins achieved to the estimated margin. • evaluating the reasonableness of assumptions used by management in estimating standalone selling price for installation services by (i) examining a sample of turnkey contracts and assessing the reasonableness of the factors considered including geographical location, product type and historical experience; and (ii) examining the most significant contract on a disaggregated level and comparing management’s assumptions to our independently-developed assumptions and evaluating the reasons for significant differences. • assessing that the estimated margin is applied consistently and calculated accurately by testing the calculation for a sample of turnkey contracts and vouching the historical cost inputs incurred for installation and recycling services and verifying the estimated margin fell within a reasonable range of historical margins deferred tax asset valuation allowance as described in note 14 to the company’s consolidated financial statements, during the year ended march 31, 2021, the company released approximately $20.9 million of the valuation allowance on a significant portion of its deferred tax assets. in evaluating the realizability of deferred tax assets, the available positive and negative evidence, including projected future taxable income exclusive of reversing temporary differences, history of book losses, tax planning strategies, and results of recent operations, are considered. we identified the company’s evaluation of the realizability of deferred tax assets as a critical audit matter. significant management judgments are required in evaluating and weighing the collective positive and negative evidence that are used to assess the realizability of deferred tax assets, which include various assumptions surrounding projected future taxable income, the rate of continued growth, and forecasted timing of reversal of temporary differences. auditing these elements involved complex and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the need to involve personnel with specialized skill and knowledge.the primary procedures we performed to address this critical audit matter included: • testing the design and operating effectiveness of internal controls over income taxes, specifically, inspecting the company’s controls over the evaluation of the realizability of deferred tax assets and controls over the development and review of the projected future taxable income. • assessing the reasonableness of the company’s ability to generate future taxable income and utilize the deferred tax assets by evaluating: (i) the forecast of future taxable income , (ii) the rate of continued growth, including performing independent estimates of the expected growth against the company’s historical performance, and (iii) the timing of future reversal of temporary differences. • utilizing personnel with specialized knowledge and skill in taxes to assist in the evaluation of the company’s assessment of positive and negative evidence, and whether the estimated future sources of taxable income were sufficient to utilize the deferred tax assets in the relevant time period./s/ bdo usa, llp we have served as the company's auditor since 2012. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. clinical trial accrual and expenses as discussed in note 2 and 8 of the consolidated financial statements, the company’s total accrued expenses for research and development were $2.3 million at december 31, 2021, which included the estimated obligation for pre-clinical and clinical trial expenses incurred as of december 31, 2021, but not paid as of that date. the company’s clinical trial expenses are based on the company’s estimates of the level of services performed each period pursuant agreements with third parties that conduct research and development on the company’s behalf, which results in an accrual or prepaid at period end.60table of contents we identified the company’s accrued clinical trial expenses as a critical audit matter because auditing the application of significant management judgment over the estimate of services provided but not yet invoiced required significant audit effort and a high degree of auditor judgment and subjectivity to evaluate the audit evidence obtained. specifically, the amount of accrued clinical trial expenses recognized is dependent on the availability of information to make the estimate, including information from multiple sources, the level of effort expended as of the balance sheet date and the associated cost of such services. additionally, due to the timing of invoicing received from third parties, the actual amounts incurred are not typically known on the date the company issues its financial statements. our audit procedures to evaluate the company’s estimate of services incurred as of period end pursuant to its clinical trials included, among others: ●we tested the accuracy and completeness of the underlying data used in the estimates and evaluated the significant assumptions stated above that are used by management to estimate the recorded amounts. ●to assess the reasonableness of the significant assumptions, we obtained information regarding the nature and extent of progress of clinical trials from the company’s research and development personnel that oversee the clinical trials and obtained information directly from third parties which indicated the third parties’ estimate of costs incurred to date. ●to evaluate the completeness and valuation of the accrual clinical trial expenses, we compared invoices received by the company subsequent to december 31, 2021, to the amounts recognized by the company as of that date. ●we inspected the company’s contracts with third parties and any pending change orders to assess the impact to the amounts recorded. /s/ rsm us llp we have served as the company’s auditor since 2013. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.uncertain tax position - caterpillar sarl irs examination as described in note 6 to the consolidated financial statements, as a result of the audits of the company’s u.s. 2007 to 2012 income tax returns, including the impact of a loss carryback to 2005, the internal revenue service (“irs”) has proposed to tax in the u.s. profits earned from certain parts transactions by caterpillar sarl (“csarl”). this proposal is based on the irs examination team’s application of the “substance-over-form” or “assignment-of-income” judicial doctrines. as described by management, the company is vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion, as management believes that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. as disclosed by management, the purchase of parts by csarl from unrelated parties and the subsequent sale of those parts to unrelated dealers outside the u.s. have substantial legal, commercial, and economic consequences for the parties involved. management has concluded that the largest amount of benefit that is more likely than not to be sustained related to this position is the entire benefit. as a result, no amount related to these irs adjustments is reflected in the company’s unrecognized tax benefits. the company has filed u.s. income tax returns on this same basis for years after 2012. the principal considerations for our determination that performing procedures relating to the uncertain tax position arising from the csarl irs examination is a critical audit matter are there was significant judgment by management in evaluating the amount of the benefit that is more likely than not to be sustained related to the position, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate whether the position was more likely than not to be sustained. also, the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the uncertain tax position arising from the csarl irs examination. these procedures also included, among others, (i) evaluating management’s process for determining the reasonableness of the uncertain tax position, including reading certain intercompany and third-party agreements which are relevant to evaluating the legal form and substance of the csarl transaction flows; (ii) evaluating management’s assessment of whether the position was more likely than not to produce a tax benefit and the determination by management of the largest amount of benefit that is more likely than not to be sustained related to this position; and (iii) evaluating the revenue agent reports (“ra rs”) from the irs and management’s protests of the ra rs. professionals with specialized skill and knowledge were used to assist in evaluating the applicable tax laws and judicial doctrines related to this matter as well as changes in relevant tax regulations, rulings, and case law./s/ pricewaterhouse coopers llp chicago, illinois february 17, 2021we have served as the company’s auditor since 1925. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.112table of contents fair value — investments — refer to footnote 2 and 5 in the financial statements critical audit matter description as described in note 5 to the consolidated financial statements, the company’s level 3 investments carried at fair value were $4,785,325 thousand as of december 31, 2020, which includes debt investments of $4,261,272 thousand for which the fair values were determined by blackstone credit bdc advisors (the “adviser”) using a yield analysis. the significant unobservable input used in the yield analysis is the discount rate based on comparable market yields. we identified the valuation of level 3 debt investments utilizing yield analyses as a critical audit matter given the significant judgments made by the adviser to estimate the fair value. this required a high degree of auditor judgment and extensive audit effort, including the need to involve fair value specialists who possess significant valuation experience, to evaluate the appropriateness of the valuation techniques and the significant unobservable input.how the critical audit matter was addressed in the audit our audit procedures related to the unobservable inputs and assumptions used to estimate the fair value of investments included the following, among others: •we evaluated the appropriateness of the valuation methodologies used by the adviser.•we evaluated the appropriateness of the estimates and assumptions in the yield analyses through independent analysis and evidence, including the selected yields for debt investments. •with the assistance of our internal fair value specialists, we evaluated the valuation methodologies and related significant assumptions. •we evaluated the impact of current market events and conditions on the valuation methodology and inputs used by the adviser./s/ deloitte & touche llp new york, new york march 3, 2021we have served as the company’s auditor since 2018. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.product liabilities description of the matter as described in note 7 to the consolidated financial statements, the company recognized $385 million of liabilities at december 31, 2021 for product liability matters relating to claims for certain products. the company establishes liabilities for product claims to the extent probable future losses are estimable based on quantitative and qualitative information from various sources.auditing management’s estimate of product liabilities was especially challenging due to the significant measurement uncertainty associated with the product liabilities estimate that involved management’s significant judgment and analysis. further, the product liability is sensitive to significant management assumptions, including average costs per claim and the number of future claims, including those resulting in revision surgery.how we addressed the matter in our audit we obtained an understanding, evaluated management’s design and tested the operating effectiveness of the controls over the company’s product liability estimation process, including management's assessment of the assumptions, and the completeness and accuracy of the data underlying the product liabilities.to evaluate the liabilities for product claims, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims and average cost per claim data and obtaining legal confirmation letters to evaluate the liabilities recognized. we involved our actuarial specialists in the evaluation of the methodologies and significant assumptions applied by management in estimating the product liabilities and range of probable losses. we also evaluated the adequacy of the company’s disclosures included in note 7 related to these liabilities.dollar amounts in millions except per share amounts or as otherwise specified.20stryker corporation 2021 form 10-k uncertain tax positions description of the matter as described in note 11 to the consolidated financial statements, the company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. uncertainty in a tax position may arise because tax laws are subject to interpretation. the company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. at december 31, 2021, the company had accrued liabilities of $444 million relating to uncertain tax positions.auditing management’s analysis of the company’s uncertain tax positions and the related unrecognized tax benefits was especially challenging as the analysis involved significant auditor judgment due to complex interpretations of tax laws, legal rulings and determination of arm’s length pricing for intercompany transactions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s accounting process for uncertain tax positions. for example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of unrecognized income tax benefits.our audit procedures included, among others, evaluating the assumptions the company used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. we also tested the completeness and accuracy of the underlying data used by the company to calculate its uncertain tax positions. for example, we involved our tax professionals to evaluate tax technical merits, which included, for certain intercompany transactions, assessing the company’s assumptions and pricing methodology to determine they were arm’s length and complied with local jurisdictional laws and regulations. we also evaluated the estimated liabilities for unrecognized income tax benefits in consideration of current tax controversy and litigation trends in similar positions challenged by tax authorities. we also evaluated the adequacy of the company’s disclosures included in note 11 related to these tax matters./s/ ernst & young llp we have served as the company's auditor since 1974g | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of goodwill for the europe reporting unit as discussed in note 8 to the consolidated financial statements, the goodwill balance as of december 31, 2021 was $1,411.7 million, a portion of which related to the europe reporting unit. the company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that it is more likely than not that an impairment may have occurred. the impairment test is performed by comparing the estimated fair value of a reporting unit to the carrying value of the reporting unit. the company estimates the fair value using a weighting of two valuation methodologies, with greater weight placed on the income approach.we identified the evaluation of the company’s assessment of goodwill for impairment for the europe reporting unit as a critical audit matter. the revenue growth rates, forecasted operating margin and the discount rate used to estimate the fair value of the europe reporting unit in the income approach are inherently uncertain and required management to make significant estimates and judgments related to the future results of operations. in addition, individuals with specialized skills and knowledge were required to assess the discount rate used to estimate the fair value of the europe reporting unit in the income approach.the following are the primary procedures we performed to address the critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s assessment of goodwill for impairment, including controls related to the:•determination of the revenue growth rates and forecasted operating margin•selection of the discount rate.we performed sensitivity analyses over the revenue growth rate and forecasted operating margin to assess their impact on the company’s determination that the fair value of the europe reporting unit exceeded its carrying value. we evaluated the forecasted revenue growth rates 64and operating margin used to value the europe reporting unit by comparing them to budgets, supporting documentation, and to historical growth rates. we compared the company’s historical revenue and operating margin forecasts for the europe reporting unit to actual results to assess the company’s ability to accurately forecast. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:•evaluating the discount rate used in the fair value model in the income approach by comparing it against a discount rate that was independently developed using publicly available market data for comparable entities•developing an estimate of the europe reporting unit’s fair value using the company’s cash flow forecast and an independently developed discount rate, and comparing the results of our estimate to the company’s estimate.fair value of acquired customer relationship intangible asset as discussed in note 7 to the consolidated financial statements, the company accounts for business combinations under the acquisition method of accounting by recording assets acquired and liabilities assumed at fair value. on april 1, 2021, the company acquired pai, midco inc. (pai) for $215.5 million and the company recorded an intangible asset representing the generation of future income from pai’s existing customers. the preliminary fair value for the customer relationship intangible asset was $60 million.we identified the evaluation of the fair value of a customer relationship intangible asset acquired in the pai transaction as a critical audit matter due to the high degree of subjectivity in evaluating certain inputs in the discounted cash flow model used to determine the fair value of the asset. the key assumptions used within the valuation model included expected future revenue growth, forecasted earnings before interest, taxes, depreciation, and amortization (ebitda) margin, customer attrition rate, and the discount rate applied. changes in these assumptions could have a meaningful impact on the fair value of the customer relationship intangible asset.the following are the primary procedures we performed to address the critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s acquisition-date valuation process, including controls related to the:•development of the expected future revenue growth•determination of the forecasted ebitda margin•determination of the customer attrition rate, and•selection of the discount rate.we evaluated the expected future revenue growth and forecasted ebitda margin by comparing these amounts to the historical revenue growth and ebitda margin of the acquired entity, and to the forecasted revenue growth of peer companies. we evaluated the customer attrition rate against the company’s historical customer attrition rate. we involved valuation professionals with specialized skills and knowledge who assisted in:•performing sensitivity analyses over future revenue growth, forecasted ebitda margin, attrition rate, and discount rate to assess the impact of changes in those assumptions on the company’s determination of the fair value estimate of the customer relationship intangible asset•evaluating the company’s discount rate by comparing it against a discount rate that was independently developed using publicly available market data for comparable entities•developing a fair value estimate of the customer relationship intangible asset using the company’s cash flow projections and independently developed discount rate and comparing it to the company’s estimate./s/ kpmg llp we have served as the company’s auditor since 2020. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.investment in 50% or less owned company as described in notes 1 and 4 to the consolidated financial statements, the company has an investment in a 50% or less owned company in the amount of approximately $29 million. this investment is reviewed at least quarterly by the company to assess whether there is an other-than-temporary decline in the carrying value of the investment. the company considers financial performance and returns as well as the value of underlying collateral in determining the estimated fair value of the investment. we identified that the recoverability of one investment included within investments in 50% or less owned companies as a critical audit matter.68table of contents the principal considerations for our determination that this investment being recoverable was a critical audit matter is that the company is located in a foreign jurisdiction and has had significant losses in the current period and prior periods. the determination of recoverability of the investment requires management to utilize subjective assumptions to estimate the fair value of the investment. this estimation process required a high degree of auditor judgment and an increased extent of effort, including the need to involve valuation specialists.our audit procedures related to this investment being recoverable included the following, among others. we evaluated the design and tested the operating effectiveness of key controls relating to management’s impairment assessment process. we reviewed the impairment analysis prepared by management. we involved valuation professionals with the specialized skills and knowledge to review the valuation models used by management as well as key assumptions.certain vessel impairment assessments as described in note 1 to the consolidated financial statements, the company has a vessel included in property and equipment in the amount of approximately $90 million. this vessel is reviewed at least quarterly by the company for impairment assessment. the company considers historical and projected financial performance and returns as well as information from the industry. we identified the impairment assessment of this vessel within property and equipment as a critical audit matter.the principal considerations for our determination that the impairment assessment of this vessel was a critical audit matter is that it has had more than normal or anticipated repairs and has had lower than anticipated charter rates and utilization over the past year. the impairment assessment of the vessel requires management to utilize subjective assumptions to estimate the undiscounted cash flows of the vessel. this estimation process required a high degree of auditor judgment and an increased extent of effort.our audit procedures related to the impairment assessment of this vessel included the following, among others. we evaluated the design and tested the operating effectiveness of key controls relating to management’s impairment assessment process. we reviewed undiscounted cash flow forecasts prepared by management and tested the key assumptions utilized./s/ grant thornton llp we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matters communicatedbelow are matters arising from the current period audit of the consolidated financial statements that were communicated or required tobe communicated to the board of directors and that (1) relate to accounts or disclosures that are material to the consolidated financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdo not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the criticalaudit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. uncertainties regarding the future outcome of litigation critical audit matter description as discussed in note 8, the companyis currently the subject to various legal proceedings including the securities and exchange commission, as well as class action and derivativecomplaints. in preparing its consolidated financial statements, the company is required to assess the probability of loss associated witheach legal proceedings and amount of such loss, if any. the outcome of legal proceedings to which the company is a party is not withinthe complete control of the company or may not be known for prolonged periods of time. the proceedings involve claims that are subjectto substantial uncertainties and unascertainable damages and could have a material adverse effect on the company’s business, reputation,financial condition, results of operations and/or stock price. the principal consideration for our determinationthat the uncertainties regarding the future outcome of litigation was a critical audit matter is the significant judgment and subjectivityinherent in predicting future outcomes of litigation. how the critical audit matter was addressedin the audit we assessed the disclosures madeby reading letters received directly from the company’s external and in-house legal counsel that discussed the company’s legalmatters. we evaluated management's conclusion that no amounts should be accrued for as of december 31, 2021 based on the opinion of externaland in house legal counsel and our assessment of contingencies in accordance with asc topic 450 contingencies. in addition, weexamined legal invoices related to the complaints in order to evaluate the appropriateness of the disclosures in the financial statements.we considered relevant publicly available information, such as published press releases about the company and its legal matters and performeda search for unrecorded liabilities. going concern assessment critical audit matter description as described further in note 1 tothe consolidated financial statements, the company has incurred net losses each year from inception through december 31, 2021, has notgenerated revenue since inception and has had a decrease in cash in excess of $4.5 million for each of the years ended december 31, 2021and 2020. the company determined these, and other factors which include the pending litigations, raised substantial doubt as to the company'sability to continue as a going concern one year from the issuance date of the consolidated financial statements. in making this determination,management prepared a short-term cash flow projection through december 2023. management used significant assumptions in preparing theshort-term cash flow projection, which included expected operating costs and other obligations. 45 the principal considerations forour determination that the evaluation of management's going concern assessment was a critical audit matter are the significant judgmentand subjectivity inherent in the company's future cash flow and a high degree of auditor judgment in evaluating management's forecastsfor at least the next 12 months. how the critical audit matter was addressedin the audit our audit procedures related to the evaluationof management's forecasted future cash flow projections and going concern assessment included the following, among others: ·assessed the overall reasonableness of the company's future cash flow projections,including significant assumptions utilized by the company.·compared january and february 2022 actual operating results to forecasted amountsas well as the company’s 2021 operating budget to actual results to determine overall accuracy of future operating cash flow projections.·evaluated the adequacy of the company's financial statement disclosures. /s/ pkf o’connor davies, llp we have served as the company’sauditor since 2020. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that is material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of acquired customer relationships and equipment as described further in note 5 to the financial statements, on december 31, 2020, the company completed an acquisition. the company’s accounting for the acquisition included estimating the fair value of the acquired tangible and intangible assets, including equipment and customer relationships. we identified the company’s methods and assumptions used in estimating the fair value of equipment and customer relationships a critical audit matter. the principal considerations for our determination that the company’s methods and assumptions used in estimating the fair value of the equipment and customer relationships is a critical audit matter include the significant auditor judgment required in evaluating the inputs and assumptions used by management when estimating the fair value of f-2these assets. the estimation was significant primarily due to the sensitivity of the respective fair values to the underlying assumptions, including discount rate, projected revenue growth rates, projected gross margins, customer attrition rate, and application of the methodology used. in addition, the audit effort involved the use of professionals with specialized skill and knowledge. our audit procedures related to the company’s methods and assumptions used in the estimation of the fair value of the acquired equipment and customer relationships included the following, among others. •we tested the design and operating effectiveness of controls relating to management’s review of the assumptions used to develop the future revenues and cash flows and the valuation methodologies applied by the third party valuation specialists. •we evaluated whether the assumptions used including, revenue growth rate, gross margin percentage, and customer attrition rate were reasonable. •for equipment acquired, we tested the reasonableness of management’s methodology and use of external market data. •we utilized a valuation specialist to assist in evaluating the methodologies and other underlying assumptions used including the application of the discount rate by the company. /s/ grant thornton llp we have served as the company’s auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition — revenue arrangements involving multiple performance obligations consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services — refer to notes 1 and 17 to the financial statements critical audit matter description many of the company's revenue arrangements involve multiple performance obligations consisting of hardware, software, and professional services such as implementation, project management, installation, and consulting services. these contracts may contain customer-specific business terms and conditions, including service level commitments, variable consideration, and terms that govern when the customer has taken control. additionally, these contracts may be modified from time to time as the company delivers under the contract. these customer-specific business terms and conditions and modifications may involve complex accounting considerations, including determining whether the company has enforceable rights and obligations, 48table of contentswhether contract modifications represent new contracts or modification of existing contracts, whether certain performance obligations are distinct, and other considerations that may impact the timing of revenue recognition. the evaluation of these factors is executed in accordance with the asc 606 revenue recognition framework and requires significant management judgment that could affect the amount and timing of revenue recognition over the contractual period. the computations to recognize revenue under the asc 606 revenue recognition framework can be complex and require a significant volume of data input. additionally, there can be complexity in the computations and entries made to record the related contract assets and liabilities at the balance sheet date. given the challenge in auditing the judgments and computations made in determining revenue recognition for these multiple performance obligation arrangements with customer-specific business terms and conditions and modifications, we identified revenue recognition as a critical audit matter.how the critical audit matter was addressed in the audit our audit procedures related to (1) determining whether the company has enforceable rights and obligations, whether contract modifications represent new contracts or modifications, whether certain performance obligations are distinct and other considerations that may impact the timing of revenue recognition and (2) the completeness and accuracy of the revenue recognition computations and entries used to recognize revenue included the following, among others:•we tested the effectiveness of controls over contract reviews, including management's use of checklists and other review procedures to determine whether customer-specific business terms are evident in the contract and whether accounting conclusions regarding enforceable rights and obligations, contract modifications, distinct products and services, and other considerations that may impact the timing of revenue recognition are appropriately applied.•we tested the effectiveness of controls over revenue recognition computations and entries to determine whether the computations and entries appropriately reflect the accounting conclusions for these contracts. such controls included (1) the review of the completeness and accuracy of data input into the computations and entries and (2) the review of the mathematical accuracy of the computations and entries. •for a sample of contracts with customers that included existing contracts, new contracts and contract modifications, we:◦tested management's identification of customer-specific terms, whether the company had enforceable rights and obligations, whether contract modifications represented new contracts or modifications to existing contracts, whether customer-specific terms introduced new or implied performance obligations, or other factors influencing the timing, nature and amount of revenue recognized, and assessed management's conclusions regarding accounting treatment. our procedures included reading the selected contracts and inquiring of the company's operational personnel to understand the nature of the contract and its business purpose, as well as evaluating management's conclusions. ◦evaluated whether the identified accounting conclusions were appropriately reflected in the revenue recognition computations and entries. ◦tested the accuracy and completeness of the data used in the computations and entries to record revenue. ◦tested mathematical accuracy of revenue recognition computations and entries. goodwill — device solutions reporting unit — refer to notes 1 and 5 to the financial statements critical audit matter description the company's evaluation of goodwill for impairment involves the comparison of the fair value of its reporting units to their carrying amounts. the company evaluates goodwill for impairment at least annually, during the fourth quarter. the company develops its estimate of fair value of the reporting unit using forecast discounted cash flows at the reporting unit level, which requires the company to make significant estimates and assumptions related to forecasts of future revenues and operating costs. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the estimated fair value of device solutions ("devices") reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized. we identified goodwill for devices as a critical audit matter because of the significant estimates and assumptions the company makes to estimate the fair value of devices and the sensitivity of devices' operations to changes in the company's financial performance. this required a high degree of auditor judgment and an increased extent of effort, including the involvement of our fair value specialists, when performing audit procedures to evaluate the reasonableness of management's estimates and assumptions related to forecasts of future revenues and operating costs. 49table of contents how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of revenue and operating costs ("forecasts") for the devices reporting unit included the following, among others: •we tested the effectiveness of controls over management's goodwill impairment evaluation, including those over the determination of the fair value of devices, such as controls related to the company's forecasts.•we inquired of members of the company's management responsible for the devices reporting unit to understand and corroborate management's plan to achieve planned forecast revenue growth.•we evaluated the reasonableness of management's forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in analyst and industry reports as well as press releases of the company and companies in its peer group.•with the assistance of our fair value specialists, we evaluated the valuation methodology and long-term forecast growth rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developed a range of independent estimates and compared those to selections made by management./s/ deloitte & touche llp seattle, washington february 28, 2022 we have served as the company's auditor since 2016. | 2 |
critical audit matters the critical audit matters communicated below are matters arisingfrom the current period audit of the consolidated financial statements that were communicated or required to be communicated tothe audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statementsand (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters doesnot alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating thecritical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to whichthey relate. allowance for loan losses as described in note 6 to the company’s consolidated financialstatements, the company has a gross loan portfolio of $3.2 billion and related allowance for loan losses of $16.5 million as of december 31, 2019. the company’s allowance for loan losses includes a general reserve, which is determined based on the resultsof a quantitative and a qualitative analysis of all loans not specifically measured for impairment at the reporting date. in calculating the allowance for loan losses, the company calculatesa reserve based on historical loss experience determined by major loan category. the actual loss experience is supplemented withinternal and external qualitative factors. as such, the estimation of loss is based on significant management judgment, particularlywhere the company has not incurred sufficient historical losses and has utilized qualitative factors in forming its estimate. auditingthese complex judgments and assumptions by management involves especially challenging auditor judgment due to the nature and extentof audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. the primary procedures we performed to address this critical auditmatter included:·testing the design and operating effectiveness of controls relatingto management’s review of loans, evaluation of historical losses, and the final reserve coverage.·substantively testing and evaluating the reasonableness of assumptionsand sources of data used by management in the allowance for loan losses calculations and in forming the qualitative loss factorsby performing retrospective review of historical loan loss experience and analyzing historical data used in developing the assumptions.·substantively testing the mathematical accuracy and computationof the allowance for loan losses by independently calculating significant elements of the allowance based on relevant source documentsand testing completeness and accuracy of data used in the calculation.80 business combinations as described in note 2 to the company’s consolidated financialstatements, the company had one acquisition during the year ended december 31, 2019, which was the acquisition of carolina trust banc shares, inc. with total consideration paid of approximately $119.5 million. the most material and complex components of thetransaction related to the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. the company’s determination of fair values of certain identifiabletangible and intangible assets acquired and liabilities assumed is complex and includes the following areas of management’sjudgments: (1) application of accounting guidance related to business combinations, (2) significant unobservable inputs and assumptionsutilized by management in determining the fair values of certain identifiable tangible and intangible assets acquired and liabilitiesassumed, and (3) changes in certain assumptions could have a significant impact on the fair values of the identifiable tangibleand intangible assets acquired and liabilities assumed. auditing these elements involves especially challenging auditor judgmentdue to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledgeneeded. the primary procedures we performed to address this critical auditmatter included:·testing the design and operating effectiveness of controls relatingto management’s review of the business combination and fair values of acquired assets and liabilities assumed.·substantively testing and evaluating management’s third-partyvaluation specialists and evaluating their conclusions regarding fair values of assets acquired and liabilities assumed, includingan evaluation of the significant assumptions utilized in their fair value calculations.·substantively testing the assumptions that were incorporated intothe various models used to calculate fair value.mortgage servicing rights as described in note 9 to the company’s consolidated financialstatements, the company has unpaid principal balances of loans serviced for others of $3.6 billion at december 31, 2019. the company’seconomic estimated fair values of mortgage servicing rights was $31.4 million at december 31, 2019. the company’s valuationof mortgage servicing rights is a material and complex estimate requiring significant management judgment, specifically as it pertainsto the evaluation of potential impairment within the mortgage servicing right portfolio. management relies on a third-party valuation specialist to calculatean estimated fair value of their mortgage servicing rights portfolio. the third-party valuation specialist and the valuation processutilizes several significant assumptions to determine an estimated fair value, including net servicing fee, weighted average discountrates, weighted average constant prepayment rates, and a weighted average delinquency rate. management evaluates the significantassumptions as well as the final value of the portfolio, including any impairment that needs to be recognized. as such, the fairvalue estimate, and specifically the measure of impairment, is based on significant management judgment. auditing these complexjudgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effortrequired to address these matters, including the extent of specialized skill or knowledge needed. the primary procedures we performed to address this critical auditmatter included:·testing the design and operating effectiveness of controls relatingto management’s review of the mortgage servicing rights portfolio valuation, including the measurement of impairment.·substantively testing and evaluating the reasonableness of assumptionsused by management and the third-party valuation specialist in the mortgage servicing rights portfolio valuation by utilizing elliott davis, llc valuation specialists to evaluate the reasonableness of the key assumptions utilized in the calculation.·substantively testing the mathematical accuracy and computationof the mortgage servicing rights by independently calculating significant elements of the valuation as determined by management’sthird-party valuation specialist./s/ elliott davis, llc we have served as the company’s auditorsince 2010. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. defined benefit pension obligation description of the matter at december 31, 2019, the aggregate defined benefit pension obligation was $475.4 million, and the fair value of pension plan assets was $432.7 million, resulting in an unfunded defined benefit pension obligation of $42.7 million. as described in note 10 to the consolidated financial statements, the company updated the estimates used to measure the defined benefit pension obligation and plan assets as of december 31, 2019 to reflect the actual return on plan assets and updated actuarial assumptions.auditing the defined benefit pension obligation was complex and required the involvement of specialists due to the judgmental nature of the actuarial assumptions used in the measurement process, including the discount rate, expected return on plan assets, and mortality rate. these assumptions have a significant effect on the projected benefit obligation.57how we addressed the matter in our audit we tested controls that address the risks of material misstatement relating to the measurement and valuation of the defined benefit pension obligation. for example, we tested controls over management’s review of the defined benefit pension obligation calculations and the significant actuarial assumptions discussed above.to test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the company. for example, we compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. in addition, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension obligation. as part of this assessment, we compared the projected cash flows to prior year and compared the current year benefits paid to the prior year projected cash flows. we also tested the completeness and accuracy of the underlying data, including the participant data used in the defined benefit obligation calculations. to evaluate the expected return on plan assets, we assessed whether management’s assumptions were consistent with a range of returns for a portfolio of comparative investments. we also evaluated the assumptions used for the mortality rate to assess whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. we involved an actuarial specialist to assist with our procedures. impairment of long-lived assets description of the matter as described in notes 3 and 9 to the consolidated financial statements, the company reviews long-lived assets for impairment annually, or if circumstances indicate that the carrying amount of those assets may not be recoverable. the company evaluates the recoverability of assets to be held and used by comparing the carrying amount of the asset to the undiscounted future net cash flows the asset is expected to generate. if the company determines that an asset is impaired, an impairment loss is recognized equal to the excess of the asset’s carrying amount over its fair value.auditing management’s evaluation of long-lived assets for impairment involved subjectivity due to the significant estimation required to determine the undiscounted future net cash flows for assets with indicators of potential impairment. in particular, these estimates are sensitive to significant assumptions, including lease rates, operating costs, the life of the asset, and final disposition proceeds, which can be affected by expectations about future market or economic conditions. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s long-lived asset impairment review process, including controls over management’s review of the significant assumptions discussed above.to test the company’s long-lived asset impairment review process, we performed audit procedures that included, among others, assessing the methodologies used, evaluating the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by the company in its analysis. we assessed the historical accuracy of management’s estimates, and we compared certain significant assumptions used by management to current industry and economic trends and evaluated whether changes to the company’s business and other relevant factors would affect those significant assumptions./s/ ernst & young llp we have served as the company’s auditor since 1916. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. valuation of contingent consideration as described in notes 2 and 4 to the company’s consolidated financial statements, the company has recorded a contingent consideration liability of approximately $3.3 million related to the acquisition of pelican therapeutics, inc. on april 27, 2017. contingent consideration is measured at fair value using a probability-weighted income approach utilizing significant unobservable inputs including the probability of achieving each of the potential milestones, the estimated timing of milestone achievement, and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. we have identified the estimate of contingent consideration as a critical audit matter. due to the company’s limited historical clinical trial experience, the inherent uncertainty involved in estimating the probabilities of success and time to milestones, and the complexity of the valuation methodology utilized by management, auditing the contingent consideration liability required increased auditor effort, including the use of valuation specialists. the primary procedures we performed to address this critical audit matter included:f-2table of contents ●assessing management’s estimated timing of milestone achievement and probabilities of success by corroborating with clinical development personnel knowledgeable of the current progression of the product candidate and performing a retrospective review over management’s estimates from prior periods. ●evaluating the reasonableness of inputs and assumptions used by management to determine the probabilities of success and timing of achievement of milestones by comparing them to external market and industry data.●utilizing professionals with specialized knowledge and experience in valuation to evaluate the valuation methodology applied by management, as well as assessing the appropriateness of the discount rate selected by management. impairment of goodwill and in-process r&d as described in notes 2 and 7 to the company’s consolidated financial statements, the company has recorded goodwill and in-process r&d (“ipr&d) in connection with the acquisition of pelican therapeutics, inc. on april 27, 2017. the company tests goodwill and in-process r&d for impairment each year as of april 1, or more frequently should a significant impairment indicator occur. during the fourth quarter of 2021, due to a sustained decline in the quoted market price of its common stock, the company performed an interim impairment analysis using the income approach which resulted in the recognition of goodwill and ipr&d impairment expenses of approximately $1.5 million and $2.4 million, respectively. we identified the valuation performed in connection with the impairment assessment of goodwill and ipr&d as a critical audit matter. the impairment assessment required significant judgments related to (i) forecasted financial information, including the estimation of future development costs, the probability of success in various phases of its development programs and potential post-launch cash flows, and (ii) estimate of risk-adjusted weighted average cost of capital. due to the company’s limited historical clinical trial experience, the inherent uncertainty involved in estimating the future cash flows and the risk-adjusted weighted average cost of capital, and the complexity of the impairment methodology utilized by management, auditing the impairment analysis required increased auditor effort, including the use of valuation specialists. the primary procedures we performed to address this critical audit matter included: •evaluating the estimated future development costs by performing a retrospective review in comparison to previous management estimates, •comparing estimated probabilities of success, future development costs, and potential post-launch costs used by management to external market and industry data.●utilizing professionals with specialized knowledge and experience in valuation to evaluate the valuation methodology applied by management, and to test specific assumptions including the weighted average cost of capital. /s/ bdo usa, llp we have served as the company’s auditor since 2012. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.impact of rate regulation on the financial statements - refer to notes 1 and 9 to the consolidated financial statements critical audit matter description the company’s subsidiaries are fully regulated natural gas and electric utility companies serving customers in six states. these rate-regulated subsidiaries account for and report assets and liabilities consistent with the economic effect of the manner in which regulators establish rates, if the rates established are designed to recover the costs of providing the regulated service and it is probable that such rates can be charged to and collected from customers. certain expenses and credits subject to utility regulation or rate determination normally reflected in income are deferred on the consolidated balance sheets and are later recognized in income as the related amounts are included in customer rates and recovered from or refunded to customers.the company’s subsidiaries’ rates are subject to regulatory rate-setting processes. rates are determined and approved in regulatory proceedings based on an analysis of the subsidiaries’ costs to provide utility service and a return on, and recovery of, the subsidiaries’ investment in the utility business. regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. the respective commission’s regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested 58table of contents item 8. financial statements and supplementary data (continued)nisource inc.report of independent registered public accounting fir mcapital. decisions to be made by the commission in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. while the company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the commission will not approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.we identified the accounting for rate-regulated subsidiaries as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. management judgments include assessing (1) the likelihood of recovery in future rates of incurred costs and (2) the likelihood of refund of amounts previously collected from customers. given that management’s accounting judgments are based on assumptions about the outcome of future decisions by regulatory commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate making process due its inherent complexities.how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the commissions included the following, among others:•we tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. we also tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments, that may affect the likelihood of recovering costs in future rates or of a future reduction in rates. •we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.•we read relevant regulatory orders issued by the commissions for the company, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the commissions’ treatment of similar costs under similar circumstances. we evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.•for regulatory matters in process, we inspected the company’s filings with the commissions and the filings with the commissions by intervenors that may impact the company’s future rates, for any evidence that might contradict management’s assertions related to recoverability of recorded assets.•we inquired of management about property, plant, and equipment that may be abandoned. for assets that were abandoned, we inquired of management about their considerations regarding the abandonment. we inspected minutes of the board of directors and regulatory orders and other filings with the commissions to identify evidence that may contradict management’s assertion regarding probability of an abandonment. •with the assistance of professionals in our firm with expertise in the application of asc topic 980, regulated operations, we evaluated management’s conclusions regarding the application of asc topic 980 to the timing differences between the amount of profit from the consolidated joint ventures and the amount included in regulated rates.•we read the relevant regulatory orders issued by the commission for the company’s renewable energy investments. we evaluated the appropriateness of recognizing a regulatory liability or asset representing timing differences between the profit allocated under the hypothetical liquidation at book value (hlbv) method related to the consolidated joint ventures and the allowed earnings included in regulatory rates. we also evaluated the appropriateness of the offset to the regulatory liability or asset recorded in depreciation expense. •we evaluated the company’s disclosures related to the application of asc topic 980 to consolidated joint venture accounting.59table of contents item 8. financial statements and supplementary data (continued)nisource inc.report of independent registered public accounting firm preferred stock—2021 equity units - refer to notes 5, 13, 18 and 24 to the consolidated financial statements critical audit matter description on april 19, 2021, the company completed the sale of 8.625 million equity units, initially consisting of corporate units, each with a stated amount of $100. each corporate unit consists of a forward contract to purchase shares of the company's common stock in the future (“forward contract”) and a 1/10th, or 10%, undivided beneficial ownership interest in one share of series c mandatory convertible preferred stock (“preferred stock”) (collectively the “equity units”).the forward contract obligates holders to purchase shares of the company's common stock on december 1, 2023, subject to early settlement in certain situations. the purchase price to be paid under the forward contract is $100 per equity unit and the number of shares to be purchased will be determined near the settlement date, subject to a maximum settlement rate. the preferred stock was pledged upon issuance as collateral to secure the purchase of the company's common stock under the related forward contract. the company will pay quarterly contract adjustment payments at the rate of 7.75% per year on the stated amount of $100 per equity unit.the preferred stock initially will not bear any dividends and is expected to be remarketed prior to december 1, 2023. following a successful remarketing, dividends may become payable on the preferred stock and/or the minimum conversion rate of the preferred stock may be increased. each share of preferred stock will automatically convert based on a conversion rate on the mandatory conversion date, which is expected to be on or about march 1, 2024, unless previously converted. if no successful remarketing of the preferred stock has previously occurred, effective as of december 1, 2023, the conversion rate will be zero, no shares of the company's common stock will be delivered upon automatic conversion, and each share of preferred stock will be automatically transferred to the company on the mandatory conversion date without any payment of cash or shares of the company's common stock thereon. in the event of such a remarketing failure, any share of preferred stock held as part of equity units will be automatically delivered to the company on december 1, 2023 in full satisfaction of the relevant holder’s obligation under the related forward contracts.the company has concluded that the forward contracts and the preferred stock host represent a single unit of account and has recorded the equity units in equity as preferred stock. the present value of the quarterly contract adjustment payments was recorded as a liability, with the offset recorded in preferred stock. we identified the accounting for the equity units as a critical audit matter due to the significant judgments made by management in the application of accounting guidance. auditing these judgments required specialized knowledge of accounting for financial instruments and extensive audit procedures to evaluate the accounting treatment associated with the equity units.how the critical audit matter was addressed in the audit our audit procedures related to the accounting for the equity units included the following, among others: •we tested the effectiveness of controls over management’s accounting assessment of the equity units. •we read the applicable agreements and compared the key terms from the agreements to management’s analysis of the transaction. •with the assistance of professionals in our firm with expertise in 1) accounting for financial instruments and 2) assessing probability of certain outcomes underlying the key accounting judgments, we evaluated management’s conclusions regarding the application of the appropriate accounting standards. •we evaluated the company's disclosure of the equity units transaction, including the related impacts to the financial statements./s/ deloitte & touche llp columbus, ohio february 23, 2022we have served as the company's auditor since 2002. | 5 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of inventories as described in notes 2 and 4 to the financial statements, the company’s inventories balance was $4.6 million as of december 31, 2021. the company values its inventories at lower of cost (determined using the first-in, first-out method) or net realizable value. the company writes down inventory that has expired or become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected requirements. the estimate of excess quantities is subjective and primarily dependent on the estimates of future demand for a particular product. changes in assumptions of product demand could have a significant impact on the amount of write-down recorded. the evaluation by management includes analysis of historical sales levels by product, projections of future demand, the risk of technological or competitive obsolescence for products, general market conditions, as well as the feasibility of reworking or using excess or obsolete products or components in the production or assembly of other products that are not obsolete or for which there are not excess quantities in inventory. f-2 we identified the valuation of inventories, in particular the estimates for excess quantities and obsolescence, as a critical audit matter, because of the significant assumptions and subjective judgments used by management, which in turn led to the use of subjective auditor judgment and audit effort to address the matter. the primary procedures we performed to address the critical audit matter included: ● evaluating management’s process for developing the estimates of excess and obsolete inventories by: ● evaluating the methodology utilized to calculate the write-downs; ● performing inquiries with management as to the composition of the reserve for inventory items without recent sales; ● assessing the appropriateness of the formulaic calculation and management adjustments by product type; and ● testing the mathematical accuracy of the formulaic calculation. ● evaluating the reasonableness of the significant assumptions used by management including those related to future demand by: ● evaluating management’s ability to provide reasonable forecast of sales by comparing prior period sales forecasts to actual results; and ● performing inquiries with nonfinancial personnel, including sales and production employees, regarding obsolete or discontinued inventory items and other factors to corroborate management’s assertions regarding qualitative judgments about excess and obsolete inventories or unrecorded reserves. ● testing the completeness, accuracy, and relevance of the underlying data used in management’s estimate and calculations related to the application of the methodology to specific inventory categories by agreement to supporting documentation and recalculation. ● performing a substantive analytical procedure, whereby we developed an independent expectation of the excess and obsolescence reserve based primarily on historical trends, and compared that expectation to the recorded amount. /s/ moss adams llp san francisco, california march 22, 2022 we have served as the company’s auditor since 2017. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. estimate for excess, obsolete, and slow-moving inventory reserve as discussed in notes 1 and 5 to the financial statements, inventories are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out method. the company records provisions for excess, obsolete, and slow-moving inventory based on changes in customer demand, technology developments or other economic factors. the excess, obsolete, and slow-moving inventory reserve serves to reduce the company’s inventory balance through a charge to cost of products sold. the company’s reserve for excess, obsolete, and slow-moving inventory is based upon assumptions related to expectations of future demand, product lifecycles, product support, technical obsolescence, regulatory requirements, and economic and market conditions. if the actual realization of excess, obsolete, and slow-moving inventory does not meet the company’s assumptions future inventory adjustments would result in a decrease in gross margin. due to the magnitude of the inventory and the subjectivity involved in estimating the reserve, we identified the evaluation of the reserve as a critical audit matter, which required a high degree of auditor judgment. addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. the primary procedures we performed include, obtaining an understanding of the process and assumptions used by management to develop the reserve for excess, obsolete, and slow-moving inventory; testing the effectiveness of controls over management’s estimate of reserves for excess, obsolete, and slow-moving inventory; testing management’s calculation of the reserve for excess, obsolete, and slow-moving inventory by: testing the completeness and accuracy of the source information used, testing the mathematical accuracy of management’s calculations, evaluating the reasonableness and consistency of methodology and assumptions applied by management, and performing a retrospective review of the prior-year estimates used to identify potential bias of management judgements. goodwill impairment analysis as discussed in notes 1 and 5 to the financial statements, the company performs its goodwill impairment test on an annual basis as of october 1st or whenever events and changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. for each reporting unit the company performed a quantitative test, which compares the fair value of the reporting unit to the carrying value of the respective reporting unit. the company has identified five goodwill reporting units. management determines fair value of the respective reporting units using a discounted cash flow model. significant estimates and judgements used in this model include internal operating and cash flow forecasts, excess working capital requirements, and inputs to the weighted-average cost of capital used to discount future cash flows. future revenue and operating cash flow forecasts, the development of the weighted average cost of capital used to discount the future cash flows, and excess working capital requirements are subject to judgement based on sources utilized and the assessment of risks related to the cash flows. due to the subjectivity involved with the assumptions used to determine the fair value of the reporting unit, we identified the goodwill impairment test as a critical audit matter, which required a high degree of auditor judgement. addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. the primary procedures we performed include: obtaining an understanding of the process and assumptions used by management to perform the impairment test, testing the effectiveness of controls over management’s test for impairment, and testing management’s impairment calculation by: testing the completeness and accuracy of the source information used, testing the mathematical accuracy of management’s calculations, evaluating the reasonableness and consistency of methodology and assumptions applied by management, performing a retrospective review of the prior-year estimates used to identify potential bias of management judgements, and verifying certain third party data used by the company in building their assumptions. professionals with specialized skills and knowledge were used to assist in evaluating certain methodologies and assumptions used in the model and performing sensitivity analysis on various inputs. /s/ freed maxick cp as, p.c. we have served as the company's auditor since 2016. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated and combined financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated and combined financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated and combined financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of revenue recognition on agreements for sales of goods manufactured to unique customer specifications as discussed in note 1 to the consolidated and combined financial statements, the company enters into agreements for sales of goods manufactured to unique customer specifications. revenue from these types of contracts is recognized to the extent of progress towards completion measured by actual costs incurred relative to total expected costs.we identified revenue recognition for contracts from the sales of goods manufactured to unique customer specifications as a critical audit matter because of the complex auditor judgment required in evaluating the company's long-term estimates of the expected costs to be incurred in order to complete the contract.baker hughes company 2019 form 10-k | 46the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s revenue recognition process for contracts from the sales of goods manufactured to unique customer specifications. such controls included controls pertaining to the company's estimation of costs expected to be incurred to complete the contract. we selected certain contracts from the sales of goods manufactured to unique customer specifications to evaluate the company's ability to accurately estimate costs expected to be incurred to complete a contract. for the selected contracts, we evaluated the estimated costs expected to be incurred to complete the contract by:–questioning the company's finance and project managers regarding progress to date based on the latest project reports and the costs expected to still be incurred until completion;–observing project review meetings performed by the company and inspecting relevant minutes of those meetings to identify changes in the estimated costs expected to be incurred to complete the contract and related contract margins;–assessing the remaining estimated costs expected to be incurred by expenditure category on contracts in progress by comparing to the actual costs incurred during the current year for the selected project and similar projects; and–investigating changes to the contract margin when compared to the prior year's estimated contract margin. assessment of the carrying value of goodwill in the oilfield equipment and oilfield services reporting units as discussed in note 7 to the consolidated and combined financial statements, the company has four reporting units which are monitored for impairment on the basis of market condition. the company performs a goodwill impairment test on an annual basis on july 1 or whenever events and changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. the goodwill balance as of december 31, 2019 was $20,690 million, of which $3,319 million and $13,043 million were related to the oilfield equipment and oilfield services reporting units, respectively. the oilfield equipment and oilfield services reporting units had fair values that were not significantly in excess of their carrying values. projected revenue, projected operating profit, and the discount rates are elements of the estimated future cash flows used by the company in determining the fair value of each reporting unit. we identified the evaluation of projected revenue, projected operating profit and the discount rates used in the assessment of the carrying value of goodwill for the oilfield equipment and oilfield services reporting units as a critical audit matter. specifically, the evaluation of projected revenue, projected operating profit, and the discount rates required the application of subjective auditor judgement because these projections involve assumptions about future events and changes to the discount rate assumptions may have a significant effect on the company's assessment of the carrying value of the goodwill of the reporting units.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s goodwill impairment process, including controls over the development of projected financial information and the discount rates, and management’s review of the projections and comparison to historical results. we evaluated the projected revenue and projected operating profit assumptions by comparing the projected amounts to (a) the past performance of the reporting unit, including historical results and growth rates, and (b) relevant and reliable industry benchmark data related to future events. we also considered evidence obtained in other areas of the audit. we evaluated the company’s ability to accurately prepare projections by comparing the projected revenues and projected operating profit to historical results for the same period. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: –evaluating the industry benchmark data used by the company in developing its projected financial information;–evaluating the discount rates used by comparing them against a discount rate range that was independently developed using publicly available market data for comparable entities; and –performing sensitivity analysis related to key inputs including revenue growth rates, discount rates and projected operating profit. /s/ kpmg llp we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of accounts receivable, net of allowances for implicit price concessions as described in note 1 to the consolidated financial statements, net service revenue is recognized at the amount that reflects the consideration the company expects to receive in exchange for providing services directly to consumers. amounts collected may be less than amounts billed due to implicit price concessions, resulting from client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized, pricing differences and other reasons unrelated to credit risk. management estimates the value of accounts receivable, net of allowances for implicit price concessions, based upon historical experience and other factors, including an aging of accounts receivable, evaluation of expected adjustments, past adjustments and collection experience in relation to amounts billed, current contract and reimbursement terms, shifts in payors and other relevant information. as disclosed by management, the evaluation of these historical and other factors involves complex, subjective judgments. accounts receivable, net of allowances for implicit price concessions (before the allowance for doubtful accounts), were $133.6 million as of december 31, 2020.the principal considerations for our determination that performing procedures relating to the valuation of accounts receivable, net of allowances for implicit price concessions is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in applying procedures relating to the valuation of accounts receivable, net of allowances for implicit price concessions due to the significant judgment by management when developing the estimate; and (ii) the significant audit effort in performing procedures and evaluating the audit evidence obtained related to the estimate. as previously disclosed by management, a material weakness existed during the year related to this matter. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s estimate of the valuation of accounts receivable, net of implicit price concessions, including controls over the allowance for implicit price concessions. these procedures also included, among others, (i) evaluating management’s process for developing the estimate of accounts receivable, net of allowances for implicit price concessions, as well as the relevance and use of historical experience data as an input into the estimate, (ii) testing the completeness and accuracy of the charges and payments used by management in the estimate by testing a sample of revenue transactions, (iii) evaluating the historical accuracy of management’s process for developing the estimate of the amount which will ultimately be collected by comparing actual cash collections to the previously recorded accounts receivable, and (iv) developing an independent expectation of the amount expected to be collected by management. developing the independent expectation involved calculating the percentage of cash collections as compared to the recorded accounts receivable balance as of the end of the prior year and comparing that percentage to management’s collection expectation used to determine the current year estimate of accounts receivable, net of allowances for implicit price concessions.valuation of queen city hospice identifiable intangible assets as described in notes 1 and 4 to the consolidated financial statements, during 2020, the company completed the acquisition of queen city hospice, llc and its affiliate miracle city hospice, llc (together “queen city hospice”) for net consideration of $194.8 million. as a result of the acquisition, management recorded total identifiable intangible assets of $20.0 million, related to trade names, non-competition agreements, and state licenses. management estimates the fair values of the trade names using the relief-from-royalty method, which requires assumptions such as the long-term growth rates of future revenues, the relief from royalty rate for such revenue, the tax rate and the discount rate. management estimates the fair value of existing indefinite-lived state licenses based on a f-3table of contents blended approach of the replacement cost method and cost savings method, which involves estimating the total process costs and opportunity costs to obtain a license, by estimating future earnings before interest and taxes and applying an estimated discount rate, tax rate and time to obtain the license. management estimates the fair value of non-competition agreements based on a method of analyzing the factors to compete and factors not to compete, which involves estimating historical financial data, forecasted financial statements, growth rates, tax amortization benefit, discount rate, review of factors to compete and factors not to compete as well as an assessment of the probability of successful competition for each non-competition agreement.the principal considerations for our determination that performing procedures relating to the valuation of identifiable intangible assets resulting from the acquisition of queen city hospice is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of identifiable intangible assets acquired due to the significant judgment by management when developing the estimates; (ii) significant audit effort in performing procedures and evaluating audit evidence relating to the significant assumptions such as (a) the relief from royalty rate and the discount rate for certain trade names, and (b) the estimated time to obtain the license and the discount rate for certain indefinite-lived state licenses (collectively, the “identifiable intangible assets significant assumptions”); and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to estimating the fair value of identifiable intangible assets recorded from the queen city hospice acquisition, including controls over development of the identifiable intangible assets significant assumptions. these procedures also included, among others, testing management’s process for estimating the fair value of intangible assets, which included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of underlying data used by management, and evaluating the reasonableness of identifiable intangible assets significant assumptions. evaluating the reasonableness of the identifiable intangible assets significant assumptions, except for the discount rates, involved considering the following, as applicable, (i) past performance of the acquired businesses, and (ii) economic and industry metrics and forecasts. in addition, the discount rates were evaluated by considering the cost of capital of comparable businesses and other industry factors. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuation methods used and the reasonableness of the discount rates. /s/ pricewaterhouse coopers llp dallas, texas march 1, 2021 we have served as the company’s auditor since 2019. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.73real estate— real estate development - refer to notes 1, 5, 14, and 16 to the financial statements critical audit matter description the company’s evaluation of real estate development for impairment involves an initial assessment of each real estate development to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of a real estate development are no longer recoverable. possible indications of impairment may include events or changes in circumstances affecting the entitlement process, government regulation, litigation, geographical demand for new housing, and market conditions related to pricing of new homes. when events or changes in circumstances exist, the company evaluates the real estate development for impairment by comparing undiscounted future cash flows expected to be generated over the life of the real estate development to the respective carrying amount. if the carrying amount of the real estate development exceeds the undiscounted future cash flows, an analysis is performed to determine the fair value of the asset.the company makes significant assumptions to evaluate each real estate development for possible indications of impairment. these assumptions include the identification of appropriate and comparable market prices, the consideration of changes to legal factors or the business climate, and assumptions surrounding continued positive cash flows and development costs. considering that the planned development communities will be in a location that does not currently have many comparable homes, the company must make assumptions surrounding the expected ability to sell the real estate assets at a price that is in excess of current accumulated costs. in addition, the company is currently involved in numerous litigation matters related to the entitlement of the property and must continue to use judgment when evaluating the likelihood that these legal matters will be resolved and that the necessary entitlements will be obtained. changes in these assumptions could have a significant impact on the real estate development identified for further analysis and any impairments identified could be material to the company’s earnings. further, the facts and circumstances utilized to make these assumptions may change from period to period. for the year ended december 31, 2020, no impairment loss has been recognized on any real estate development.we identified the determination of impairment indicators for real estate development as a critical audit matter due to the quantitative significance of real estate development and because of the assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of any real estate development may not be recoverable. this required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified impairment indicators. how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of real estate development for possible indications of impairment included the following, among others: •we tested the effectiveness of the controls over management’s identification of possible circumstances that may indicate that the carrying amounts of any real estate development is no longer recoverable, including controls over management’s evaluation of the entitlement process, government regulation, litigation, geographical demand for new housing and market conditions related to pricing of new homes. •we read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside sources. •we evaluated management’s impairment analysis by: ◦testing the real estate development for possible indications of impairment, including searching for adverse asset-specific and/or market conditions by reviewing publicly available information on home values and land values in the surrounding regions of the development, periodicals and news information relating to the southern california housing market, other independent market data, including considerations of the demand for housing in the market and changes to comparable home prices ◦we obtained letters from legal counsel and performed inquiries with the company’s in-house legal counsel in order to evaluate any changes in the status of the litigation matters affecting the development properties and the potential impact on the ability to recover the accumulated costs, including any relevant government regulations and/or other matters impacting the entitlement process. ◦developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis./s/ deloitte & touche llp los angeles, california march 3, 2021 we have served as the company's auditor since 2019. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. oil and gas properties, depletion and amortization and impairment of long-lived assets - refer to note 1 to the financial statements critical audit matter description as described in note 1 to the financial statements, oil and gas properties are accounted for using the successful efforts method. depletion and amortization of the cost of proved oil and gas properties are calculated using the units-of-production method. proved developed reserves are used as the base for depleting capitalized costs associated with successful exploratory well costs, development costs and related facilities, other than offshore platforms. the sum of proved developed and proved undeveloped reserves is used as the base for depleting or amortizing leasehold acquisition costs and costs to construct offshore platforms and associated asset retirement costs. also, the fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of its oil and gas properties may not be recoverable. recoverability is evaluated by comparing estimated future net undiscounted cash flows to the carrying value of the oil and gas properties at the time of the review. if the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the oil and gas properties is impaired, and written down to fair value. f-2 table of contents estimates of proved reserves are key components of the fund’s most significant estimates involving its rate for recording depletion and amortization and estimated future cash flows of oil and gas properties used to test for impairment. annually, the fund engages an independent petroleum engineering firm to perform a comprehensive study of the fund’s proved properties to determine the quantities of reserves and the period over which such reserves will be recoverable. the fund’s estimates of proved reserves are based on the quantities of oil and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. the fund’s oil and gas properties, net balance was $11.7 million as of december 31, 2021 and depletion and amortization expense recognized was $4.3 million for the period ended december 31, 2021. no impairment was recognized during 2021. we identified the impact of the oil and natural gas reserve quantities on the oil and gas properties and depletion and amortization financial statement line items and the evaluation of impairment of long-lived assets as a critical audit matter due to the significant judgments made by the fund. the significant judgments made by the fund include the use of specialists to develop and evaluate the fund’s oil and natural gas reserve quantities, future cash flows, reserve risk weightings, future development costs, and future oil and natural gas commodity prices. auditing these significant judgments required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the fund’s estimates and assumptions related to oil and natural gas reserve quantities included the following, among others: • we evaluated the reasonableness of the fund’s oil and natural gas reserve quantities by performing the following procedures: o comparing the fund’s oil and natural gas reserve quantities to historical production volumes. o evaluating the reasonableness of the methodology used and the production volume decline curve. o understanding the experience, qualifications and objectivity of management’s expert, an independent petroleum engineering firm. o comparing forecasts of proved undeveloped oil and natural gas reserves to historical conversions of proved undeveloped oil and natural gas reserves and communication from third-party well operators. • we evaluated management’s assessed reserve risk weighting associated with the development of proved, probable and possible oil and natural gas reserve quantities by comparing the assessed risk to industry surveys. • we evaluated the reasonableness of future development costs by comparing such costs to the approval for expenditures, historical well cost data and communication from third-party well operators. f-3 table of contents • we evaluated, with the assistance of our fair value specialists, the reasonableness of future oil and natural gas commodity prices by performing the following procedures: o understanding the methodology utilized by management for development of the future oil and natural gas commodity prices. o comparing the future oil and natural gas commodity prices to an independently determined range of prices. o comparing management’s future oil and natural gas commodity prices to published forward pricing indices and third-party industry sources. • we evaluated the future oil and natural gas commodity prices by comparing future oil and natural gas commodity price differentials to historical realized price differentials. /s/ deloitte & touche llp parsippany, new jersey february 28, 2022 we have served as the fund's auditor since 2006. | 5 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the u.s. medicare, medicaid, and performance-based contract rebates accrual as discussed in note 1h to the consolidated financial statements, the company records estimated deductions for medicare, medicaid, and performance-based contract rebates (collectively, u.s. rebates) as a reduction to gross product revenues. the accrual for u.s. rebates is recorded in the same period that the corresponding revenues are recognized. the length of time between when a sale is made and when the u.s. rebate is paid by the company can be as long as one year, which increases the need for significant management judgment and knowledge of market conditions and practices in estimating the accrual. we identified the evaluation of the u.s. rebates accrual as a critical audit matter because the evaluation of the product-specific experience ratio assumption involved especially challenging auditor judgment. the product-specific experience ratio assumption relates to estimating which of the company’s revenue transactions will ultimately be subject to a related rebate.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s u.s. rebates accrual process related to the development of the product-specific experience ratio assumptions. we estimated the u.s. rebates accrual using internal information and historical data and compared the result to the company’s estimated u.s. rebates accrual. we evaluated the company’s ability to accurately estimate the accrual for u.s. rebates by comparing historically recorded accruals to the actual amount that was ultimately paid by the company.evaluation of gross unrecognized tax benefits as discussed in notes 5d and 1q, the company’s tax positions are subject to audit by local taxing authorities in each respective tax jurisdiction, and the resolution of such audits may span multiple years. since tax law is complex and often subject to varied interpretations and judgments, it is uncertain whether some of the company’s tax positions will be sustained upon audit. as of december 31, 2021, the company has recorded gross unrecognized tax benefits, excluding associated interest, of $6.1 billion. pfizer inc.2021 form 10-k49report of independent registered public accounting firm we identified the evaluation of the company’s gross unrecognized tax benefits as a critical audit matter because a high degree of audit effort, including specialized skills and knowledge, and complex auditor judgment was required in evaluating the company’s interpretation of tax law and its estimate of the ultimate resolution of its tax positions.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of an internal control over the company’s liability for unrecognized tax position process related to (1) interpretation of tax law, (2) evaluation of which of the company’s tax positions may not be sustained upon audit, and (3) estimation and recording of the gross unrecognized tax benefits. we involved tax and valuation professionals with specialized skills and knowledge who assisted in evaluating the company’s interpretation of tax laws, including the assessment of transfer pricing practices in accordance with applicable tax laws and regulations. we inspected settlements with applicable taxing authorities, including assessing the expiration of statutes of limitations. we tested the calculation of the liability for uncertain tax positions, including an evaluation of the company’s assessment of the technical merits of tax positions and estimates of the amount of tax benefits expected to be sustained.evaluation of product and other product-related litigation as discussed in notes 1s and 16 to the consolidated financial statements, the company is involved in product liability and other product-related litigation, which can include personal injury, consumer, off-label promotion, securities, antitrust and breach of contract claims, among others. certain of these pending product and other product-related legal proceedings could result in losses that could be substantial. the accrued liability and/or disclosure for the pending product and other product-related legal proceedings requires a complex series of judgments by the company about future events, which involves a number of uncertainties.we identified the evaluation of product and other product-related litigation as a critical audit matter. challenging auditor judgment was required to evaluate the company’s judgments about future events and uncertainties.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s product liability and other product-related litigation processes, including controls related to (1) the evaluation of information from external and internal legal counsel, (2) forward-looking expectations, and (3) new legal proceedings, or other legal proceedings not currently reserved or disclosed. we read letters received directly from the company’s external and internal legal counsel that described the company’s probable or reasonably possible legal contingency to pending product and other product-related legal proceedings. we inspected the company’s minutes from meetings of the audit committee, which included the status of key litigation matters. we evaluated the company’s ability to estimate its monetary exposure to pending product and other product-related legal proceedings by comparing historically recorded liabilities to actual monetary amounts incurred upon resolution of prior legal matters. we analyzed relevant publicly available information about the company, its competitors, and the industry. we have not been able to determine the specific year that we or our predecessor firms began serving as the company’s auditor, however, we are aware that we or our predecessor firms have served as the company’s auditor since at least 1942. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.38table of contents goodwill impairment related to tripwire reporting unit description of the matter at december 31, 2021, the company had goodwill on its balance sheet aggregating $1.2 billion. as more fully described in notes 2 and 13 to the company’s consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. goodwill is assigned to reporting units on the respective acquisition dates. the company performed a quantitative impairment assessment for all of its reporting units to determine if the fair values of these reporting units were in excess of the carrying values. an impairment charge should be recognized for the amount by which the carrying amount of goodwill exceeds the reporting unit’s fair value with a charge not to exceed the total amount of goodwill allocated to that reporting unit. as a result of these assessments, the company recognized an impairment of $131.2 million related to the tripwire reporting unit during the year ended december 31, 2021. auditing the company’s annual goodwill impairment test for the tripwire reporting unit under the quantitative assessment was complex due to the judgments and estimation required in determining the fair value of the reporting unit. in particular, the fair value estimate is sensitive to significant assumptions such as the discount rate, revenue growth rate, projected operating margin, and terminal growth rate, which are sensitive to and affected by expectations about future market or economic conditions and company-specific qualitative factors.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s preparation and review of the goodwill impairment test, significant assumptions discussed above, as used in the model, and the completeness and accuracy of the data used in the model. our audit procedures included, among others, involving our specialists to assist us in assessing methodologies, and testing the significant assumptions discussed above and the underlying data used by the company in its analyses, and reviewing the methodology and market support used to determine the discount rate. we compared the significant assumptions used by the company to current industry and future economic trends, changes to the company’s business model, customer base or product mix and other relevant factors. we assessed the historical accuracy of the company’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair values of the reporting units that would result from changes in the assumptions. we also reconciled the fair value of the reporting unit to the carrying amount, testing the company’s determination of the assets and liabilities used within the reporting unit that are the basis for the carrying amount. we also evaluated whether any changes in the composition of the reporting units reflected significant changes in the organizational structure or segments.revenue recognition - allocating consideration to performance obligations and estimating variable consideration description of the matter as described in notes 2 and 3 to the consolidated financial statements, the company has contractual arrangements that include software, support, and service revenues. the company estimated the selling prices of those contractual arrangements to determine the allocation of consideration to each of the performance obligations. the objective was to determine the price at which the company would transact a sale if the product, support or service was sold on a standalone basis. generally, the company determines standalone selling price using the adjusted market assessment approach. for software licenses with highly variable standalone selling prices sold with either support or professional services, the company generally determines the standalone selling price of the software license using the residual approach. the company estimated the standalone selling prices of each of the performance obligations and projected cash flows over the term of each contractual arrangement to determine the amount of total consideration allocated to each of the performance obligations. the company also enters into sales contracts that provide certain distributors with unprocessed changes in the form of price concessions, product return rights, refunds, and stock rotations, which all result in variable consideration. at the time of sale, the company establishes an estimated reserve for the variable consideration and recognizes it by reducing revenues. estimates are based on a percentage of revenues and the average time period between the original sale and the issuance of the adjustments. as of december 31, 2021, the company recorded $23.4 million in unprocessed changes that were recognized as a reduction of revenues and accounts receivable and $12.5 million in unprocessed changes recognized as accrued liabilities. 39table of contents auditing the company’s allocation of consideration expected to be received under its contractual arrangements was complex and involved a high degree of subjective auditor judgment because of the management judgment required to develop the estimates of standalone selling prices for the highly variable pricing of software licenses. auditing the company's measurement of variable consideration under the distributor contracts involved especially challenging judgment because the calculation involves subjective management assumptions, including historical adjustments as a percentage of revenues and the estimated period of time between the original sale and the issuance of the adjustment, all used in the estimates of reserves for variable consideration related to unprocessed changes and pricing concessions. the estimates developed by the company are also dependent on anticipated sales demand, trends in product pricing, and historical and anticipated adjustment patterns. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company's processes to determine the estimated standalone selling price of each of the performance obligations, the allocation of total consideration to be received over the contractual term to all performance obligations based on their relative standalone selling price and to calculate the variable consideration, including the process to determine and evaluate the underlying assumptions about estimates of expected unprocessed changes and pricing concessions. we performed audit procedures related to the estimated standalone selling prices and allocation to the performance obligations over the term of the contractual arrangement, including the following, among others. to test the calculation of the amount of consideration allocated to each performance obligation, we evaluated the accuracy and completeness of the underlying data used in the company’s calculation of the ranges of each standalone selling price and recalculated the established range for the standalone selling price used. we analyzed transaction level detail, such as invoices and price lists, to test that, if necessary, the transaction price was reallocated to bring the amount allocated to the performance obligation within the established range. we evaluated the appropriateness of the methodology used to determine the standalone selling price by comparing such prices to historical analysis and practices observed in the industry. in addition, we performed detailed testing of the underlying transactions in the calculation by comparing the amounts recognized to source documents and performed an analysis to recalculate the allocation of revenue between performance obligations as part of our overall testing of revenue transactions. our audit procedures related to the company’s estimates of variable consideration included, among others, evaluating the significant assumptions and the accuracy and completeness of the underlying data used in the company's calculation. this included testing the company's estimate of historical adjustments as a percentage of revenues and the average time period between the original sale and the issuance of the adjustment memo. in addition, we inspected the results of the company's retrospective review of adjustments reserved compared to actual adjustments issued, evaluated the estimates made based on historical experience and performed sensitivity analyses to evaluate the changes in variable consideration that would result from changes in the company's significant assumptions. /s/ ernst & young llp we have served as the company’s auditor since 1993. | 3 |
critical audit matter the critical audit matter communicated below isa matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicatedto the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and(2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical auditmatter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. accounting for warrants issued as part of equityoffering as described in note 10 to the consolidatedfinancial statements, the company completed a private placement offering in january 2021 that included the issuance of common stockand warrants to purchase common stock. the warrants were evaluated for proper classification on the consolidated balance sheet andit was determined that the warrants issued in this equity offering should be classified within stockholders’ equity. we identified the accounting for warrantsissued as part of the equity offering in january 2021 as a critical audit matter. our principal considerations included theexistence of accounting complexities related to certain provisions of the warrant agreements, including provisions of cashsettlement and derivative elements. auditing these elements required especially challenging auditor judgement and significant auditeffort as well as the need for specialized knowledge and skill assessing these elements of the agreement. the primary procedures we performed to addressthis critical audit matter included: ·reading the agreements related to the warrants issued along with management’s technical accounting memo to understand the facts and circumstances within the warrant agreements and other assumptions impacting the determination of warrant classification. ·utilizing personnel with specialized knowledge and skill in debt and equity accounting to evaluate the appropriateness of management’s interpretation on how to apply the relevant accounting guidance for the classification of the warrants issued, including the evaluation of derivative characteristics and the terms associated with the company’s control that could require cash settlement of the warrants. /s/ bdo usa, llp we have served as the company’s auditor since 2011. | 5 |
critical audit matters the critical audit matter communicated below isa matter arising from the current period audit of the financial statements that was communicated or required to be communicated to theaudit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective or complex judgments. the communication of critical audit matter does not alter in any way our opinion on theconsolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separateopinion on the critical audit matter or on the account or disclosure to which it relates. valuation of goodwill description of the matter as of december 31, 2021, the company’s goodwill was $29.5 million. as discussed in note 2 to the consolidated financial statements, goodwill is assessed annually for impairment as of december 31, or more frequently if an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit has declined below its carrying value. auditing the company’s quantitativeimpairment test for goodwill was especially complex and judgmental due to the significant estimation required in determining the fairvalue of the reporting unit. in particular, the fair value estimate was sensitive to the significant assumptions that require judgmentincluding the amount and timing of expected future cash flows and the related discount rate. these assumptions are affected by such factorsas expected future market or economic conditions and clinical trial and regulatory events. how we addressed the matter in our audit to test the estimated fair value of the reporting unit, our audit procedures included, among others, assessing the valuation methodology, evaluating the significant assumptions used to develop the projected financial information, and testing the underlying data used by the company in its analysis. for example, we compared the projected financial information developed by management to current industry benchmarks and economic trends and evaluated the expected impacts of the company’s ongoing operating strategies to develop its portfolio of therapies on the significant assumptions. we performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the assumptions. we also considered the relationship between the fair value of the reporting unit to the market capitalization of the company. in addition, we involved our internal valuation specialists to assist in evaluating the methodology and significant assumptions applied in developing the fair value estimate. /s/ ernst & young llp we have served as the company’s auditorsince 2021. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the general partner and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. impairment of long-lived assets as discussed in note 2, topic, long-lived assets, once an asset comes off lease or is released, the partnership reassesses the useful life of an asset. the partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. the partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. if the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. the amount of the impairment is determined based on the difference between the carrying value and the fair value. fair value is determined based on estimated discounted cash flows to be generated by the asset, third party appraisals, or comparable sales of similar assets, as applicable, based on asset type. the principal considerations for our determination that performing procedures relating to the impairment of long-lived assets is a critical audit matter are the use of significant judgment and subjective factors in the partnership’s assessment of any changes in events or circumstances that may affect the carrying amount of its long-lived assets. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included the following: ·reviewed the internal controls over the partnership’s impairment assessment process for equipment ·reviewed the valuation method for appropriateness ·reviewed the specialized skills and knowledge of the valuation professional ·tested the estimated fair value to an independent service reimbursable expenses as discussed in note 2, topic, reimbursable expenses, reimbursable expenses are ongoing operational expenses and fees associated with the allocation of salaries and benefits which are charged to the partnership by commonwealth capital corp. (ccc) in connection with the administration and operation of the partnership are allocated to the partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases. we identified the allocation of reimbursable expenses as a critical audit matte due to a high degree of subjectivity in the selection of certain key factors. the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over ccc’s allocation process. f-2table of contents to the partners commonwealth income & growth fund v(continued) addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included the following: ·evaluated that the reimbursement is in compliance with the partnership agreement ·evaluated the reasonableness and consistency of key factors used by ccc to allocate the ongoing operational expenses ·tested the dollar amounts in the key factors to the accounting records of the partnerships included in the allocation ·tested the calculation of the allocation percentage applied to the partnership ·confirmed that the operational expenses do not include costs of control persons /s/ morison cogen llp we have served as the partnership’s auditors since 2021. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.50 accounting for revenue recognition description of the matter as described in note 3 to the consolidated financial statements, the company derives revenues from two primary sources: software and services. most of the company’s contracts with customers contain multiple performance obligations which are accounted for separately, if they are distinct. the transaction price is allocated to separate performance obligations on a relative standalone selling price basis. the standalone selling prices of software are typically estimated using the residual approach. standalone selling prices of services are typically estimated based on observable transactions when those services are sold on a standalone basis.auditing the identification of performance obligations in a software contract requires significant judgment as it relates to the evaluation of the contractual terms of the arrangement. auditing the allocation of the transaction price to performance obligations requires significant judgment in determining whether the use of the residual approach to estimate the standalone selling prices of software is appropriate.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s revenue recognition process, including the evaluation of the contractual terms of the revenue arrangements and the company’s assessment of the appropriateness of the residual method for estimating the standalone selling prices of software. to test the amount of revenue recognized, we performed audit procedures that included, among others, testing a sample of revenue transactions during the year and evaluating the identification of performance obligations based on analysis of the contractual terms and independent confirmations of the terms and conditions of the contract directly with customers. our testing of the application of the residual method to estimate standalone selling prices of software included inquiries with management and analysis of the variability of actual software pricing during the year by customer class. accounting for the acquisition of hedvig description of the matter as discussed in note 4 to the consolidated financial statements, on october 1, 2019, the company completed its acquisition of hedvig, inc. (“hedvig”) for a total purchase price of $163 million. the transaction was accounted for as a business combination and the assets acquired and liabilities assumed were recorded in the financial statements as of october 1, 2019.auditing the company's accounting for its acquisition of hedvig was significant to our audit due to the higher extent of audit effort and because the amounts are material to the consolidated financial statements and related disclosures. the company’s determination of the fair value of the developed technology asset involved significant estimation uncertainty, primarily due to projections of the acquired entity’s future financial performance used in the calculation and the discount rate assumption.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process of accounting for business combinations. we tested controls over the estimation process supporting the recognition and measurement of the developed technology asset, including management’s review of the valuation models and management’s evaluation of the underlying assumptions and estimates used to determine its fair value.to test the estimated fair value of the developed technology intangible asset, we performed audit procedures that included, among others, evaluating the company's selection of the valuation methodology, evaluating the methods and significant assumptions applied and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. we involved our valuation specialists to assist with our evaluation of the methodology used by the company, and we tested the significant assumptions, including the discount rate and the projected financial information used to estimate the fair value.we have served as the company’s auditor since 1998. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.interest income recognition-certain mortgage-backed securities where the company may not recover substantially all of their initial investment as described in note 2 to the consolidated financial statements, interest income on certain mortgage-backed securities (mbs) where the company may not recover substantially all of their initial investment is based on estimated future cash flows. interest income subject to these cash flow assumptions makes up a portion of total interest income of $280 million for the year ended december 31, 2020. these estimated future cash flows are utilized at the time of purchase in determining the effective interest rate. over the life of the investments, management updates these estimated future cash flows to compute a revised yield based on the current amortized cost of the investment, unless those changes are reflected in an allowance for credit losses. in situations where an allowance for credit losses is limited by the fair value of the investment, the yield is computed as the rate that equates expected future cash flows to the current fair value of the investment. in estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. the principal considerations for our determination that performing procedures relating to interest income recognition on certain mbs where the company may not recover substantially all of their initial investment is a critical audit matter are the significant judgment by management to estimate the cash flows of these investments, which included significant assumptions related to the rate and timing of principal payments; this in turn led to a high degree of auditor subjectivity, judgment and effort in performing procedures to evaluate the audit evidence obtained related to the cash flow estimates and related effective interest yields, and the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to interest income, including the updating of cash flows and related effective interest yields for these mbs where substantially all of their initial investment may not be recovered. these procedures also included, among others, (i) testing the calculation of the effective interest yield for mbs where substantially all of their initial investment may not be recovered and (ii) testing of the classification of the investments to be categorized as such upon acquisition. for a sample of mbs securities where substantially all of their initial investment may not be recovered, professionals with specialized skill and knowledge were used to assist in developing an independent range of effective interest yields and comparison of management’s estimated yield to the independently developed ranges to evaluate the reasonableness of the estimate. developing the independent yield involved testing the completeness and accuracy of data provided by management and evaluating the reasonableness of management’s cash flows estimates, including assumptions related to the rate and timing of principal payments. /s/ pricewaterhouse coopers llp atlanta, georgia february 22, 2021we have served as the company’s auditor since 2016. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.asbestos-related and silica-related litigation – liability and insurance recovery receivable – refer to note 21 to the financial statements critical audit matter description the company has been named as a defendant in a number of asbestos-related and silica-related personal injury lawsuits. the plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically the company is one of approximately 25 or more named defendants. at december 31, 2021, the company has recorded an estimated liability of $136.9 million with respect to the company’s asbestos-related and silica- related litigation. the company uses a third-party actuary to assist in determining certain assumptions and in calculating the estimated liability. the estimated liability is based on currently available information and assumptions, including the estimated future number and type of new claims to be filed each year, the estimated future resolution or outcome of new and pending claims, and the estimated average cost of resolution of each new and pending claim.the company has entered into a series of agreements with certain of its or its predecessors’ legacy insurers and certain potential indemnitors to secure insurance coverage and reimbursement for the costs associated with the asbestos- and silica-related lawsuits filed against the company. the company has also pursued litigation against certain insurers or indemnitors, where necessary. the company has an insurance recovery receivable for probable asbestos and silica-related recoveries of $145.1 million. the estimated asset is based on key variables and assumptions used to determine the recorded amounts, including the amount of insurance available, allocation methodologies, the resolution of coverage issues with other excess coverage carriers with whom the company has not yet achieved settlements, and the solvency risk with respect to the company’s insurance carriers.we identified the liability for asbestos and silica litigation and the related insurance recovery receivable as a critical audit matter because of the significant judgments made by management to estimate the liability and related recoverability of insurance proceeds. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial and insurance recovery specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to estimated future claims development, the estimated resolution or outcome of these claims, the estimated average cost of resolution of each claim and, separately, the expected recoverability of claims through insurance.how the critical audit matter was addressed in the audit our audit procedures related to the estimated liability for asbestos-related and silica-related litigation included the following, among others:•we tested the effectiveness of internal controls related to the estimated liability for asbestos-related and silica-related litigation, including those over the estimated future claims development, the estimated resolution or outcome of these claims, and the estimated average cost of resolution of each claim.•we evaluated the methods and assumptions used by the company to determine the estimated liability by:◦testing the underlying claim and settlement cost data that served as inputs for the actuarial analysis, including testing historical and pending claims by comparing key attributes to accounting records and legal documents to assess the accuracy and completeness of the data.102table of contents◦with the assistance of our actuarial specialists, we evaluated whether the estimates of future claim numbers and types, number of claims expected to be dismissed or sustained and the estimated average cost of resolution used in the company’s calculations were reasonable in relation to historical claim trends at the company.◦with the assistance of our actuarial specialists, we independently recalculated the liability based on the company’s estimates of future claim numbers and types and assumptions of estimated future resolution or outcome of the claims and estimated average cost of resolution of each claim.◦with the assistance of our actuarial specialists, we developed independent estimates of the liability using available third-party estimates of future claim numbers and types that we determined were reputable and widely-accepted in the industry and compared our independent estimates to the company’s recorded liability.our audit procedures related to the insurance recovery receivable for probable asbestos and silica-related recoveries included the following, among others:•we tested the effectiveness of internal controls related to the insurance recovery receivable for probable asbestos and silica-related recoveries.•with the assistance of our insurance recovery specialists, we evaluated the company’s analysis of the solvency of insurance carriers with policies with the company or its predecessors. with the assistance of these specialists, we read the company’s analysis and supporting documentation of policy coverage by year as compared to estimated claims per year to assess the company’s determination of coverage by claim year. with the assistance of these specialists, we obtained legal opinions regarding recoverability that the company had obtained from external counsel and read associated legal proceedings to evaluate the company’s assessment of the probability of recovery./s/ deloitte & touche llp charlotte, nc february 25, 2022we have served as the company’s auditor since 2013. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.assessment of the allowance for credit losses and unfunded loan commitments collectively evaluated as discussed in note 1 to the consolidated financial statements, the company adopted asu no. 2016-13, financial instruments – credit losses (asc topic 326) as of january 1, 2020. as discussed in notes 1, 5, and 6 to the consolidated financial statements, the company’s allowance for credit losses related to loans and unfunded loan commitments collectively evaluated for credit losses is comprised of an allowance for credit losses on loans and an allowance for credit losses on unfunded loan commitments (the collective acl). as of january 1, 2020, the total allowance for credit losses related to loans and unfunded loan commitments was $82.5 million and $13.9 million, respectively, of which a portion was related to the collective acl. as of december 31, 2020, the total allowance for credit losses related to loans and unfunded loan commitments was $131.6 million and $15.3 million, respectively, of which $122.2 million and $15.3 million, respectively, was related to the collective acl. the company estimates the collective acl using a current expected credit losses methodology which is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported loan amounts, including expected defaults. the allowance for credit losses on unfunded commitments leverages the same methodology utilized for the allowance for credit losses on loans. the company estimates the collective acl on a pool basis for loans with similar risk characteristics using 1) a transition matrix probability of default (pd) and loss given default (lgd) model, which is based on transition of loans between risk ratings and through default based on the company’s historical loss experience, for certain commercial and agricultural loans, or 2) a lifetime average historical loss model for all other commercial and agricultural loans, residential real estate loans, and consumer loans. a portion of the collective acl on outstanding loans is comprised of qualitative adjustments, based on a comparison of current conditions to the average conditions over the look back period. the qualitative adjustments are determined by the company using an anchoring approach to determine the minimum and maximum amount of qualitative allowance, which is determined by comparing the highest and lowest historical rate to the average loss rate to calculate the rate for the adjustment. the collective acl utilizes an overlay approach for its economic forecasting component which incorporates a reasonable and supportable forecast of various macro-economic indices. the company utilizes an economic forecast scenario which reverts to the historical mean immediately at the end of the reasonable and supportable forecast period. for the allowance for credit losses on unfunded loan commitments, the company separately estimates the exposure at default using estimated average utilization rates.we identified the assessment of the january 1, 2020 collective acl and the december 31, 2020 collective acl as a critical audit matter. a high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective acl estimates. specifically, the assessment encompassed the evaluation of the collective acl methodology, including the methods and models used to estimate (1) the pd and lgd and their significant assumptions, including the risk ratings for certain commercial and agricultural loans, the historical loss experience, the look back period, and pooling of loans with similar risk characteristics, (2) the lifetime average historical loss rates and their significant factors and assumptions, including pooling of loans with similar risk characteristics, and the look back period, (3) the economic forecasting component, including the economic forecast scenario and the reasonable and supportable forecast period, and (4) the qualitative adjustments. the assessment also included an evaluation of the conceptual soundness and performance of the pd, lgd, and lifetime average historical loss models. in addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s measurement of the collective acl estimates, including controls over the:•development and approval of the collective acl methodology •development of the pd, lgd, and lifetime average historical loss models•performance monitoring and validation of the pd, lgd, and lifetime average historical loss models•identification and determination of the significant assumptions used in the pd and lgd models•identification and determination of the significant assumptions used in the lifetime average historical loss models•identification and determination of the exposure at default assumption used in the pd, lgd, and lifetime average historical loss models•development of the qualitative adjustments, including the anchoring approach •analysis of the collective acl results, trends and ratios.we evaluated the company’s process to develop the collective acl estimates by testing certain sources of data, factors, and assumptions that the company used, and considered the relevance and reliability of such data, factors, and assumptions. in addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in evaluating:•the company’s collective acl methodology for compliance with u.s. generally accepted accounting principles•judgments made by the company relative to the development and performance monitoring of the pd, lgd, and lifetime average historical loss models, including the exposure at default assumption, by comparing them to relevant company-specific metrics and trends and applicable industry and regulatory practices•the exposure at default assumption by comparing to relevant company-specific metrics and trends and applicable industry and regulatory practices•the conceptual soundness of the pd, lgd, and lifetime average historical loss models by inspecting the model documentation to determine whether the models are suitable for their intended use •the methodology used to develop the economic forecasting component, including selection of the economic forecast scenario, by comparing it to the company’s business environment and relevant industry practices•the length of the historical look back period and reasonable and supportable forecast period by comparing to company specific portfolio risk characteristics and trends•whether the loan portfolio is segmented by similar risk characteristics by comparing to the company’s business environment and relevant industry practices•the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective acl estimates compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models•individual risk ratings for a selection of commercial and agricultural loan relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral.we also assessed the sufficiency of the audit evidence obtained related to the collective acl estimates by evaluating the:•cumulative results of the audit procedures•qualitative aspects of the company’s accounting practices•potential bias in the accounting estimates.valuation of goodwill for certain reporting units as discussed in notes 1 and 8 to the consolidated financial statements, the goodwill balance as of december 31, 2020 was $576.0 million, which represents goodwill recorded at various subsidiary banks (the reporting units). the company performs goodwill impairment testing using either a qualitative or quantitative assessment at least annually or whenever circumstances indicate a potential impairment may exist that would more likely than not reduce the fair value of a reporting unit below its carrying amount. due to the covid-19 pandemic and economic conditions, an interim quantitative assessment of goodwill was performed during the second quarter of 2020, and no goodwill impairment was identified. the quantitative impairment testing involves estimating the fair value of the reporting units using a combination of discounted cash flow and market-based approaches. depending on the specific approach, significant assumptions include the discount rates used for cash flows, long-term growth rates, forecasted cash flow projections, and control premiums and multiples.we identified the valuation of goodwill for certain reporting units for which a quantitative impairment assessment was performed as a critical audit matter. the estimated fair value of certain reporting units involved significant measurement uncertainty and required a high degree of subjective auditor judgment. the discount rates used for cash flows, the long-term growth rates and the forecasted cash flow projections used in the discounted cash flow method, and the control premiums and multiples used in the market-based approach used to estimate the fair value of certain reporting units were challenging to test as they represented subjective determinations of market and economic conditions that were sensitive to variations and minor changes to those assumptions could have had a significant effect on the company’s assessment of the value of the goodwill for certain reporting units. additionally, the audit effort associated with the valuation of goodwill required specialized skills and knowledge.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s determination of the estimated fair value of certain reporting units, including controls over the development of the discount rates used for cash flows, the long-term growth rates and the forecasted cash flow projections used in the discounted cash flow method, and the control premiums and multiples used in the market-based approach and application of the overall fair value methodology. we evaluated the forecasted cash flow projections used in the discounted cash flow method by comparing the assumptions used by management to the company’s historical information and historical trends. additionally, we involved valuation professionals with specialized skills and knowledge, who assisted in:•evaluating the discount rates used in the discounted cash flow method, by comparing the rates against discount rate ranges that were independently developed using publicly available market data for comparable companies•evaluating the long-term growth rates used in the discounted cash flow method, by comparing the rates to economic and industry growth trends•evaluating the multiples used in the market-based approach, by comparing them to market data for trading multiples for comparable companies•evaluating the control premiums used in the market-based approach by comparing them to market data of premiums paid for comparable companies.initial measurement of the fair value of acquired loans in a business combination as discussed in notes 1, 2 and 8 to the consolidated financial statements, on december 4, 2020, the company completed the acquisition of aim bank. the company records all assets and liabilities, including intangibles, purchased in business combinations at fair value. as of the closing date, the company acquired, at fair value, total assets of aim bank of $1.97 billion, which included gross loans of $1.09 billion, and deposits of $1.67 billion. the fair value of acquired loans for aim bank was based on a discounted cash flow methodology that projected principal and interest payments using significant assumptions related to the discount rate and loss rates. we identified the evaluation of the initial measurement of the fair value of acquired loans in the acquisition of aim bank as a critical audit matter. this fair value measurement involved a high degree of measurement uncertainty and subjectivity, which required specialized skills and knowledge to evaluate the measurement. specifically, there was a high degree of subjectivity in applying and evaluating the fair value measurement methodology including the acquired loan valuation significant assumptions.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s determination of the fair value of acquired loans in the acquisition of aim bank, including controls over the application of the overall fair value measurement methodology and the identification and determination of the significant assumptions used in the acquired loan fair value estimate. we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the fair value measurement methodology, including the significant assumptions, for compliance with u.s. generally accepted accounting principles and evaluating the significant assumptions used in the fair value measurement through (1) comparison to internal historical data and publicly available data and (2) review of the underlying support and methodology for the development of the significant assumptions./s/ kpmg llp we have served as the company’s auditor since 1994. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.goodwill and broadcast license impairment assessment as described in notes 1 and 5 to the consolidated financial statements, the company’s consolidated goodwill and broadcast license amounted to $165.6 million and $41.4 million, respectively as of december 31, 2020. goodwill, at the reporting unit level, and the broadcast license, at the unit of account, are tested by the company for impairment at least annually. the fair values of the reporting units for the goodwill impairment assessment are determined utilizing a combination of an income approach, through a discounted cash flow model, and a market approach, using a comparable sales analysis. the fair value of the broadcast license is determined using an income approach, through a discounted cash flow model which assumes a hypothetical start-up scenario. the determination of the fair values of the reporting units f-3table of contentsand the broadcast license require management to make significant estimates and assumptions related to the specific circumstances of each reporting unit and the broadcast license such as revenue projections, projected operating cash flow margins, and discount rates, for the income approaches for the goodwill and broadcast license impairment assessments, and comparable sales for the market approach for the goodwill impairment assessment. we identified the goodwill, for each of the company’s reporting units with goodwill, and the broadcast license impairment assessments as a critical audit matter because of the significant assumptions management used in the impairment assessments. auditing management’s judgments, used in the impairment assessments, regarding revenue projections, projected operating cash flow margins, discount rates, and comparable sales involved a high degree of auditor judgment and increased audit effort, including the use of our valuation specialists. our audit procedures related to the company’s goodwill and broadcast license impairment assessments included the following, among others:●we obtained an understanding of the relevant controls related to the company’s goodwill and broadcast license impairment assessments and tested such controls for design and operating effectiveness, including management’s review controls related to revenue and operating cash flow margin projections, discount rates, and comparable sales.●we tested the reasonableness of management’s revenue and operating cash flow margin projections by comparing them to actual results and historical trends for each reporting unit and the broadcast license and by comparing management’s historical forecasts to actual results for each reporting unit and the broadcast license.●we utilized an internal valuation specialist to assist in the following procedures, among others:o evaluating the reasonableness of the discount rates for each reporting unit and the broadcast license by comparing the inputs used by management to publicly available market data;o evaluating the reasonableness of comparable sales analysis data used by management in the market approach valuation model for the goodwill impairment assessment based upon market data; o evaluating the appropriateness of the valuation models used by management and testing their mathematical accuracy./s/ rsm us llp we have served as the company’s auditor since 2008. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill — trust reporting unit critical audit matter description the company assesses the recoverability of the carrying amount of goodwill at least annually at the reporting unit level. the company has identified two reporting units, which are consistent with its reporting segments: advisory and trust. the fair value of each reporting unit is estimated using a market multiple approach and an income approach. the income approach is based on the long-term projected future cash flows of the reporting unit. these cash flows are determined based on revenue and expense projections over each of the next five years and a terminal revenue growth rate thereafter. the company discounts the estimated cash flows to present value using a weighted average cost of capital (the “discount rate”). an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. the company’s annual goodwill impairment assessment for 2020 resulted in full impairment of goodwill related to the advisory reporting unit and no goodwill impairment for the trust reporting unit. the goodwill balance was $16.4 million as of december 31, 2020, all of which related to the trust reporting unit.we identified goodwill for the trust reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of the trust reporting unit using the income approach. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and terminal growth rate and the projections of future revenue.2how the critical audit matter was addressed in the audit our audit procedures related to the discount rate, terminal growth rate and projections of future revenue used by management to estimate the fair value of the trust reporting unit included the following, among others: •we evaluated management’s ability to accurately forecast future revenues of the trust reporting unit by comparing actual results to management’s historical projections. •we evaluated the reasonableness of management’s revenue forecasts by comparing the projections to:–historical revenues and revenue growth rates.–internal communications to management and the board of directors.–forecasted information included in industry and analyst reports for companies in the company’s peer group.•we evaluated the impact of changes in management’s revenue projections from the july 1, 2020, annual measurement date to december 31, 2020.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) terminal growth rate, and (3) discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management./s/ deloitte & touche llp dallas, texas march 4, 2021we have served as the company's auditor since 2015. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.acquisition of iora health, inc. – valuation of intangible assets related to medicare advantage and cms direct contracting contracts as described in note 8 to the consolidated financial statements, on september 1, 2021, the company acquired all outstanding equity and capital stock of iora health, inc. for an aggregate purchase consideration of $1.4 billion, which resulted in intangible assets of $298 million for medicare advantage contracts and $52 million for cms direct contracting contracts (“contract intangibles”) being recorded. as disclosed by management, management valued the acquired contract intangibles using the income method. significant estimates and assumptions used in valuing these contract intangibles included, revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life.the principal considerations for our determination that performing procedures relating to the valuation of contract intangibles as a result of the acquisition of iora health, inc. is a critical audit matter are (i) a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value of the contract intangibles acquired due to the significant judgment by management when developing the estimates; (ii) the significant audit effort in evaluating the significant assumptions related to revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the contract intangibles and controls over the development of significant assumptions related to revenue growth rates, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life. these procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for estimating the fair value of the contract intangibles. testing management’s process included evaluating the appropriateness of the income method, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to revenue growth rate, medical claims expense, cost of care expenses, operating expenses, trademark royalty rate, contributory asset charges, discount rate, contract terms, and useful life. evaluating the reasonableness of the revenue growth rate, medical claims expense, cost of care expenses, operating expenses, contract terms, and useful life assumptions involved considering (i) the past performance of the acquired business; (ii) consistency with economic and industry forecasts, considering comparable businesses; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s income method and the trademark royalty rate, contributory asset charges, discount rate and useful life assumptions.f-3valuation of incurred but not yet reported (“ibnr”) claims liability related to iora health, inc. as described in note 2 to the consolidated financial statements, the company’s incurred but not yet reported (“ibnr”) claims liability was $32.2 million as of december 31, 2021. as disclosed by management, the estimated ibnr liability is developed by management using actuarial models which consider significant assumptions such as completion factors and per member per month claim trends. actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of healthcare services, the amount of charges and other factors. changes in this estimate can materially affect, either favorably or unfavorably, results from operations and overall financial position. the estimated reserve for ibnr claims liability is included in accounts receivable, net.the principal considerations for our determination that performing procedures relating to the valuation of the ibnr claims liability related to iora health, inc. is a critical audit matter are (i) the significant judgment by management when developing the estimate of ibnr claims liability related to iora healthcare, inc., (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the actuarial models and significant assumptions related to completion factors and per member per month claims trends; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge .addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the ibnr claims liability. this independent estimate considers a range of reasonable outcomes which are compared to management’s estimate of the ibnr claims liability. developing the independent estimate involved developing independent completion factors and per member per month claims estimates using management’s data, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of management’s assumptions related to completion factors and per member per month claims trends assumptions. /s/ pricewaterhouse coopers llp san francisco, california february 23, 2022we have served as the company's auditor since 2013. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.proved oil and gas properties and depletion – crude oil and condensate, ng ls, and natural gas reserves — refer to note 1 to the financial statements critical audit matter description the company’s capitalized costs of proved oil and natural gas properties are depleted using the units of production method based on estimated proved reserves. the development of the company’s estimated proved crude oil, ng ls and natural gas reserve volumes requires management to make significant estimates and assumptions. the company’s reserve engineers estimate crude oil, ng ls and natural gas quantities using these estimates and assumptions and engineering data. changes in these assumptions could materially affect the company’s estimated reserve quantities and the amount of depletion. proved oil and gas properties were $23 billion as of december 31, 2021, net of accumulated depletion, and depletion was $3.5 billion, for the year then ended. given the significant judgments made by management, performing audit procedures to evaluate the company’s estimated proved crude oil, ng ls and natural gas reserve quantities, required a high degree of auditor judgment and an increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to management’s significant estimates and assumptions related to crude oil, ng ls and natural gas reserve quantities included the following, among others:•we tested the operating effectiveness of controls over the company’s estimation of proved crude oil, ng ls and natural gas reserve quantities.•we evaluated the company’s estimated proved crude oil, ng ls and natural gas reserve quantities by: ◦evaluating the experience, qualifications, and objectivity of the company’s reserve engineers and the independent petroleum consultants, including the methodologies used to estimate proved crude oil, ng ls and natural gas reserve quantities. ◦comparing the company’s reserve volumes to those independently developed by the independent petroleum consultants.◦comparing the company’s reserve estimated future production to historical production volumes.◦assessing the reasonableness of the production volume decline curves by comparing to historical decline curve estimates./s/ deloitte & touche llp houston, texas february 24, 2022we have served as the company's auditor since 2002. | 5 |
critical audit matters thecritical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee of the board of directors and that: (1) relate toaccounts or disclosures that are material to the consolidated financial statements and (2) involved challenging, subjective, orcomplex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financialstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions onthe critical audit matter or on the accounts or disclosures to which they relate. related party transactions and recoverability of notes receivable from related parties asdiscussed in notes 12 and 14 to the consolidated financial statements, the company has significant related party transactionsand arrangements with the majority owners of the company and other companies owned by the majority owners. in addition to holdingseveral receivable agreements, including notes receivable with these related parties, the company is currently involved in a lawsuitagainst one of the majority owners and other companies owned by the majority owner. weidentified the evaluation of the identification of related parties, related party transactions and collectability of notes receivablefrom related parties as a critical audit matter. auditor judgement was involved in assessing the sufficiency of the proceduresperformed to identify related parties, identify related party transactions and assess the collectability of the notes receivablefrom related parties. thefollowing are the primary procedures we performed to address this critical audit matter. we performed the following proceduresto evaluate the identification of related parties, related party transactions and the collectability of the notes receivable fromrelated parties by the company: ●reviewed new agreements and contracts between the company and its related parties;●queried the accounts payable system for transactions with its related parties;●inspected director and officer questionnaires from the company’s directors and officers;●evaluated the company’s reconciliation of its applicable accounts to the related parties’ records of transactionsand balances;●read the company’s minutes from meetings of the board of directors and related committees;●inquired with executive officers and key members of management;●reviewed public filings, external news, and research sources for information related to transactions between the company and relatedparties; and●confirmed with the company’s legal counsel, management, and its outside counsel as to the status of the lawsuits and thecollectability of the notes receivable from related parties. wehave served as the company’s auditor since 2009. | 5 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.103 genentech agreement description of the matter as more fully described in note 3 of the financial statements, genentech agreement revenue is estimated to be recognized over a period of seven to eight years from the effective date. the non-refundable upfront consideration of $300.0 million is recognized using a proportional performance model through an input method based on costs incurred relative to the total estimated costs of research and development efforts. for the year ended december 31, 2021, total revenue recognized was $62.0 million and the related deferred revenue at december 31, 2021 totaled $150.1 million.auditing management’s estimate of the total expected research and development costs at completion is complex and requires judgment as a result of the uncertainties of the ultimate progression of the customized product paths, timing and path of development and commercialization decisions, which are controlled by genentech.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the company’s process to evaluate the progress of the collaboration and the likely path of future development based on significant decisions made by genentech communicated through the joint committees and any resulting impacts on the total costs of research and development efforts for the collaboration.to test the estimate of total expected research and development costs, we performed audit procedures that included, among others, observing the quarterly meetings with accounting and the company collaboration managers discussing the status of the collaboration and the future development for the customized product paths, investigating any changes to the development path. we reviewed supporting documentation to corroborate progress and status of the overall timeline, including meeting minutes from the joint committees. /s/ ernst & young llp we have served as the company’s auditor since 2015 | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.purchase price allocations for property acquisitions as described in notes 2 and 3 to the consolidated financial statements, the company completed property acquisitions with cash paid for acquired real estate investments, net of liabilities assumed, of $562.7 million during the year ended december 31, 2019. for acquired properties with leases classified as operating leases, management allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values. tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. management utilizes various estimates, processes and information to determine the as-if vacant property value. estimates of value are made by management using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. fair value estimates are also made using significant assumptions such as capitalization rates, discount rates, fair market lease rates, and land values per square foot. identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, and the value of in-place leases, as applicable. above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease, and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. the principal considerations for our determination that performing procedures relating to purchase price allocations for property acquisitions is a critical audit matter are there was significant judgment by management to develop the fair value estimates of tangible and intangible assets and liabilities. this in turn led to a high degree of auditor judgment and subjectivity in applying procedures and evaluating audit evidence relating to these fair value estimates. in addition, significant audit effort was required in evaluating the significant assumptions relating to the discounted cash flows of tangible and intangible assets and liabilities, including capitalization rates, discount rates, fair market lease rates, and land values per square foot. the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to purchase price allocations for property acquisitions, including controls over management’s valuation of tangible and intangible assets and liabilities and controls over developing the related assumptions used in the discounted cash flow model, including capitalization rates, discount rates, fair market lease rates, and land values per square foot. audit procedures also included, among others, (i) reading the executed purchase agreements and lease documents; (ii) testing management’s process for estimating the fair value of tangible and intangible assets and liabilities; (iii) testing management’s projected cash flows used to estimate the fair value of tangible and intangible assets and liabilities, using professionals with specialized skill and knowledge to assist in doing so; and (iv) evaluating the accuracy of discounted cash flow model outputs, using professionals with specialized skill and knowledge to assist in doing so. testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of the significant assumptions used in the discounted cash flow model, including capitalization rates, discount rates, fair market lease rates, and land values per square foot. evaluating the reasonableness of the significant assumptions included considering whether these assumptions were consistent with external market data, comparable transactions, and evidence obtained in other areas of the audit./s/ pricewaterhouse coopers llp new york, new york february 28, 2020we have served as the company’s auditor since 2015. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill and intangible assets - shave care goodwill and gillette indefinite lived intangible asset - refer to notes 1 and 4 to the financial statements critical audit matter description the company’s evaluation of goodwill and indefinite lived intangible assets for impairment involves the comparison of the fair value of each reporting unit or indefinite lived intangible asset to its carrying value. the company estimates fair value using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets. this requires management to make significant estimates and assumptions related to forecasts of future net sales and earnings, including growth rates beyond a 10-year time period, royalty rates and discount rates. changes in the assumptions could have a significant impact on either the fair value, the amount of any impairment charge, or both. the company performed their annual impairment assessments of the shave care reporting unit as of october 1, 2020 and the gillette brand indefinite lived intangible asset (the “gillette brand”) as of december 31, 2020. because the estimated fair values exceeded their carrying values, no impairments were recorded. as of june 30, 2021, the shave care reporting unit goodwill was $12.8 billion, and the gillette brand was $14.1 billion. we identified the company’s impairment evaluations of goodwill for the shave care reporting unit and the gillette brand as a critical audit matter because of the significant judgments made by management to estimate the fair values of the reporting unit and the brand. a high degree of auditor judgment and an increased extent of effort was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future net sales and earnings as well as the selection of royalty rates and discount rates, including the need to involve our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures related to forecasts of future net sales and earnings and the selection of the royalty rates and discount rates 36 the procter & gamble companyfor the shave care reporting unit and the gillette brand included the following, among others: •we tested the effectiveness of controls over goodwill and indefinite lived intangible assets, including those over the determination of fair value, such as controls related to management’s development of forecasts of future net sales and earnings, and the selection of royalty rates, and discount rates. •we evaluated management’s ability to accurately forecast net sales and earnings by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s forecast of net sales and earnings by comparing the forecasts to:•historical net sales and earnings.•underlying analysis detailing business strategies and growth plans including consideration of the effects related to the covid-19 pandemic.•internal communications to management and the board of directors. •forecasted information included in company press releases as well as in analyst and industry reports for the company and certain of its peer companies. •with the assistance of our fair value specialists, we evaluated the net sales and earnings growth rates, royalty rates, and discount rates by:•testing the source information underlying the determination of net sales and earnings growth rates, royalty rates, and discount rates and the mathematical accuracy of the calculations.•developing a range of independent estimates for the discount rates and comparing those to the discount rates selected by management./s/ deloitte & touche llp cincinnati, ohio august 6, 2021we have served as the company’s auditor since 1890. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that werecommunicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts ordisclosures to which they relate. valuationfor allowance on receivables – refer to note 1 and note 3 to the financial statements descriptionof the critical audit matter asdiscussed in note 3 to the consolidated financial statements, the company has recognized an aggregate $322.5 thousand for allowanceon accounts receivable and long-term financing receivables, respectively. the company recognizes reserves or valuation allowancesbased on historical collection experience and specific account analysis for its receivables. significant judgment is needed indetermining the appropriate allowance against receivables. auditingmanagement’s valuation for allowance was highly judgmental due to significant estimation required to determine likely futurecollections on accounts and financing receivables. howthe critical audit matter was addressed in the audit ourprincipal audit procedures to evaluate management’s valuation of allowance on receivables consisted of the following, amongothers: ●we evaluated management’s policies for reviewing and assessing allowances. ●we selected a sample of significant outstanding balances for confirmation and further testing of collectability. ●we evaluated management’s significant accounting estimates related to its financing receivables and tested those estimates. revenue recognition – refer to note 1 to the financial statements descriptionof the critical audit matter asdiscussed in note 1, the company recognizes revenue upon transfer of control of promised products or services to customers inan amount that reflects the consideration the company expects to receive in exchange for those products or services.significantjudgment is exercised by the company in determining revenue recognition for its customer agreements, and includes the following: ●determination of whether products and installation/commissioning services are considered distinct performance obligations that should be accounted for separately. ●identification and treatment of contract terms that may impact the timing and amount of revenue recognized. ●determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. auditingmanagement’s revenue recognition was highly judgmental due to the significant estimation required for the recognition ofrevenue. howthe critical audit matter was addressed in the audit ourprincipal audit procedures related to the company’s revenue recognition for these customer agreements included the following,among others: ●we evaluated management’s significant accounting policies related to revenue recognition and reviewed underlying customer agreements for reasonableness of the application of asc 606. ●we obtained and read contract source documents for selected revenue contracts and tested management’s treatment of those terms. ●we tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements. we have served as the company’s auditor since 2015. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. auto liability and workers’ compensation claims reserve accrual as described further in notes 1 and 7 to the consolidated financial statements, the company is self-insured for a portion of its risk related to auto liability and workers’ compensation. self-insurance results when the company insures itself by maintaining funds to cover possible losses rather than by purchasing an insurance policy. the company accrues for the cost of the self-insured portion of unpaid claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends. the actual cost to settle self-insured claim liabilities may differ from the company’s reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties. we identified the estimation of auto liability and workers’ compensation claims accruals subject to self-insurer insurance retention of $2.0 million and $1.0 million, respectively, as a critical audit matter. auto liability and workers’ compensation unpaid claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date. these estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid. the principal considerations for assessing auto liability and workers’ compensation claims as a critical audit matter are the high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims. our audit procedures related to this critical audit matter included the following, among others:•we tested the effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments.f-1•we tested management’s process for determining the auto liability and workers’ compensation accrual, including evaluating the reasonableness of the methods and assumptions used in estimating the ultimate claim losses with the assistance of an actuarial specialist. •we tested the claims data used in the actuarial calculation by selecting samples of historical claims data and inspecting source documents to test key attributes of the claims data. we have served as the company’s auditor since 2018. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.determination of vessel asset impairment indicators — refer to note 2 to the financial statements critical audit matter description the company’s evaluation of vessel assets for impairment involves an initial assessment of each vessel asset to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of vessel assets are no longer recoverable. total vessels and vessel improvements, at cost, net of accumulated depreciation as of december 31, 2021 and 2020, were $908 million and $811 million, respectively.possible indications of impairment may include events or changes in circumstances affecting the legal environment, the business climate, employment, charter hire rates, market value, useful economic life and physical condition of the vessel assets. when events or changes in circumstances exist, the company evaluates its vessel assets for impairment by comparing undiscounted future cash flows expected to be generated over the life of each vessel asset to the respective carrying amount. if the company’s estimate of undiscounted future cash flows for any vessel asset for which indicators of impairment exist is lower than the vessel asset’s carrying value, and the vessel’s carrying value is greater than its fair market value, the carrying value is written down, by recording a charge to operations, to the vessel asset’s fair market value.the company makes significant assumptions to evaluate vessel assets for possible indications of impairment. changes in these assumptions could have a significant impact on the vessel assets identified for further analysis. for the years ended december 31, 2021, 2020, and 2019, no impairment loss has been recognized on vessel assets.we identified the determination of impairment indicators for vessel assets as a critical audit matter because of the significant assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of vessel assets may not be recoverable. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators.f- 3how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of vessel assets for possible indications of impairment included the following, among others: •we tested the effectiveness of the controls over management’s identification of possible circumstances that may indicate that the carrying amounts of vessel assets are no longer recoverable, including controls over management’s estimates of the legal environment, the business climate, employment, charter hire rates, market value, useful economic life and physical condition of the vessel assets. •we evaluated management’s impairment analysis by:◦testing vessel assets for possible indications of impairment, including searching for adverse asset-specific and/or market conditions.◦developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis.◦obtained from the company’s management the vessel assets impairment indicators analysis and the assumptions used in the legal environment, the business climate, employment, charter hire rates, market value, and physical condition of the vessel assets, and considered the consistency of the assumptions used with evidence obtained in other areas of the audit. this included, among others, 1) internal communications by management to the board of directors, and 2) external communications by management to analysts and investors./s/ deloitte & touche llp new york, new york march 11, 2022we have served as the company's auditor since 2015. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.acquisition of laboratoires filorga cosmétiques - valuation of trademark intangible asset as described in note 3 to the consolidated financial statements, on september 19, 2019, the company completed the acquisition of laboratoires filorga cosmétiques for consideration of $1,712 million, of which $774 million of value was assigned to the trademark intangible asset. management applied significant judgment in estimating the fair value of the trademark intangible asset acquired, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, the royalty rate, and the discount rate.the principal considerations for our determination that performing procedures relating to the valuation of the trademark intangible asset acquired is a critical audit matter are there was significant judgment and estimation by management when developing the fair value measurement of the trademark intangible asset acquired. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s significant assumptions and estimates, including revenue growth rates, the royalty rate, and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to acquisition accounting, including controls over management’s valuation of the trademark intangible asset acquired and controls over development of the assumptions and estimates, including the revenue growth rates, the royalty rate, and the discount rate. these procedures also included, among others, reading the purchase agreement and testing management’s process for estimating the fair value of the trademark intangible asset acquired. this included evaluating the appropriateness of the valuation method and the reasonableness of significant assumptions used by management, including the revenue growth rates, the royalty rate, and the discount rate for the trademark intangible asset acquired. 66evaluating the reasonableness of the revenue growth rates and the royalty rate involved evaluating whether the assumptions and estimates used by management were reasonable considering the past performance of the acquired business, market transactions for similar brands and products, and consistency with economic and industry forecasts. professionals with specialized skill and knowledge were used to assist us in evaluating the appropriateness of the valuation method and the reasonableness of certain significant assumptions and estimates, including the royalty rate and the discount rate./s/ pricewaterhouse coopers llp new york, new york february 21, 2020 we have served as the company’s auditor since 2002. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. pension projected benefit obligation description of the matter at may 31, 2022, the company’s aggregated projected benefit obligation for u.s. pension plans was $28.7 billion and exceeded the $26.0 billion fair value of u.s. pension plan assets, resulting in an unfunded u.s. pension obligation of $2.7 billion. the net periodic benefit cost for the year ended may 31, 2022 for the u.s. pension plans was $1.6 billion. as explained in note 14 to the consolidated financial statements, the company sponsors defined benefit pension plans that provide retirement benefits to certain u.s. employees. the company’s projected benefit obligation for the u.s. pension plans is measured using actuarial techniques that reflect management’s assumptions for discount rate, future salary increases, employee turnover, mortality, and retirement ages.auditing the projected benefit obligation of the u.s. pension plans was complex due to the highly judgmental nature and significant effect of the discount rate used in the measurement process. the discount rate is developed by utilizing the yield on a theoretical portfolio of high-grade corporate bonds that match cash flows to benefit payments, limit the concentration by industry and issuer, and apply screening criteria to exclude bonds with a call feature unless they have a low probability of being called. - 74 - how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s process for estimating the projected benefit obligation of the u.s. pension plans, including management’s review of the significant assumptions and assessment of the data inputs provided to the actuary. to test the projected benefit obligation of the u.s. pension plans, our audit procedures included, among others, evaluating the methodologies used, the significant actuarial assumptions described above, and the underlying data used by the company. we compared the actuarial assumptions used by management to historical trends and evaluated the change in the projected benefit obligation of the u.s. pension plans from the prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. in addition, we involved our actuarial specialists to assist in evaluating management’s methodology for determining the discount rate. as part of this assessment, we compared management’s selected discount rate to an independently developed range of reasonable discount rates. additionally, we compared the projected future cash flows of the u.s. pension plans to the prior year projections and compared the current year benefits paid to the prior year projected cash flows. we also tested the completeness and accuracy of the underlying data, including the participant data provided to management’s actuarial specialists. valuation of self-insurance accruals description of the matter at may 31, 2022, the company’s self-insurance accruals reflected in the balance sheet were $4.5 billion. as explained in note 1 to the consolidated financial statements, self-insurance accruals include costs associated with workers’ compensation claims, vehicle accidents, property and cargo loss, general business liabilities, and benefits paid under employee disability programs. these accrued liabilities are primarily based on the actuarially estimated cost of claims, including incurred-but-not-reported (ibnr) claims.auditing the company’s self-insurance accruals is complex due to the significant measurement uncertainty inherent to the estimate, the application of management judgment, and the use of various actuarial methods. in addition, the accruals are sensitive due to the volume of claims and the amount of time that can pass before the final cost is known.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s process for estimating self-insurance accruals, including management’s review of the assumptions used, results of calculations and assessment of data underlying the accruals.to evaluate the self-insurance accruals, our audit procedures included, among others, testing the completeness and accuracy of the underlying claims data used by the company. we involved our actuarial specialists to assist in our evaluation of the methodologies applied by management in establishing the actuarially determined accrual and in reviewing the company’s reinsurance contracts by policy year to assess the company’s self-insured retentions, deductibles, and coverage limits. we compared the company’s accrued amounts to a range developed by our actuarial specialists. furthermore, we compared the company’s historical estimates of expected incurred losses to actual losses experienced during the current year. /s/ ernst & young llp we have served as the company’s auditor since 2002. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.as discussed in note 2 to the financial statements, the company had a going concern due to a continual net loss, stockholders’ deficiency and cash used in operations.auditing management’s evaluation of a going concern can be a significant judgment given the fact that the company uses management estimates on future revenues and expenses which are not able to be substantiated.to evaluate the appropriateness of the going concern, we examined and evaluate the financial information that was the initial cause along with management’s plans to mitigate the going concern and management’s disclosure on going concern.f - 2 going concern the accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. as discussed in note 2 to the financial statements, the company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. management's plans regarding those matters are also described in note 2. the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ m&k cpas, pllc we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. as discussed in note 1 to the financial statements, the company has capitalized software development costs in accordance with asc 985-20. auditing management’s calculation of the fair value of stock-based compensation can be a significant judgment given the fact that the company uses management estimates on various inputs to the calculation. to evaluate the appropriateness of the fair value determined by management, we examined and evaluated the inputs management used in calculating the fair value of the stock-based compensation. /s/ m&k cpas, pllc m&k cpas, pllc we have served as the company’s auditor since 2010. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.measurement of patient revenue net of contractual adjustments as discussed in note 2 to the consolidated financial statements, revenues are recognized in the period in which services are rendered. net patient revenues (patient revenues less estimated contractual adjustments) are recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. the company has agreements with third-party payors that provides for payments at amounts different from its established rates. each month the company estimates its contractual adjustment for each clinic based on the terms of third-party payor contracts and the historical collection and write-off experience of the clinic and applies a contractual adjustment reserve percentage to the gross accounts receivable balances. the company then performs a comparison of cash collections to corresponding net revenues for the prior twelve months. we identified the measurement of contractual adjustments as a critical audit matter.the principal consideration for our determination that the measurement of contractual adjustments is a critical audit matter is that the estimate requires a high degree of auditor subjectivity in evaluating management’s assumptions related to developing future collection patterns across the various clinic locations.our audit procedures related to the company’s measurement of contractual adjustments included the following, among others. •we tested the design and operating effectiveness of controls relating to billing and cash collection, net rate trend analysis by clinic and cash collection versus net revenue trend analysis. •for a sample of patient visits, we inspected and compared underlying documents for each transaction, which included gross billing rates and cash collected (net revenue). •for a sample of patient visits, we traced gross billings and net revenue to net revenue recorded in the general ledger and to each report used in determining and assessing the contractual adjustment calculation. •we compared cash collections to recorded net revenue over a twelve month period ending december 31, 2021 and again for the twelve month period ending in the first month subsequent to period end, to identify whether there were unusual trends that would indicate that the usage of historical collection patterns would no longer be reasonable to predict future collection patterns./s/ grant thornton llp we have served as the company’s auditor since 2004. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.environmental accrued liabilities description of the matter as described in note 12 to the consolidated financial statements, the environmental accrued liability as of december 31, 2020 is approximately $119.7 million and is comprised primarily of the cost estimate for the calvert city location of $106.4 million. the company records an accrual for probable future environmental remediation projects on an undiscounted basis which represents management’s best estimate of probable future costs based upon currently available information and technology and management’s view of the most likely remedy. auditing the determination of the accrual involved a high degree of subjectivity as estimates underlying the determination of the accrual were based on assumptions unique to the affected site and subject to various laws and regulations governing the protection of the applicable environment. actual costs incurred in future periods could differ from amounts estimated and future changes to environmental laws and regulations could increase the extent of remediation work required, therefore the calculation is complicated due to uncertainty in determining the probable future costs and the extent of the remediation efforts. 33 avient corporation how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process to establish the environmental accrued liability, including management’s review and evaluation of the information included in the calvert city record of decision and the administrative settlement agreement and order on consent issued by the united states environmental protection agency (usepa). for example, we tested controls over management’s review of the estimation and the significant assumptions used to develop future cost estimates. we also tested management’s controls to validate that the data used in the accrual estimate was complete and accurate.with the assistance of our specialist, we tested the balance of the environmental accrued liability and the disclosure of the expected cost to remediate. our audit procedures included, among others, making inquiries of internal general counsel, obtaining internal general counsel’s representation and external communications used in determining the environmental accrued liability. this included an evaluation of externally available information and a comparison of management’s cost estimates to the estimates published in the record of decision by the usepa. we tested the significant assumptions used by management by comparing those assumptions to accepted industry practice and information included in the record of decision issued by the usepa. we examined historical costs for recurring items and compared those amounts to future projections for similar costs. quantitative impairment assessment of goodwill description of the matter at december 31, 2020, the company’s goodwill was approximately $1,294.9 million. as discussed in note 1 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level or at an interim date if potential impairment indicators are present. the company’s goodwill is initially assigned to its reporting units as of the acquisition date. goodwill is tested for impairment, quantitatively or qualitatively, at the reporting unit level. as it relates to the quantitative approach, the company uses an income approach to estimate the fair value of the reporting units using a combination of internal forecasts, external market information and discounted cash flow projections.auditing the impairment assessment of the quantitative goodwill assessment for a certain reporting unit is complex as the income approach requires the company to make assumptions and estimates regarding projected economic and market conditions, growth rates, operating margins and cash expenditures. the fair value of the reporting unit is based on a number of subjective factors including; (a) appropriate consideration of valuation approaches, (b) the consideration of the company’s business outlook, and (c) weighted average cost of capital (discount rate), annual and terminal growth rates. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the quantitative impairment assessment of goodwill, including controls over management’s review of the significant assumptions described above. to test the estimated fair value of the company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the company in its analyses. we compared the significant assumptions used by management to current industry and economic trends. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. we also utilized our specialist to assist in the review of the methodology, weighted average cost of capital, terminal growth rates used by the company and the reconciliation of the aggregate estimated fair value of the reporting units to the market capitalization of the company.34 avient corporation accounting for the clariant masterbatch business combination description of the matter as discussed in note 2 to the consolidated financial statements, on july 1, 2020 the company completed its acquisition of the equity interests in the global masterbatch business of clariant ag and the masterbatch assets in india of clariant chemicals (india) limited. the business and assets are collectively referred to as clariant mb and the acquisitions are collectively referred to as the clariant mb acquisition. total consideration paid by the company to complete the clariant mb acquisition was approximately $1.4 billion, net of cash and debt. the acquisition is being accounted for under the acquisition method of accounting.auditing the company’s accounting for the preliminary allocation of the purchase price to the identifiable assets and liabilities for the clariant mb acquisition was complex due to the significant estimation in determining the preliminary fair value of identifiable intangible assets, which principally consisted of customer relationships and developed technology. the company used the relief from royalty and multi-period excess earnings method to determine the fair value of developed technology and customer relationships, respectively. the purchase price allocation, including the fair value estimates of the identifiable intangible assets, were recorded on a preliminary basis. the high degree of subjectivity was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. the significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results including revenue growth rates, profitability, and royalty rates. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the determination of the preliminary fair value of the identifiable intangible assets. this included testing controls over management’s review of the fair value methodologies and significant assumptions described above.to test the preliminary estimated fair values of the acquired intangible assets, our audit procedures included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the company. we compared the significant assumptions used by management to current industry and economic trends. we performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value that would result from changes in the assumptions. we utilized our specialist in assessing the methodologies applied and evaluating significant assumptions. furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements regarding the acquisition.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audits provide a reasonable basis for our opinion./s/ ernst & young llp we have served as avient corporation's auditor since 1993. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. purchase price allocation as described in notes 2 and 3 to the consolidated financial statements, upon acquisition of a property, management allocates the purchase price of the property based upon the fair value of the assets acquired and liabilities assumed, which generally consists of land, buildings, tenant improvements, construction in progress, leasing commissions and lease intangibles including in-place lease assets and above market and below market lease assets and liabilities. the purchase price is allocated to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. the determination of fair value for tangible assets includes the use of significant assumptions such as land comparables, discount rates, terminal capitalization rates and market rent assumptions. the company acquired four industrial properties for consideration of approximately $38.7 million, of which approximately $12.7 million was recorded to land and $25.0 million to building and improvements/construction in progress during the year ended december 31, 2021. the principal considerations for our determination that performing procedures relating to purchase price allocation is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates, which resulted in a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating evidence relating to the fair value of land and building and improvements/construction in progress, including the significant assumptions related to land comparables, discount rates, terminal capitalization rates and market rent; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge. 51addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the purchase price allocations, including controls over the valuation methods and significant assumptions for the tangible assets, such as land comparables, discount rates, terminal capitalization rates and market rent. these procedures also included, among others, (i) reading the purchase and sales agreements and (ii) testing management’s process for determining the fair value of land and building and improvements/construction in progress, (iii) testing the completeness and accuracy of the data used in the fair value estimates, (iv) evaluating the appropriateness of the valuation methods and (v) evaluating the reasonableness of significant assumptions related to land comparables, discount rates, terminal capitalization rates and market rent. evaluating the significant assumptions relating to the land comparables, discount rates, terminal capitalization rates and market rent involved obtaining evidence to support the reasonableness of the assumptions, including whether the assumptions used were consistent with evidence obtained in other areas of the audit or third party market data. professionals with specialized skill and knowledge were used to assist in obtaining audit evidence over land comparables. /s/ pricewaterhouse coopers llp chicago, illinois february 17, 2022we have served as the company's auditor since 1993. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.lease classification - lease term - see note 14 to the financial statements critical audit matter description the company performs a lease classification test upon the entry into any new tenant lease or lease modification to determine if the company will account for the lease as an operating, sales-type lease, or direct financing lease. the accounting guidance under asc 842 is complex and requires the use of judgments and assumptions by management to determine the proper accounting treatment of a lease. the lease classification tests and the resulting calculations require subjective judgments, such as determining the likelihood a tenant will exercise all renewal options, in order to determine the lease term. a slight change in estimate or judgment can result in a material difference in the financial statement presentation.59table of contents given the significant judgments made by management to determine the expected lease term, we performed audit procedures to assess the reasonableness of such judgments, which required a high degree of auditor judgment. how the critical audit matter was addressed in the audit our audit procedures related to the judgments surrounding the determination of lease term for any new or reassessed lease included the following, among others: •we tested the effectiveness of the controls over management’s assessment of the likelihood a tenant would exercise all renewal options.•we evaluated the significant judgments management made to determine the expected lease term by:◦evaluating the significance of the leased assets to the tenant’s operations by examining available information including tenant’s financial statements. ◦evaluating the company’s historical pattern of tenant lease modifications by examining both confirming and contradictory evidence.◦obtaining lease agreements to examine material lease provisions considered by management in their analysis./s/ deloitte & touche new york, new york february 19, 2021 we have served as the company's auditor since 2016. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. houghton trademarks and tradename – annual impairment assessment as described in note 16 to the consolidated financial statements, the company’s consolidated other intangible assets, net balance was $1,027.8 million as of december 31, 2021, and the indefinite-lived intangible asset was $196.9 million, which substantially relates to the houghton trademarks and tradename. management completes its annual indefinite-lived intangible asset impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment. management completed its annual impairment assessment during the fourth quarter of 2021 for the houghton trademarks and tradename and concluded no impairment charge was warranted. the determination of estimated fair value of the houghton trademarks and tradename is based on a relief from royalty valuation method, which requires management’s judgment and often involves the use of significant estimates and assumptions with respect to the weighted average cost of capital and royalty rates, as well as revenue growth rates and terminal growth rates. the principal considerations for our determination that performing procedures relating to the houghton trademarks and tradename annual impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value of the houghton trademarks and tradename; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the royalty rate, revenue growth rates, and terminal growth rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible assets annual impairment assessment, including controls over the valuation of the houghton trademarks and tradename. these procedures also included, among others (i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of the relief from royalty valuation method; (iii) testing the completeness and accuracy of underlying data used in the method; and (iv) evaluating the reasonableness of significant assumptions related to the royalty rate, revenue growth rates and terminal growth rates. evaluating management’s assumptions related to the royalty rate, revenue growth rates, and terminal growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the legacy houghton business; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the relief from royalty valuation method and the royalty rate assumption. /s/pricewaterhouse coopers llp philadelphia, pennsylvania march 1, 2022 we have served as the company’s auditor since at least 1972. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.accounting for the effects of regulation as described in notes 1 and 2 to the consolidated financial statements, the company has operations that are subject to the decisions and requirements of its regulators. the company’s use of accounting guidance for rate-regulated businesses results in recording regulatory assets and liabilities for certain transactions that management expects will be recovered from or returned to customers in future rates. regulatory assets and liabilities are amortized consistent with the period of expected regulatory treatment. as of december 31, 2020, the company’s consolidated balance sheet reflected $1.2 billion of regulatory assets and $5.4 billion of regulatory liabilities. as disclosed by management, in some cases, management must apply judgment related to the probability of recovery if regulatory balances are recorded before approval has been received from the regulator or probability of refund of amounts collected in rates that may be returned to customers. additionally, management recognizes revenue for alternative revenue programs that allow for an automatic rate adjustment, are probable of recovery, and are collected within 24 months of the end of the annual period in which they are recognized. management’s conclusions are based on certain factors including, but not limited to, regulatory commission orders, legislation, or historical experience, as well as management’s discussions with legal counsel.the principal considerations for our determination that performing procedures relating to accounting for the effects of regulation is a critical audit matter are the significant judgment by management when accounting for (i) new or existing regulatory assets or liabilities that were impacted by updates in regulatory commission orders, legislation, historical experience, or management’s discussions with legal counsel, (ii) the probability of recovery of regulatory assets and refund of regulatory liabilities recorded before approval has been received from the regulator, and (iii) regulatory mechanisms meeting the alternative revenue program criteria, which in turn led to a high degree of auditor judgment, subjectivity, and effort when performing audit procedures and evaluating audit evidence obtained related to management’s application of regulatory accounting, assessment of probability of recovery of regulatory assets and refund of regulatory liabilities, and expected timing of collection within 24 months of the end of the annual period in which mechanisms are recognized.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s implementation and application of new or existing regulatory assets or liabilities, including controls related to evaluating the probability of recovery of regulatory assets and refund of regulatory liabilities, and alternative revenue programs. these procedures also included, among others, (i) testing calculations of new and existing regulatory assets or liabilities by comparison to provisions and formulas outlined in regulatory commission orders, legislation, or external legal counsel correspondence, (ii) evaluating management’s assessment of the probability of recovery of regulatory assets and refund of regulatory liabilities, and (iii) evaluating management’s assessment of regulatory mechanisms meeting the alternative revenue program criteria and the expected timing of collection within 24 months of the end of the annual period in which mechanisms are recognized./s/ pricewaterhouse coopers llp st. louis, missouri february 22, 2021we have served as the company’s auditor since at least 1932. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.assessment of qualitative risk factors in the allowance for credit losses as discussed in note 7 to the consolidated financial statements, the company’s allowance for credit losses of $15 million at december 31, 2019 relates to the loans collectively evaluated for impairment (acl). the company estimates the allowance for credit losses using a methodology that first considers the historical loss rates calculated using recorded charge-offs and recoveries over a historical period as well as delinquencies as the primary quantitative factors. the company’s methodology also considers qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available.we identified the assessment of qualitative risk factors as a critical audit matter. due to significant measurement uncertainty, such assessment required complex and subjective auditor judgment, including knowledge and experience in the industry. this judgment includes evaluating the qualitative framework and related risk factors, including lending policies and procedures, economic and business conditions, as well as the effect of other external and internal factors.the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the (1) development and approval of the overall allowance for credit losses methodology, which includes the qualitative framework and related risk factors and (2) determination of the qualitative risk factor adjustments. we tested the company’s process to develop the qualitative framework and related risk factors. specifically, we tested the sources of data, factors, and assumptions that the company used by considering whether they are relevant and reliable, and whether additional factors and alternative assumptions should be used. further, we evaluated trends in the total acl, including the qualitative factor adjustments, for consistency with trends in the company’s historical loan portfolio growth and credit performance. we involved credit risk professionals with specialized industry knowledge and experience who assisted in evaluating (1) the company’s overall allowance for credit losses methodology, which included the qualitative framework and related risk factors, for compliance with u.s. generally accepted accounting principles and (2) the qualitative risk factors and their relationship to the quantitative model and how those factors address recent information not captured in the quantitative model.fair value measurement of the contingent consideration liability related to the cars on the web acquisition as discussed in note 3 to the consolidated financial statements, the initial fair value of the contingent consideration liability related to the cars on the web acquisition was $29.3 million. the contingent consideration liability was recognized at fair value on the date of acquisition and is re-measured each reporting period. the estimate of the fair value of the contingent consideration was determined using an option pricing valuation model (“the model”) and 58table of contentsrequired the company to make significant estimates and assumptions related to the acquired entity’s future earnings before interest, income taxes, depreciation and amortization (ebitda) and discount rates (“estimates and assumptions”). we identified the initial fair value measurement of the contingent consideration liability as a critical audit matter because it involved a high degree of subjectivity and audit effort. specifically, the testing and evaluation of the company’s model required the involvement of professionals with specialized skill and knowledge. in addition, complex and challenging auditor judgment was required in evaluating the internally-developed estimates and assumptions used in the model because there was limited observable market information.the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the acquisition-date valuation process for contingent consideration, including controls over the model and related estimates and assumptions. we evaluated the significant ebitda assumptions used in the model by comparing them to historical company specific results, evaluating for consistency with external market data, and assessing whether these assumptions were consistent with evidence obtained in other areas of the audit. finally, we involved valuation professionals with specialized skills and knowledge, who assisted in (1) evaluating the company’s selection of a valuation model for the contingent consideration, (2) evaluating the discount rate used by comparing it against ranges that were independently developed using publicly available market data for comparable entities, and (3) developing an independent estimate of the initial fair value of the contingent consideration liability using an option pricing valuation model and an independently developed discount rate. we compared the results of our valuation professional’s estimate of fair value for the contingent consideration liability to the company’s fair value estimate./s/ kpmg llp we have served as the company's auditor since 2007. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. net realizable value of inventory as discussed in note 1 to the consolidated financial statements, adjustments are made to reduce the cost of inventory to its net realizable value, if required, for estimated excess, obsolete or impaired balances. management monitors inventory quantities on hand and on order and records write-downs for estimated excess or obsolescence based on estimated demand for products, obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds estimated selling price. we identified the net realizable value of inventory for certain product categories as a critical audit matter. 62table of contents the principal consideration for our determination that the net realizable value of inventory represents a critical audit matter is that the assessment of the valuation of inventory is complex and includes an estimate of forecasted demand. the demand estimate is subjective and requires the company to consider significant assumptions such as economic conditions, consumer trends, product acceptance and competition, all of which are subject to significant uncertainty and therefore require significant auditor judgement. our audit procedures related to the net realizable value of inventory included the following, among others: •we obtained management’s analysis of parts in inventory and expected customer demand, recalculated inputs into the analysis and tested for completeness. this included, among other inputs, forecasted demand and general ledger balances.•we tested selected inventory items by making inquiries of management and evaluating the appropriateness of judgments, assumptions and documentation supporting adjustments to the net realizable value of inventory. •we compared selected 2022 estimated demand to actual customer sales orders and forecasted demand information as provided by the sales and operations team in order to test the accuracy of demand information included in the calculation. •we performed a retrospective review by comparing previous demand forecasts to actual usage during the year for a sample of items. •we inquired with management and various staff members outside of the finance function to obtain support for selected forecasted demand inputs as well as to understand macroeconomic and customer specific trends. •we tested the design and operating effectiveness of controls related to the forecasted demand for the company’s products as well as management’s review of the net realizable value of inventory. realizability of deferred tax assets as discussed in note 1 to the consolidated financial statements, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. we identified the realizability of deferred tax assets relating to the company’s foreign tax credits as a critical audit matter. the principal considerations for our determination that the realizability of deferred tax assets relating to the company’s foreign tax credits represent a critical audit matter are the significance of the company’s foreign tax credits and the use of forecasted profitability by jurisdiction and source. the forecasts, including future sales and expenses by jurisdiction, are subject to a high level of estimation uncertainty and subjectivity. additionally, realizability depends on continued implementation of a tax planning strategy. as a result, significant auditor judgment is necessary to audit management’s judgments and assumptions. our audit procedures related to the realizability of deferred tax assets relating to the company’s foreign tax credits included the following, among others: •we considered the applicability of the company’s international transfer pricing arrangements as it relates to the company’s ability to utilize foreign tax credits. •we tested the accuracy of the underlying data used in the forecasts by agreeing the baseline 2021 results for selected jurisdictions to general ledger balances. •we compared the previous year’s forecast of future taxable income with the 2021 actual results to assess management’s ability to accurately estimate future growth. 63table of contents•we evaluated the appropriateness of the assumptions supporting the future revenue growth rate by jurisdiction. •we evaluated management’s assumptions with respect to anticipated relief from withholding on intercompany charges paid by selected jurisdictions for consistency and credibility. •we tested the design and operating effectiveness of controls related to the generation of the forecasts and assumptions that underpin the assessment of the realizability of deferred tax assets relating to the company’s foreign tax credits. /s/ grant thornton llp we have served as the company’s auditor since 2008. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. valuation of insurance reserves for losses and claims (claim reserves) as reflected on the consolidated balance sheet and discussed in note 5 to the financial statements, the company’s insurance reserves for losses and claims (claim reserves), were $79.1 million as of december 31, 2020. the company’s claim reserves relate primarily to its property casualty lines of business and medicare supplement business. the process of establishing claim reserves requires the use of estimates and judgments based on circumstances underlying the insured loss at the date of accrual. management’s judgments include claims adjusters’ evaluations for unpaid claims reported prior to the close of the accounting period, estimates of incurred but not reported (ibnr) claims based on past experience and estimates of loss adjustment expenses. the principal considerations for our determination that the valuation of claim reserves is a critical audit matter are the high degree of judgment and subjectivity in auditing the actuarial methods and assumptions used in the valuation process, including assumptions around expected loss ratios and reported and paid loss emergence patterns. 23table of contents addressing the matter involved performing the following audit procedures, among others: •involving our actuarial specialists to assist in our procedures in:o evaluating the appropriateness of management’s actuarial reserving methodologies and assumptions;o evaluating management’s hindsight analyses;o comparing management’s carried reserve to the range calculated by management’s specialist for property casualty claim reserves;•testing the completeness and accuracy of data provided by management that served as the basis for the actuarial analyses on a sample basis; and•evaluating movement of the company’s recorded property casualty claim reserves within the company’s estimated reserve range year over year. valuation of insurance reserves for future policy benefits (policy reserves) as reflected on the consolidated balance sheet and discussed in note 5 to the financial statements, the company’s insurance reserves for future policy benefits (policy reserves) were $90.9 million as of december 31, 2020. policy reserves are related to life and health insurance policies and are based upon significant assumptions including future investment yields, mortality rates, withdrawal rates and expenses after giving effect to possible risks of unexpected claim experience. these assumptions are based on historical experience modified as necessary to reflect anticipated trends and are generally established at contract inception. the principal considerations for our determination that the valuation of policy reserves is a critical audit matter are the high degree of judgment required to assess certain assumptions that impact policy reserves and the complexity of the actuarial calculations. addressing the matter involved performing the following audit procedures, among others:•involving our actuarial specialists to assist in our procedures in:o evaluating whether the methodology applied by management is consistent in the aggregate with the methodology compliant with gaap;o assessing the significant assumptions used by management for new insurance contracts issued during the current year by comparing the significant assumptions noted above to historical experience, observable market data or management’s estimates of prospective changes to these assumptions;o performing an independent recalculation of policy reserves for a sample of contracts for comparison to management’s estimate; ando evaluating management’s loss recognition testing of aggregate reserve sufficiency.•testing the completeness and accuracy of data used by management in developing assumptions on a sample basis./s/ dixon hughes goodman llp we have served as the company’s auditor since 2018. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment – extrusions reporting unit as described in notes b and o to the consolidated financial statements, the company’s consolidated goodwill balance was $322 million as of december 31, 2021. goodwill is reviewed for impairment annually (in the fourth quarter) or more frequently if indicators of impairment exist or if a decision is made to sell, exit, or realign a business. the company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. during the current year’s annual review of goodwill, management proceeded directly to the quantitative impairment test for all three of the company's reporting units. under the quantitative impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. management recognized an impairment charge of $65 million for the extrusions reporting unit based on the result of the annual review of goodwill for impairment for the year ended december 31, 2021. management uses a discounted cash flow model to estimate the current fair value of the reporting units when testing for impairment. several significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including sales growth (volumes and pricing), production costs, capital spending, working capital levels, and discount rate.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the extrusions reporting unit is a critical audit matter are the significant judgment by management when developing the fair value of the reporting unit. this in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s significant assumptions related to sales growth (volumes and pricing), production costs, capital spending, and discount rate. also, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the extrusions reporting unit. these procedures also included, among others (i) testing management’s process for developing the fair value estimate of the extrusions reporting unit; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness, accuracy, and relevance of underlying data used in the model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to sales growth (volumes and pricing), production costs, capital spending, and discount rate. evaluating management’s assumptions related to sales growth (volumes and pricing) production costs, and capital spending involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with available industry or market data, executed customer contracts, and approved capital spending budgets; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow model and the discount rate assumption./s/ pricewaterhouse coopers llp pittsburgh, pennsylvania february 18, 2022we have served as the company’s auditor since 2019. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill valuation – composite fibers reporting unit — refer to notes 2 and 16 to the financial statements critical audit matter description the company reviews goodwill for impairment at least annually or more frequently if impairment indicators are present. the fair value of goodwill is determined using a market approach and a discounted cash flow model. these approaches incorporate several assumptions, including estimates of future cash flows expected to be generated from the use of the underlying assets. for goodwill, impairment losses, if any, are recognized for the amount by which the carrying value of the reporting unit exceeds its fair value. the goodwill balance was $236.2 million as of december 31, 2021, of which $78.4 million was allocated to the composite fibers operating segment, which is also a reporting unit. the fair value of the composite fibers reporting unit exceeded its carrying value and, therefore, no impairment was recognized. given the significant estimates and assumptions management makes to estimate the fair value of the composite fibers reporting unit and the sensitivity of the reporting unit’s operations to market conditions, such as higher raw materials and energy prices, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions 30required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures over management’s estimates of future cash flows expected to be generated from the use of the underlying assets used to value the composite fibers reporting unit, included the following, among others:•we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over management’s development of the estimates of future cash flows used to value the reporting unit. •we evaluated management’s historical ability to accurately forecast financial results by comparing management’s projections reflected in the prior period reporting unit forecast to actual results. •we evaluated the reasonableness of management’s current reporting unit forecast by comparing the forecast to: •historical results. •internal communications to management and the board of directors.•forecasted information included in industry reports for the company and certain of its peer companies. •with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation assumptions, including testing the underlying source information supporting the assumptions and the mathematical accuracy of the calculations./s/ deloitte & touche llp charlotte, north carolina february 25, 2022we have served as the company’s auditor since at least 1940; | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for loan losses as described in note 3 to the financial statements, the corporation’s allowance for loan losses (all) was $10.39 million at december 31, 2021. the corporation also describes in note 1 of the financial statements the "allowance for loan losses" accounting policy around this estimate. the allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. the allowance consists of specific and general components. the specific component relates to loans that are classified as impaired and an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. the general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. f-2 table of contents we identified the valuation of the all as a critical audit matter. auditing the all involved significant judgement and complex review as there is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management's assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades. our audit procedures related to the estimated allowance for loan losses included: ● testing of completeness and accuracy of the underlying data utilized in the all as well as the completeness and accuracy of the information and reports utilized in the all. ● testing the clerical and computational accuracy of the formulas within the corporation’s all calculation. ● evaluating credit quality indicators such as trends in delinquencies, nonaccruals, charge-offs, and loan grades. ● testing of the loan review function and the accuracy of loan grades determined. ● evaluating the qualitative factor adjustments to historical loss by performing the following: o evaluating the reliability and relevancy of data used as a basis for the adjustments relating to qualitative factors o evaluating the reasonableness of management's judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative factors and the resulting allocation to the allowance o analytically reviewed and collectively evaluated for impairment component year over year o evaluating the reasonableness of the qualitative factor allowance allocation derived by management o recalculating the dollar amount of the reserve derived from the qualitative factor assessment o agreeing the allowance allocation from the qualitative factor analysis to the overall allowance calculation /s/ bkd, llp we have served as the corporation’s auditor since 2021. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that wascommunicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts ordisclosures to which it relates. convertible promissory notes the company has significant amount of outstanding convertible promissory notes. as disclosed in note 11 to the consolidated financialstatements, the company issued three unsecured convertible promissory notes a total principal amount of $1,790,000 with an initialissuance discount of $190,000. as part of debt issuance, the company also incurred brokers’ fees of $130,000, recorded asa debt issuance cost. the notes bear the face interest rate of 10% and have contractual maturity of 18 months since the issuance.the company assessed the notes agreements for embedded derivatives, and recorded beneficial conversion feature of $995,500, derivativeliability related to put options of $474,500, and accretion interest expense of $832,200 for the amounts in excess of the debtproceeds. weidentified the valuation of and the accounting treatment for convertible note as key audit matters because both are complex areas.the separation of the debt element from the embedded derivatives element of a convertible note as well as the fair value valuationof the embedded derivatives can involve a significant degree of judgment and is subject to an inherent risk of error. in addition,the audit effort involved specialized skill and knowledge to assist in evaluating the accounting treatment for convertible debtsand embedded derivatives. f-2 ouraudit procedures in this area included the following, among others: (a)inspected board minutes and other appropriate documentation of authorization to assess whether the transactions were appropriately authorized. (b)verified amounts, interest rate and maturity date to the supporting documentation and debt agreement; and examined terms and conditions of the note. (c)reviewed the analysis carried out by the management on bifurcation of the convertible debt into debt, beneficial conversion feature, and embedded derivatives. (d)considering the adequacy of the disclosures in the financial statements in relation to convertible notes. valuationof financial derivatives instruments the company has certain derivatives that are bifurcated from convertible promissory notes. as disclosed in note 9 to the consolidatedfinancial statements, the company issued three unsecured convertible promissory notes with certain investors’ early redemptionoptions that are considered derivative liabilities. the company used trinomial option pricing model to estimate the fair valueof the derivative liability. the derivative liability was classified within level 3 of the fair value hierarchy because certainunobservable inputs were used in the valuation model. the fair value of the derivative liability was estimated to be $1,306,700at inception and $1,109,800 at december 31, 2020. weidentified the valuation of the fair value measurement of these derivatives instruments requires significant judgements as thecontracts are not traded on public exchange and requires the company to estimate their fair values. the fair values of these optioncontracts are determined by the company’s engaged specialist using option pricing models with inputs about share price,strike price, risk-free interest rates, term to expiration, and volatility. as such, the company has categorized these optioncontracts as level 3 fair value measures. ouraudit procedures in this area included the following, among others: (a)obtained an understanding the company’s specialist process to calculate the fair value of options. (b)evaluated and tested significant inputs used by the company’s specialist in determining the fair value option pricing for derivatives. (c)examined the mathematical accuracy of calculations, evaluated the valuation technique applied and approach used and evaluated the assumptions used to calculate the fair value of derivatives. (d)compared the company’s engaged specialist option contract valuations to auditor’s option pricing model valuations. (e)considering the adequacy of the disclosures in the financial statements in relation to fair value measurements and derivative liabilities. investmentsand impairment valuation the company has significant investments as they represented approximately 49% of total assets. as disclosed in note 6 to the consolidatedfinancial statements, the company had equity securities investments in privately held companies without readily determinable marketvalues. the company adopted the guidance of asc 321, investments - equity securities, which allows an entity to measure investmentsin equity securities without a readily determinable fair value using a measurement alternative that measures these securitiesat cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identicalor similar investment of same issuer (the “measurement alternative”). the company made qualitative assessments toevaluate whether the investments are impaired and concluded that the investments are not impaired. weidentified the impairment valuation of investments as a key audit matter due to the significance of the balance to the financialstatements as a whole. these investments require significant judgements as they are private entities that are not traded on publicexchange and requires the company to assess if there is any changes in circumstances that indicate that the carrying amount ofan investment may require impairment. there were significant judgments made by management to identify indicators of impairmentand estimating the fair value of the investments which led to a high degree of auditor judgment, subjectivity and effort in evaluatingmanagement’s estimation of the fair value of the investment including management’s assessment of the equity investmentfinancial condition, operating performance, prospects and other company-specific information. ouraudit procedures in this area included the following, among others: (a)inspecting board minutes and other appropriate documentation of authorization to assess whether the transactions were appropriately authorized. (b)inquired management to obtain an understanding of the company management’s process in evaluating its convertible debt issuance decisions, impairment assessments, and fair value assessments. (c)evaluated the company’s assessment of impairment by reviewing financial condition, operating performance, prospects, business plans, appraisal reports, or other company-specific information of the investees. (d)considering the adequacy of the disclosures in the financial statements in relation to investments. /s/ jlkz cpa llp we have served as the company’s auditor since july 2020. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of customer relationships intangible asset – perstorp holding ab’s caprolactone business acquisition as described in note 17 to the consolidated financial statements, the company completed the acquisition of perstorp holding ab’s caprolactone business on february 13, 2019 for an aggregate purchase price of $652.5 million, less assumed debt of $113.1 million. one of the most significant assets recorded was $159 million related to a customer relationships intangible asset. the fair values assigned to the customer relationships intangible asset acquired was determined by using a multi-period excess earnings model. significant assumptions utilized in the model are the attrition rate, revenue growth rates, and the discount rate.the principal considerations for our determination that performing procedures relating to the valuation of the customer relationships intangible asset acquired as part of the perstorp holdings ab’s caprolactone business acquisition is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying our procedures related to the fair value measurement of the customer relationships intangible asset acquired due to the significant judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the valuation of the customer relationships intangible asset, including the attrition rate, revenue growth rates, and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships intangible asset and the development of the assumptions related to the valuation of the customer relationships intangible asset, including the attrition rate, revenue growth rates, and the discount rate. these procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for estimating the fair value of customer relationships intangible asset; and (iii) testing the completeness and accuracy of the underlying data used in the model. testing management’s process included evaluating the appropriateness of the valuation model and the reasonableness of significant assumptions, including the attrition rate, revenue growth rates and the discount rate. evaluating the reasonableness of the attrition rate and revenue growth rates involved considering the past performance of the acquired perstorp holdings ab’s caprolactone business and whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating significant assumptions, including the discount rate and the attrition rate. the discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors./s/ pricewaterhouse coopers llp charlotte, north carolina february 26, 2020 we have served as the company’s auditor since 2015. | 1 |
critical audit matters the critical audit matters communicated below arematters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicatedto the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and(2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. -26- table of contents cost estimates for long-term contracts and related revenue recognition description of the matter as more fully described in note 1 to the consolidatedfinancial statements, the company recognizes revenue over time for long-term contracts as goods are produced. the company uses costs incurredas the method for determining progress, and revenue is recognized based on costs incurred to date plus an estimate of margin at completion.the process of estimating margin at completion involves estimating the costs to complete production of goods and comparing those coststo the estimated final revenue amount. long-term contracts are inherently uncertain in that revenue is fixed while the estimates of costsrequired to complete these contracts are subject to significant variability. due to the technical performance requirements in many ofthese contracts, changes to cost estimates could occur, resulting in higher or lower margins when the contracts are completed. given the inherent uncertainty and significant judgmentsnecessary to estimate future costs at completion, auditing these estimates involved a focused audit effort and a high degree of auditorjudgment. how we addressed the matter in our audit our auditing procedures related to the cost estimatesfor long-term contracts and related revenue recognition included the following, among others:we evaluated the appropriateness and consistency of management’s methodsused to develop its estimates.we evaluated the reasonableness of judgments made and significant assumptionsused by management relating to key estimates.we selected a sample of executed contracts to understand the contract, performan independent assessment of the appropriate timing of revenue recognition, and test the mathematical accuracy of revenue recognized basedon costs incurred to date relative to total estimated costs at completion.we performed inquiries of the company’s project managers and othersdirectly involved with the contracts to evaluate project status and project challenges which may affect total estimated costs to complete.we also observed the project work site when key estimates related to tangible or physical progress of the project.we tested the accuracy and completeness of the data used in developing keyestimates, including material, labor, overhead, and sub-contractor costs.we performed retrospective reviews of prior year long-term contracts, comparingactual performance to estimated performance and the related financial statement impact, when evaluating the thoroughness and precisionof management’s estimation process in previous years. valuation of inventory description of the matter as of may 31, 2021, the company’s inventorybalance was $5.8 million, net of a $100,000 allowance for obsolescence, its maintenance and other inventory balance was $1.6 million,net of a $2.0 million allowance for obsolescence, and its provision for obsolescence for the year ended was $1.5 million. as discussedin note 5, maintenance and other inventory represents certain items that are estimated to have a product life-cycle in excess of twelvemonths the company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering.the company evaluates its inventory for obsolescence on an ongoing basis by considering historical usage as well as requirements for futureorders. given the inherent uncertainty and significant judgmentsnecessary to estimate potential inventory obsolescence, auditing management’s estimates involved a high degree of auditor judgment. -27- how we addressed the matter in our audit our auditing procedures related to valuation of inventoryincluded the following, among others:we evaluated the appropriateness and consistency of management’s methodsused to develop its estimates.we evaluated the reasonableness of judgments made and significant assumptionsused by management relating to key estimates.we inquired of management relative to write-offs of inventory during the year.we tested the completeness and accuracy of management’s schedule ofinventory.we developed an independent expectation of the obsolescence reserve basedon our knowledge of the company’s inventory, including analysis of slow-moving items and historical usage and compared it to actual.we examined management’s lower of cost or net realizable value analysisand performed procedures to test its completeness and accuracy.we selected a sample of material purchases made during the year to ensurethey were included in inventory at the proper value.during our physical inventory observation, we toured the company’s warehousesand examined inventory on hand for any indications of obsolescence. /s/lumsden & mc cormick, llp lumsden & mc cormick, llp we have served as the company’s auditor since 1998. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. goodwill impairment test as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $235.1 million as of december 31, 2020. management tests for impairment of goodwill annually in the fourth quarter. to test goodwill, management estimates the fair values of its reporting units using the present value of future cash flows approach, subject to a comparison for reasonableness to its market capitalization at the date of valuation. if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. in addition, goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. a considerable amount of management judgment and assumptions are required in performing the impairment tests as it relates to revenue growth rates and projected operating income. the principal considerations for our determination that performing procedures relating to the goodwill impairment test is a critical audit matter are (i) the significant judgment by management when developing the fair value of the reporting units and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates and projected operating income. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill test, including controls over the determination of the fair value of the reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value of the reporting units, (ii) evaluating the appropriateness of the method, (iii) testing the completeness, accuracy, and relevance of underlying data, and (iv) evaluating the reasonableness of the significant assumptions related to revenue growth rates and projected operating income. evaluating management’s assumptions related to the revenue growth rates and projected operating income involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp milwaukee, wisconsin february 12, 2021 we have served as the company’s auditor since 1995. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of investments as described in notes 2 and 3 to the consolidated financial statements, the company's consolidated investments at fair value were $5,232 million at june 30, 2020. investments were valued in accordance with asc 820, fair value measurement 119(“asc 820”), which defines the fair value of investments as the price received upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted. the company’s investment portfolio is primarily comprised of privately held equity and debt instruments, all of which have been determined to be level 3 investments. per asc 820, level 3 investments utilize inputs that are unobservable and significant to the entire fair value measurement. the fair value of investments in equity and debt instruments is determined on a quarterly basis by the board of directors based on input from third-party valuation firms, management and the audit committee. the third-party valuation firms prepare independent valuations with a range of values for each investment based on their independent assessments.we identified the valuation of investments as a critical audit matter. the principal considerations for our determination are: (i) the number of illiquid investment types in which the company invests, including portfolio companies, collateralized loan obligations (“clo”) and real estate properties, (ii) the use of various complex models to value these investments, and (iii) the use of significant unobservable inputs and assumptions in the valuation models. auditing these complex models and management’s assumptions involved a high degree of auditor judgment and specialized skills and knowledge needed.the primary procedures we performed to address this critical audit matter included:•evaluating the reasonableness of management’s fair value estimates of investments by assessing management’s and the third-party valuation firms' assumptions used for each investment type, testing the accuracy and relevance of significant underlying data and validating the mathematical accuracy of the fair value estimates. significant underlying data testing includes: ◦portfolio companies - (i) assessing the reasonableness and accuracy of underlying data used by obtaining audited, interim and forecasted financial statements from portfolio companies containing revenue and earnings before interest, taxes, depreciation, and amortization (“ebitda”) amounts, (ii) testing the reasonableness of ebitda adjustments, (iii) testing the accuracy of the capital structure for control investments and (iv) recalculating the reasonableness of the contractual cash flows associated with non-control investments in accordance with the terms defined in the respective credit agreement. ◦clo - assessing the reasonableness and accuracy of the call date assumption by independently obtaining and verifying historical call dates and recalculating the projected call dates for a sample of investments.◦real estate properties - assessing the reasonableness and accuracy of property net operating income through confirmations and audited financial statements obtained from underlying property managers. •utilizing personnel with specialized knowledge and skill in valuation to assist in performing the following procedures for a selection of investments: (i) assessing the appropriateness of valuation models, such as the market or income approach for portfolio companies, including discounted cash flow models for portfolio companies and cl os or net asset value (“nav”) analysis for real estate properties, (ii) evaluating whether assumptions used were reasonable including (a) historical or forecasted revenue or ebitda multiples, discount rates, and market yields for portfolio companies (b) assumptions such as, but not limited to default rate, prepayment rate, recovery rate, and reinvestment spread for cl os, and (c) capitalization rates for real estate properties, (iii) recalculating the fair value estimates for accuracy for portfolio companies and real estate properties, and (iv) performing independent fair value calculations for cl os from independently derived assumptions. clo interest income recognition the company’s interest income derived from cl os listed as structured credit securities was $111 million for the year ended june 30, 2020. as described in note 2 to the consolidated financial statements, interest income from investments in the “equity” class of securities of clo funds is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows. for each clo security, the estimate of future cash flow is generated using third-party cash flow models, modeled with the terms of the clo and its structure, and assumptions. the estimated future cash flows are used to estimate the effective yield that is applied to determine clo interest income. management of the company monitors the expected cash inflows from the company’s clo equity investments, including the expected residual payments. the effective yield is determined and updated quarterly.120we identified clo interest income recognition as a critical audit matter. the principal considerations for our determination are the high degree of subjectivity and complexity in management’s judgments relating to the various assumptions used in the future cash flow models, which are then used to allocate interest income to the “equity” class of the clo. auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed. the primary procedures we performed to address this critical audit matter included:•on a sample basis, testing clo interest income through: (i) recalculating management’s accretable yield and resulting income from respective cash flow runs, and (ii) testing of management’s assumptions by recalculating and independently corroborating management provided inputs and outputs for significant assumptions, including but not limited to call dates, clo manager specific default rate, prepayment rate, recovery rate and reinvestment term, in accordance with management’s policy, to external sources and confirmations received directly from the underlying collateral managers.•on a sample basis, evaluating the reasonableness of clo projected cash flows against actual cash collections, where applicable. evaluating significant variances, if any, to determine whether the methodology and assumptions utilized were appropriate.•utilizing personnel with specialized skill and knowledge in valuation to assist in evaluating the reasonableness and appropriateness of management’s significant assumptions used to estimate projected future cash flows from cl os, including but not limited to default rate, discount rate, prepayment rate, recovery rate, and reinvestment term and spread. /s/ bdo usa, llpbdo usa, llp we have served as the company’s auditor since 2005. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. revenue recognition – uniquely configured contracts — refer to notes 1 and 2 to the financial statements critical audit matter description the company recognizes revenue as its contractual performance obligations are satisfied, which may be at a point in time or over time. certain of the company’s contracts are for the delivery, installation, and integration of uniquely configured audio-visual communication systems. revenue for these uniquely configured systems is recognized over time using the cost incurred input method. this input method requires management to make estimates of the costs that will ultimately be incurred at the completion of each contract. revenue is recognized based on the transaction price and the percentage of cost incurred as of the balance sheet date in relation to the total estimated inputs at completion. 24 table of contents we identified revenue associated with uniquely configured contracts as a critical audit matter because of the significant judgments necessary for management to estimate total costs to be incurred to recognize revenue under these contracts. changes in estimated costs could have a significant impact on the timing and amount of revenue recognized. this required an increased level of auditor judgment due to the complexity of uniquely configured contracts and extent of effort when performing audit procedures to audit management’s estimate of total costs and evaluating the reasonableness of the underlying estimates. how the critical audit matter was addressed in the audit our audit procedures related to estimates of total cost used to recognize revenue for uniquely configured contracts included the following, among others: ● we tested the effectiveness of controls over uniquely configured contracts, including management’s controls over the estimates of total costs. ● we selected a sample of uniquely configured contracts and performed the following: ● compared costs incurred to date to the costs management estimated to be incurred to date. ● evaluated management’s ability to achieve the estimates of total cost by performing corroborating inquiries with the company’s project managers and engineers, and compared the estimates to management’s work plans, engineering specifications, and supplier contracts. ● confirmed contractual terms with third parties. ● tested the mathematical accuracy of management’s estimate of total costs. ● we evaluated management’s ability to accurately estimate total costs by comparing actual costs to management’s historical estimates for uniquely configured contracts that have been fulfilled. /s/ deloitte & touche llp minneapolis, minnesota june 11, 2021 we have served as the company's auditor since 2017. | 2 |
critical audit matters in the auditor’s report on the financial statements.we cannot predict whether investors will find our class a common stock less attractive if we rely on these exemptions. if some investors find our class a common stock less attractive as a result, there may be a less active trading market for our class a common stock and our stock price may be reduced or more volatile. in addition, the jobs act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. this allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. we intend to utilize the extended transition period and, as a result, we will not be required to comply with new or revised accounting standards on the same time line as other public companies.we are a “smaller reporting company” and the reduced disclosure requirements applicable to smaller reporting companies may make our class a common stock less attractive to investors.we are a “smaller reporting company” and are therefore entitled to rely on certain reduced disclosure requirements for as long as we remain a smaller reporting company, such as presenting 2 years of audited financial statements in our annual form 10-k or reduced disclosure requirements for executive compensation. this reduced disclosure in our sec filings due to our status as a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects. we cannot predict if investors will find our class a common stock less attractive because we may rely on these exemptions. if some investors find our class a common stock less attractive as a result, there may be a less active trading market for our class a common stock and our stock prices may be more volatile.71table of contents if we fail to maintain effective internal control over financial reporting and effective disclosure controls and procedures, we may not be able to accurately report our financial results in a timely manner or prevent fraud, which may adversely affect investor confidence in our company.we are not currently required to comply with the rules of the sec implementing section 404 of the sarbanes-oxley act, or section 404, and, therefore, we are not required to make a formal assessment of the effectiveness of our internal control over financial reporting. as a public company, we will be required to comply with the sec’s rules implementing sections 302 and 404 of the sarbanes-oxley act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we are not required to make our first annual assessment of our internal control over financial reporting pursuant to section 404 until the year following our first annual report required to be filed with the sec. as an emerging growth company, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to section 404 until the later of the year following our first annual report required to be filed with the sec or the date we are no longer an emerging growth company and a “non-accelerated filer.” at such time, our independent registered public accounting firm may issue a report that is adverse in the event material weaknesses have been identified in our internal control over financial reporting.to comply with the requirements of being a public company, we will need to undertake actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. in addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of section 404. if we identify any material weaknesses in our internal control over financial reporting or we are unable to comply with the requirements of section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports. as a result, the market price of our class a common stock could be materially adversely affected.our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.we are subject to the periodic reporting requirements of the exchange act. we are continuing to refine our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the exchange act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the sec. we believe that any disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.these inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected, which could have a material adverse effect on investors’ confidence in our reporting and the price of our class a common stock.provisions in our restated certificate of incorporation and amended and restated bylaws and under delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.provisions in our restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. these provisions could also limit the price that investors might be willing to pay in the future for shares of our class a common stock, thereby depressing the market price of our class a common stock. in addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts 72table of contentsby our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. among other things, these provisions include those establishing:●a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;●no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;●the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from filling vacancies on our board of directors;●the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;●the ability of our board of directors to alter our bylaws without obtaining stockholder approval;●the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors;●the required approval of the holders of at least two-thirds of the shares entitled to vote thereon to (i) effect a reorganization, recapitalization, share exchange, share classification, consolidation, conversion or merger, (ii) sell, lease, exchange, transfer or otherwise dispose of all or substantially all of our assets, or (iii) dissolve our company or revoke a dissolution of our company;●a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;●the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and●advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.moreover, because we are incorporated in delaware, we are governed by the provisions of section 203 of the general corporation law of the state of delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.our restated certificate of incorporation designates specific courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.our restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the court of chancery of the state of delaware will be the sole and exclusive forum for most legal actions 73table of contentsinvolving claims brought against us by stockholders; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the securities act, the exchange act, the rules and regulations thereunder or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the court of chancery of the state of delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the state of delaware. our restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the united states of america shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the securities act. any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our restated certificate of incorporation described above; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the u.s. federal securities laws and the rules and regulations thereunder.we believe these provisions benefit us by providing increased consistency in the application of delaware law by chancellors particularly experienced in resolving corporate disputes and in the application of the securities act by federal judges, as applicable, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. however, the provision may have the effect of discouraging lawsuits against our directors, officers, employees and agents as it may limit any stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for disputes with us or our directors, officers, employees or agents and result in additional litigation costs in pursuing any such claims. in addition, while the delaware supreme court ruled in march 2020 that federal forum selection provisions purporting to require claims under the securities act be brought in federal court are “facially valid” under delaware law, there is uncertainty as to whether other courts will enforce our federal forum provision. if a court were to find the choice of forum provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition or results of operations. the choice of forum provision contained in our restated certificate of incorporation may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid. the court of chancery of the state of delaware and the federal district courts of the united states may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, would be stockholders’ sole source of gain.we have never declared or paid any cash dividends on our common stock. we currently anticipate that we will retain all available funds and future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. as a result, capital appreciation, if any, of our common stock will be the sole source of gain on an investment in our common stock for the foreseeable future.our ability to use our net operating losses and research and development tax credits to offset future taxable income or income tax liabilities may be subject to certain limitations.as of december 31, 2021, we had u.s. federal and state net operating loss carryforwards, or no ls, of $137.5 million and $62.7 million, respectively, which may be available to offset future taxable income, if any, that begin to expire in 2037 and 2032, respectively. additionally, we had federal no ls of $124.7 million which do not expire but are (for taxable years beginning after december 31, 2017) generally limited in their usage to an annual deduction equal to 80% of taxable income. in addition, we had federal and state research and development tax credits of $1.1 million and $2.1 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2038 and 2024, respectively. in general, under sections 382 and 383 of the internal revenue code of 1986, as amended, or the code, a corporation that undergoes an “ownership change,” generally defined as a greater than 50 percentage point change by value in its equity ownership by one or more stockholders or groups of stockholders owning at least 5% of the corporation’s stock over a rolling three-year period, is subject to limitations on its ability to utilize its pre-ownership change no ls and tax credits to offset future taxable income or income tax liabilities for u.s. federal income tax purposes. similar rules may apply under state tax laws. our existing no ls and tax credits are subject to limitations 74table of contentsarising from previous ownership changes based on the preliminary results of the section 382 study for ownership changes. the section 382 study is expected to be completed in 2022 and may result in additional limitations. the ipo transaction, could result in ownership changes. for these reasons, we are not able to utilize a material portion of the no ls and tax credits even if we attain profitability. for additional information on our use of no ls, see the section entitled “management’s discussion and analysis of financial condition and results of operations—components of results of operations—income tax expense” and note 14—income taxes to our consolidated financial statements included elsewhere in this annual report on form 10-k. general risk factors changes in tax laws, including as a result of the upcoming congressional elections, may impact our future financial position and results of operations.new income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, or interpreted, changed, modified or applied adversely to us, any of which could adversely affect our business operations and financial performance. in particular, the upcoming congressional elections in the united states could result in significant changes in, and uncertainty with respect to, tax legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and suppliers. for example, the united states government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions, and the imposition of minimum taxes or surtaxes on certain types of income. the likelihood of these changes being enacted or implemented is unclear. we are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. to the extent that such changes have a negative impact on us, our suppliers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.if securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline, even if our business is doing well.the trading market for our class a common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. we do not currently have, and may never obtain, research coverage by securities and industry analysts. if no or few securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. in the event we obtain securities or industry analyst coverage, if the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, or our stock performance, or if our product development or marketing and sales results fail to meet the expectations of analysts, our stock price would likely decline. if one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.if our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our class a common stock.the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america, or gaap, requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. if our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our class a common stock.75table of contents we could be subject to securities class action litigation.in the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. this risk is especially relevant for us because early-stage technology companies have experienced significant stock price volatility in recent years. if we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.we will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.as a public company, we will continue incur significant legal, accounting and other expenses that we did not incur as a private company, particularly after we are no longer an emerging growth company and a non-accelerated filer. the sarbanes-oxley act of 2002, the dodd-frank wall street reform and consumer protection act, the listing requirements of the nasdaq global select market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. for example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.we are evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. these rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. this could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practice.item 1b. unresolved staff comments.none. item 2. properties.our principal office is located in lowell, massachusetts, where we lease 67,663 square feet of office, laboratory, manufacturing and inventory-storage space. we lease this space under a lease agreement, as amended, which expires in july 2029. in june 2021, we entered into a sublease agreement for 33,339 square feet of office and back-up manufacturing space in lexington, massachusetts, which expires in june 2029. further, we maintain inventory at storage a warehouse in noord-brabant, netherlands as well as various offsite warehouses in the united states and europe. we believe that our facilities are sufficient to meet our current needs. item 3. legal proceedings.from time to time, we may become involved in litigation or other legal proceedings. we are not currently a party to any litigation or legal proceedings that, in the opinion of our management, are probable to have a material adverse effect on our business. regardless of outcome, litigation can have an adverse impact on our business, financial condition, results of operations and prospects because of defense and settlement costs, diversion of management resources and other factors. item 4. mine safety disclosures.not applicable. 76table of contents 77table of contents part ii item 5. market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities.market information on july 15, 2021, our class a common stock began trading on the nasdaq global select market under the symbol “rpid.” prior to that time, there was no public market for our common stock. there is no established public trading market for our class b common stock.holders as of march 21, 2022, there were 53 holders of record of our class a common stock and 2 holders of record of our class b common stock.dividend policy we have never declared or paid any cash dividends on our capital stock. we currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business and do not anticipate declaring or paying any dividends in the foreseeable future. any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, contractual requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments.recent sales of unregistered securities; purchases of equity securities by the issuer or affiliated purchaser other than as disclosed in our quarterly report on form 10-q for the quarter ended june 30, 2021, the company did not sell any equity securities during the year ended december 31, 2021 that were not registered under the securities act. on july 16, 2021, we filed a registration statement on form s-8 under the securities act to register all of the shares of our class a common stock subject to outstanding options and all shares of our class a common stock otherwise issuable pursuant to our equity compensation plans.use of proceeds on july 19, 2021, we completed our ipo, in which we issued and sold 7,920,000 shares of our class a common stock at a price to the public of $20.00 per share. we raised net proceeds to us of approximately $143.8 million, after deducting the underwriting discount of $11.1 million and offering expenses of $3.7 million. on august 4, 2021, the underwriters exercised their option to purchase additional shares in part for 1,086,604 shares at the public offering price of $20.00 per share less underwriting discounts and commissions, for additional net proceeds to us of approximately $20.2 million. all shares sold were registered pursuant to a registration statement on form s-1 (file no. 333-257431), as amended, or the “registration statement”, declared effective by the sec on july 14, 2021. the offering terminated after the sale of all securities registered pursuant to the registration statement. no payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.the net proceeds from our ipo have been invested in cash, a money market fund comprised of u.s. government and u.s. treasury securities, and short and long-term investments in u.s. government treasury bills. there has been no material change in the expected use of the net proceeds from our ipo as described in our registration statement.item 6. reserved 78table of contents item 7. management’s discussion and analysis of financial condition and results of operations.you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. as a result of many factors, including those factors set forth in the “risk factors” section of this annual report on form 10-k, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.overview we are an innovative life sciences technology company that enables the safe and efficient manufacture of pharmaceutical products through our rapid automated microbial quality control, or mqc, detection platform. we develop, manufacture, market and sell the growth direct system and related proprietary consumables, and value-added services to enable rapid mqc testing in the manufacture of biologics, cell and gene therapies, vaccines, sterile injectables, and other healthcare products. our system delivers the power of industrial automation to bioprocessing and pharmaceutical manufacturing firms by modernizing and digitizing their mqc operations. our growth direct platform, developed with over 15 years of active feedback from our customers, was purpose-built to meet the growing demands posed by the increasing scale, complexity, and regulatory scrutiny confronting global pharmaceutical manufacturing. our growth direct platform comprises the growth direct system, optional laboratory information management system, or lims, connection software (which the majority of our customers purchase), proprietary consumables, and comprehensive field service, validation services and post-warranty service contracts. once embedded and validated in our customers’ facilities, our growth direct platform provides for recurring revenues through ongoing sales of consumables and service contracts.our technology fully automates and digitizes the process of pharmaceutical mqc and is designed to enable our customers to perform this critical testing process more efficiently, accurately, and securely. our growth direct platform accelerates time to results by several days, a 50% improvement over the traditional method, and reduces mqc testing to a simple two-step workflow, eliminating up to 85% of the manual steps of traditional mqc, generating significant time, operational, and cost savings for our customers. we seek to establish the growth direct as the trusted global standard in automated mqc by delivering the speed, accuracy, security, and data integrity compliance that our customers depend on to ensure patient safety and consistent drug supply.since inception, we have devoted a majority of our resources to designing, developing, and building our proprietary growth direct platform and associated products, launching our growth direct platform commercially, expanding our sales and marketing infrastructure to grow our sales, building a global customer support team to deliver our value-added services, investing in robust manufacturing and supply chain operations to serve our customers globally, and providing general and administrative support for these operations. prior to our ipo, we funded our operations primarily with proceeds from sales of preferred stock, borrowings under loan agreements and product and service sales as well as our cost-reimbursement contract with the u.s. department of health and human services biomedical advanced research & development authority (“barda”). all funding under this contract was fully earned by the fourth quarter of 2021 and, as such, we do not currently anticipate recognizing any non-commercial revenue in the year ending december 31, 2022. on july 19, 2021, we closed an initial public offering of our class a common stock (the “ipo”), which resulted in the sale of 7,920,000 shares of our class a common stock at a public offering price of $20.00 per share, before underwriting discoun | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.inventories – valuation —refer to notes 1 and 3 of the financial statements critical audit matter description inventories are stated at the lower of cost and net realizable value, including any applicable duty and freight charges. the company accounts for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated net realizable value based upon assumptions about future demand, market conditions and available liquidation channels through the establishment of an inventory excess and obsolescence valuation adjustment. changes in these assumptions could have a significant impact on the inventory excess and obsolescence valuation adjustment.we identified inventory valuation as a critical audit matter because of the significant judgments made by management to estimate future demand, market conditions, and available liquidation channels which are used to arrive at the net realizable value. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions within the inventory excess and obsolescence allowance.how the critical audit matter was addressed in the audit our audit procedures related to the inventory excess and obsolescence allowance included the following, among others:50table of contents▪we tested the effectiveness of controls over the inventory excess and obsolescence valuation adjustment, specifically the control over the estimation of the net realizable value of inventory.▪we evaluated management’s ability to estimate net realizable value by comparing management’s estimates to subsequent transactions, taking into account changes in market conditions subsequent to january 1, 2022.▪we evaluated the method and assumptions used by management to estimate net realizable value by:–testing the underlying data that served as the basis for the assumptions. –evaluating the appropriateness of the inputs to the estimate, including future demand, market conditions, and available liquidation channels.–comparing management’s prior-year estimate of demand to actual results for the year.–comparing management’s estimate of future demand to historical results and forecasted information included in the company’s press releases, as well as in third-party analyst and industry reports. –comparing actual sales values realized subsequent to the balance sheet date to the recorded amounts, net of the inventory excess and obsolescence allowance. ▪tested the completeness of the inventory valuation adjustment by: –identifying slow-moving inventory with a turnover of less than one and comparing to management’s analysis and investigating the rationale for no adjustment if required.–inquiring of brand management and performing corroborative inquiry about returns, inventory that is under-performing, and anticipated trends based on market reaction and comparing to management’s analysis. –comparing inventory sold at a loss or to liquidators to management’s analysis. –testing a sample of inventory items to determine if the inventory excess and obsolescence allowance is reasonable through evaluations of historical margin data, obtaining evidence of past or future product orders, and other qualitative factors for each selection.▪tested the mathematical accuracy of the inventory excess and obsolescence allowance by recalculating the net realizable value and comparing our recalculation to the recorded balance.▪compared management’s prior-year estimate of the inventory excess and obsolescence allowance for a sample of inventory items to the recorded sales price to identify potential bias for determination of the inventory excess and obsolescence allowance. /s/ deloitte & touche llp dallas, texas march 10, 2022we have served as the company's auditor since 1988. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. convertible preferred shares critical audit matter description: as described in note 13 to the consolidated financial statements, the company has previously issued series d convertible preferred stock which required the identification and assessment of the embedded features to be recognized separately and recorded at fair value. the company determined that the embedded conversion option, redemption option and participating dividend feature contained in the series d convertible preferred stock were required to be recognized separately as derivative liabilities at fair value. the determination of fair value involved using complex valuation methodologies and significant assumptions including the expected volatility of the company’s common stock and the probability of certain conditions or events occurring. we identified auditing the company’s evaluation of the accounting for the embedded features included in the series d convertible preferred stock, specifically the methods and assumptions used to estimate the fair value of the derivative liability as a critical audit matter. how we addressed the matter in our audit: the primary procedures we performed to address this critical audit matter included: ● obtaining and reviewing the underlying series d convertible preferred stock agreements to understand the terms and conditions, economic substance, and identify embedded features requiring evaluation. ● obtaining an understanding of management’s process for developing the estimated fair value of the embedded features, including evaluation of the appropriateness of the method selected by the company, identifying the significant assumptions used to determine the fair value estimate, and the application of those assumptions in the related method. ● testing the data and significant assumptions used in developing the fair value estimate, including procedures to determine whether the data was complete and accurate and sufficiently precise and whether management’s estimation of the probability of whether certain conditions or events were reasonable as of each valuation date. ● utilizing a valuation specialist assisting in evaluating the reasonableness of the valuation methodology used, and the underlying assumptions including the forecasted volatility of the company’s common stock price to its historical volatility. /s/ baker tilly us, llp we have served as the company's auditor since 2021. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.acquisitions and investments in businesses and technologies — in-process research and development intangible assets — refer to notes 1 and 6 critical audit matter description the company completed the acquisition of smart ag, inc. and a majority ownership in dot technology corp. (“dot”) for an aggregate purchase price of approximately $54 million during fiscal 2020. the company accounted for the acquisitions of these businesses using the acquisition method of accounting. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including intangible assets of approximately $31 million for in-process research and development (“ipr&d”). management estimated the fair value of the ipr&d intangible asset using the multi-period excess earnings method. the fair value determination of the ipr&d intangible asset required management to make significant estimates and assumptions related to the selection of the discount rate and the amount and timing of future cash flows, including expected growth rates, product obsolescence factors, and profitability. given the significance of the dot ipr&d intangible asset and given the fair value determination of the dot ipr&d intangible asset requires management to make significant estimates and assumptions related to the selection of the discount rate and the amount and timing of future cash flows, including expected growth rates, product obsolescence factors and profitability, performing audit procedures to evaluate the reasonableness of these estimates and assumptions for the dot ipr&d intangible 36 asset required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to management’s judgments regarding the selection of the discount rate and the amount and timing of future cash flows, including expected growth rates, product obsolescence factors, and profitability for the dot ipr&d intangible asset included the following, among others:•we tested the effectiveness of controls over the valuation of the ipr&d intangible asset, including management’s controls over the selection of the discount rate and forecasts of expected growth rates, product obsolescence factors, and profitability.•we evaluated the reasonableness of management’s forecasts of expected growth rates, product obsolescence factors, and profitability by evaluating the source information and assumptions used by management and by comparing the projections to (1) internal communications to management and the board of directors, (2) management’s estimates of market demand including consideration of external market sources, (3) historical order and cost activity, and (4) external information on obsolescence factors of similar assets. •with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by:–testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.–developing a range of independent estimates and comparing those to the discount rate selected by management./s/ deloitte & touche llp minneapolis, minnesota march 26, 2020we have served as the company's auditor since 2017. | 2 |
critical audit matters50 the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of component parts inventory as described in notes 1 and 7 to the consolidated financial statements, inventory is valued at the lower of cost or net realizable value. the company performs reviews of its on-hand inventory, including component parts, to determine amounts, if any, of inventory that is deemed discontinued, excess, or unsaleable. as of january 31, 2022, the company’s component parts inventory balance was $29.8 million. as disclosed by management, the company retains adequate levels of component parts to facilitate both the manufacturing of its watches as well as the after-sales service of its watches for an extended period of time after the discontinuance of the manufacturing of such watches. the adjustment to reduce the value of component parts below their cost to their net realizable value is based on the timing of when a component part is no longer associated with a watch that is being manufactured as well as the significant assumption related to the anticipated utilization of component parts for after-sales service. the principal considerations for our determination that performing procedures relating to the valuation of component parts inventory is a critical audit matter are (i) the significant judgment by management when determining the valuation of component parts inventory and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating the timing of when a component part is no longer associated with a watch that is being manufactured as well as the significant assumption related to the anticipated utilization of component parts for after-sales service. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of component parts inventory. these procedures also included, among others, testing management’s process for determining the valuation of component parts inventory, which included (i) evaluating the appropriateness of management’s valuation methodology; (ii) testing the completeness and accuracy of underlying data used in the valuation; and (iii) evaluating the reasonableness of the timing of when a component part is no longer associated with a watch that is being manufactured as well as the significant assumption related to the anticipated utilization of component parts for after-sales service. evaluating the timing of when a component part is no longer associated with a watch that is being manufactured as well as the significant assumption related to the anticipated utilization of component parts for after-sales service involved evaluating the reasonableness considering (i) management’s process for determining the timing of when a component part is no longer associated with a watch that is being manufactured; (ii) historical utilization of component parts for after-sales service; (iii) the company’s objectives and strategies; (iv) consistency with external market and industry data; and (v) consistency with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp new york, new york march 24, 2022we have served as the company’s auditor since 1976. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. going concern description of matter as described further in note 1 to the consolidated financial statements, the company has incurred losses each year from inception through december 31, 2021, and expects to incur additional losses in the foreseeable future. currently, management’s forecasts and related assumptions illustrate the company’s ability to sufficiently fund operations and satisfy the company’s obligations as they come due for at least one year from the financial statement issuance date. management made judgments to conclude that it is probable that the company’s plans will be effectively implemented and will provide the necessary cash flows to fund the company’s obligations as they become due. the judgments with the highest degree of impact and subjectivity in reaching this conclusion included management’s estimates of research and development clinical trial costs and other general and administrative costs. as a result, a high degree of auditor judgment and increased audit effort was required in performing audit procedures to evaluate the reasonableness of management’s estimates. how we addressed the matter in our audit our audit procedures included the following:• obtained an understanding of the internal controls and processes in place over the company’s preparation of forecasted information and considerations of the company’s obligations.• we tested the reasonableness of the forecasted research and development expenses, operating expenses, and uses and sources of cash used in management’s assessment of whether the company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. this testing included inquiries with management, comparison of prior period forecasts to actual results, consideration of positive and negative evidence impacting management’s forecasts, the company’s financing arrangements in place as of the report date, consideration of the company’s relationships with its financing partners, performance of a sensitivity analysis of accelerated uses of cash, and creation of an independent estimate of expected future cash flows. f-1index valuation of derivative liabilities description of matter as discussed in note 5 to the consolidated financial statements, during the year ended december 31, 2021, the company and a related party entered into three debt financing arrangements for a total of $30 million loaned to the company. these arrangements include various conversion and other features, including a contingent interest component that has been bifurcated and recognized as a derivative liability. at december 31, 2021, the company’s derivative liabilities related to the related party convertible notes payable totaled $1.1 million. as more fully described in note 6 to the consolidated financial statements, the company utilizes a monte carlo geometric brownian stock path model in measuring the fair value of the derivative liabilities, which requires the use of estimates and assumptions. auditing management’s valuations of the derivative liabilities was challenging due to the complexity of the valuation model and the inputs that are highly sensitive to changes such as the common stock market price, volatility, risk free rates, and yields. how we addressed the matter in our audit our audit procedures included, among others, the following:• obtained an understanding of the internal controls and processes in place over the company’s process used in determining the valuation of the derivative liabilities.• evaluated the company’s use of the models used and tested the significant assumptions used in the models, as described above.• we evaluated the completeness and accuracy of underlying data used in supporting the assumptions and estimates.• in addition, we involved valuation specialists to assist in assessing the significant assumptions and methodologies used by the company. accrued and prepaid clinical trial expenses description of matter the company’s accrued expenses total approximately $7.2 million at december 31, 2021, which included the estimated obligation for clinical trial expenses incurred as of december 31, 2021, but not paid as of that date in the amount of approximately $6.4 million. in addition, the company’s total prepaid expenses and other current assets totaled $2.2m, which included amounts that were paid in advance of services incurred pursuant to clinical trials in the amount of approximately $1.1 million. as discussed in note 2 to the consolidated financial statements, when the third-party contract research organization and other vendor billing terms do not coincide with the company’s period-end, the company is required to make estimates of its obligations to those vendors, including personnel costs, allocated facility costs, lab supplies, outside services, contract laboratory costs related to manufacturing drug product, clinical trials and preclinical studies costs incurred in a given accounting period and record accruals at the end of the period. the company bases its estimates on its knowledge of the research and development programs, services performed for the period, past history for related activities, and the expected duration of the vendor service contract, where applicable. payments for these activities are based on the terms of the individual arrangements and may result in payment terms that differ from the pattern of costs incurred. there may be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of the clinical expense. auditing the company’s accrued and prepaid clinical trial expenses is especially challenging due to the large volume of information received from multiple vendors that perform services on the company’s behalf. while the company’s estimates of accrued and prepaid clinical trial expenses are primarily based on information received related to each study from its vendors, the company may need to make an estimate for additional costs incurred. additionally, due to the long duration of clinical trials and the timing of invoicing received from vendors, the actual amounts incurred are not typically known at the time the financial statements are issued. how we addressed the matter in our audit our audit procedures included, among others, the following:• obtained an understanding of the internal controls and processes in place over the company’s process used in determining the completeness and existence of accrued and prepaid clinical trial expenses.• tested the accuracy and completeness of the underlying data used in determining the accrued and prepaid clinical trial expenses and evaluating the assumptions and estimates used by management to adjust the actual information received. we corroborated the schedules of the underlying data used in the accrual calculation with the company’s third-party contract research organization who oversees the clinical trials. to evaluate the completeness of the accrual, we also tested subsequent invoices received to assess the impact to the accrual. /s/ cherry bekaert llp we have served as the company’s auditor since 2015. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.assessment of the impact of estimated proved oil and gas reserves on depletion expense related to producing oil and gas properties as discussed in note 1 to the consolidated financial statements, the company calculates depletion expense related to producing oil and gas properties using the unit-of-production method. under this method, capitalized costs of producing oil and gas properties, along with support equipment and facilities, are depleted to expense over proved oil and gas reserves. for the year ended december 31, 2019, the company recorded depreciation, depletion and amortization expense of $2,197 million. the estimation of proved oil and gas reserves requires the expertise of professional petroleum reserve engineers who take into consideration forecasted production. the company’s internal reserve engineers prepare an estimate of the proved oil and gas reserves. the company engages external reserve engineers to independently evaluate the proved oil and gas reserves estimated by the company. 59table of contents index to financial statements we identified the assessment of the impact of estimated proved oil and gas reserves on depletion expense related to producing oil and gas properties as a critical audit matter. complex auditor judgment was required in evaluating the company’s estimate of proved oil and gas reserves, which was an input to the depletion expense calculation. specifically, auditor judgment was required to evaluate the forecasted production of proved oil and gas reserves. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s depletion process, including controls related to the forecasted production of proved oil and gas reserves. we analyzed and recalculated the depletion expense for compliance with industry and regulatory standards. we assessed the methodology used by the company’s internal reserve engineers to estimate proved oil and gas reserves. we assessed the competence, capabilities, and objectivity of the company’s internal reserve engineers, who estimated the proved oil and gas reserves, and the external reserve engineers engaged by the company. we compared the forecasted production used by the company to historical production rates. we read the findings of the company’s external reserve engineers in order to understand the method and assumptions used by the engineers in connection with our evaluation of the company’s reserve estimates.assessment of recoverability of oil and gas properties in the eagle ford shale and in the delaware basin as discussed in note 1 and 10 to the consolidated financial statements, the company routinely assesses its oil and gas properties for impairment indicators. if an impairment indicator is identified in relation to one or more oil and gas properties, an undiscounted cash flow analysis is required to quantitatively evaluate recoverability. the company estimates future net cash flows expected in connection with the oil and gas property and compares such future net cash flows to the carrying amount of the oil and gas property to determine if the carrying amount is recoverable. when the carrying amount of an oil and gas property exceeds its estimated undiscounted future net cash flows, the carrying amount is reduced to estimated fair value. estimated future net cash flows used to estimate fair value are based on the company’s forecasted production of oil and gas reserves, commodity prices based on published forward price curves or contract prices as of the date of the estimate, operating and development costs, and a discount rate. the company recorded an impairment of $1.2 billion related to the eagle ford shale proved properties and did not record any impairment related to the delaware basin oil and gas properties.we identified the assessment of recoverability of oil and gas properties in the eagle ford shale and in the delaware basin as a critical audit matter. there was a high degree of subjective auditor judgment in evaluating the key assumptions used to estimate the undiscounted future net cash flows of oil and gas properties in the delaware basin and the discounted future net cash flows of oil and gas properties in the eagle ford shale. the key assumptions were the estimated future commodity prices, including relevant market differentials, forecasted production of oil and gas reserves, risk adjustment factors associated with oil and gas reserves, estimated future operating and development costs, and a discount rate applied to the cash flows. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s oil and gas property impairment process, including controls related to the key assumptions. we compared forecasted commodity prices to publicly available market information. we evaluated the company’s undiscounted future net cash flows by comparing the company’s forecasted production of oil and gas reserves, development costs, and operating costs to historical results. we evaluated risk adjustment factors against supporting information used by the company and guideline ranges by reserve class from published industry surveys. we evaluated the competence, capabilities, and objectivity of the company’s internal reserve engineers, who estimated the reserves, including the applicable risk adjustment factors. in addition, we involved a valuation professional with specialized skills and knowledge, who assisted in evaluating the discount rate used in the valuation, by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities. /s/ kpmg llp we have served as the company’s auditor since 2002. | 5 |
critical audit matters thecritical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financialstatements and (2) involved are especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical auditmatter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. estimationof proved reserves impacting the recognition and valuation of depletion expense and impairment of oil and gas properties f-2 critical accounting matter description asdescribed in note 2 to the financial statements, the company accounts for its oil and gas properties using the full cost method of accountingwhich requires management to make estimates of proved reserve volumes and future revenues and expenses to calculate depletion expenseand measure its oil and gas properties for potential impairment. to estimate the volume of proved reserves and future revenues, managementmakes significant estimates and assumptions, including forecasting the production decline rate of producing properties and forecastingthe timing and volume of production associated with the company’s development plan for proved undeveloped properties. in addition,the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performanceof wells associated with proved reserves to determine if wells are expected, with reasonable certainty, to be economical under the appropriatepricing assumptions required in the estimation of depletion expense and potential impairment measurements. we identified the estimationof proved reserves of oil and gas properties, due to its impact on depletion expense and impairment evaluation, as a critical audit matter. theprincipal consideration for our determination that the estimation of proved reserves is a critical audit matter is that changes in certaininputs and assumptions, which require a high degree of subjectivity necessary to estimate the volume and future revenues of the company’sproved reserves could have a significant impact on the measurement of depletion expense or the impairment assessment. in turn, auditingthose inputs and assumptions required subjective and complex auditor judgment. howthe critical audit matter was addressed in the audit weobtained an understanding of the design and implementation of management’s controls and our audit procedures related to the estimationof proved reserves included the following, among others. ●we evaluated the level of knowledge, skill, and ability of the company’s reservoir engineering specialists and their relationship to the company, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the company’s proved reserve volumes, and read the reserve report prepared by the company’s specialists. ●to the extent key, sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions are derived from the company’s accounting records, such as commodity pricing, historical pricing differentials, operating costs, estimated capital costs and working and net revenue interests, we tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis. specifically, our audit procedures involved testing management’s assumptions as follows: -compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for the pricing differentials; -evaluated the models used to estimate the operating costs at year-end compared to historical operating costs; -compared the models used to determine the future capital expenditures and compared estimated future capital expenditures used in the reserve report to amounts expended for recently drilled and completed wells with similar locations; -evaluated the working and net revenue interests used in the reserve report by inspecting a sample of ownership interests, historical pricing differentials, and operating costs to underlying support from the company’s accounting records. f-3 -evaluated the company’s evidence supporting the amount of proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the company’s or the operator’s intent to develop the proved undeveloped properties; -applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year reserve report. /s/weaver and tidwell, l.l.p. wehave served as the company’s auditor since 2017. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.self-insurance liabilities (general and professional liability claims) - refer to notes 2 and 18 to the financial statements critical audit matter description the company's self-insurance liabilities for general and professional liability claims totaled $60.9 million at december 31, 2020. the company develops information about the size of the ultimate claims based on historical experience, current industry information, and actuarial analysis.the determination of case reserves for known general and professional liability claims, which is used in developing the actuarial estimated liability, is highly subjective. given the significant judgments in estimating the case reserves for known claims, we have determined the reserve for general and professional liabilities to be a critical audit matter. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management estimates of case reserves for known claims.how the critical audit matter was addressed in the audit our audit procedures relating to management’s judgment regarding the estimation of the reserve for general and professional liability claims included the following, among others:•we tested the effectiveness of controls over the reserve for general and professional liabilities, including those over the determination of the case reserves for known claims.•we obtained an understanding of the factors considered and assumptions made by management and the actuaries in developing the estimate of the general and professional liability reserves, the sources of data relevant to these factors and assumptions and the procedures used to obtain the data, and the methods used to calculate the estimate.•we performed a retrospective review in which we compared the current portion of the total liability at the end of the prior year with what was actually paid in the current year in order to assess the ability of the company to forecast the timing of reserve payouts.•we tested known case reserves by making selections and obtaining the associated notice of claim and settlement support (if applicable), as well as inquiring with the company as to the nature of each case reserve selection and the judgment rationale for the established reserve amount. additionally, we selected external legal counsel and inquired about open cases handled by each legal firm, and agreed those cases are appropriately included in the claims data. /s/ deloitte & touche llp costa mesa, california february 3, 2021we have served as the company's auditor since 1999. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition – revenue recognized over time description of the matter as discussed in notes 2 and 3 to the consolidated financial statements, the company provides quality, quick-turn prototyping and on-demand manufacturing services. the majority of revenue recognized in a reporting period is based on completed, invoiced contracts. the company manufactures parts that have no alternative use to the company since the parts are custom made to specific customer orders and the company believes that there is a legally enforceable right to payment for performance completed to date on these manufactured parts. revenue is recognized over time for manufactured parts which meet these two criteria. for revenue recognized over time, management uses the input method to measure progress toward the complete satisfaction of performance obligations, based on production time incurred to date as a percentage of total estimated production time. 48 table of contents auditing revenue recognized over time was challenging because the relevant accounting standard requires the company to estimate the progress towards satisfaction of performance obligations, applying a single appropriate method to measure progress. the input method requires an analysis of the incurred time in production and an estimate of the total time necessary to complete the total parts per the customer’s order. the company also estimates a reasonable profit margin. these estimates are based on management’s assessment of the current status of production as well as historical results. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process for recognizing revenue over time. this included testing controls over management’s evaluation of contract terms, the estimation of production time incurred to date and total production time used in the input method, estimation of a reasonable profit margin and the completeness and accuracy of the data used in the input method. to test the company’s revenue recognition over time, we performed audit procedures that included, among others, inspecting a sample of contracts to evaluate the existence of an enforceable right to payment for performance completed to date, evaluating the progress towards completion of orders in process through examination of a sample of product shipments subsequent to the end of the reporting period, evaluating the reasonableness of management’s estimate of profit margins based on a comparison to historical margins, testing the appropriateness of the timing and amount of revenue recognized over time based on the underlying inputs, and performing an independent sensitivity analysis to evaluate the impact on revenues of changes in significant assumptions. capitalized software costs description of the matter as discussed in note 2 to the consolidated financial statements, the company follows asc 350-40, internal-use software, in accounting for internally developed software. the company capitalized $16.1 million of internal-use software costs during the year ended december 31, 2019. auditing capitalized internal-use software development costs was challenging due to the degree of subjectivity involved in management’s assessment of what development activities and related costs met the capitalization criteria, as only those costs incurred in certain stages of software development and certain types of costs qualify for capitalization in accordance with the applicable accounting standard. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s internal-use software costs process. this included testing controls over management’s determination of which costs qualify for capitalization in accordance with the applicable accounting standard and company policy. to test the company’s capitalization of internal-use software costs, we performed audit procedures that included, among others, inspecting underlying documentation to evaluate whether the costs were capitalizable in accordance with the company’s capitalization policy and the applicable accounting standard. we also assessed the company’s determination of costs that qualified for capitalization through inspection of a sample of vendor contracts and invoices, inquiries of project personnel to assess the nature of the costs and review of payroll data to evaluate the internal payroll costs capitalized. /s/ ernst & young llp we have served as the company’s auditor since 2011. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.fair value measurements associated with the sale of the company’s subsidiary to tonogold resources, inc. – refer to note 2 and note 15 to the financial statements.critical audit matter description:the company’s sale of a subsidiary as described in note 2 to the consolidated financial statements under the heading tonogold resources inc. securities, purchase, lease and option agreements contained convertible preferred shares, a contingent forward asset, and a convertible note receivable, all of which are financial instruments subject to fair value measurements during the year ended december 31, 2020.under accounting principles generally accepted in the united states of america, these specific financial instruments are classified as level 3 in the fair value hierarchy. unlike the fair value of other assets and liabilities that are readily observable, the valuation of these financial instruments classified as level 3 was inherently subjective and involved the use of complex valuation models and unobservable inputs. note 15 to the financial statements describes the valuation models and various inputs used for each of these financial instruments.f-1we identified the valuation of these financial instruments as a critical audit matter because of the complex valuation models and unobservable inputs management used to estimate fair value, which required a high degree of auditor judgment and an increased extent of effort. how the critical audit matter was addressed in the audit our audit procedures related to valuation models and unobservable inputs used by management to estimate the fair value of the financial instruments described above included the evaluation and assessment of the following, among others:•management’s process for determining the fair value of the financial instruments, including an evaluation of the methodologies used and the appropriateness of significant inputs (e.g., the discount and default rates) and of key probability factors (e.g., redemption, conversion, prepayment, and maturity date extension). •the consistency by which management applied significant unobservable valuation assumptions and utilized particular valuation models.•the competence, capabilities, and objectivity of the valuation specialist that management engaged to assist in the development of significant assumptions and to calculate the fair value by applying selected valuation models.•the reasonableness of inputs for discount and defaults rates which included comparison to rate ranges developed using publicly available market data for comparable entities and other industry factors. •the reasonableness of the basis of management’s determination of probability factors including whether assumptions were consistent with evidence obtained in other areas of the audit and consideration of contrary information./s/ assure cpa, llc we have served as the company’s auditor since 2020. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of interest-rate related derivatives and hedged items as described in notes 7 and 14 to the financial statements, the fhl bank uses derivatives to manage its exposure to interest-rate risks and reduce funding costs, among other objectives. the total notional amount of derivatives as of december 31, 2020 was $17 billion, of which 82% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of december 31, 2020 was $137 million and $4 million, respectively. the fair values of interest-rate related derivatives and hedged items are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. the discounted cash flow analysis uses market-observable inputs, such as discount rate, forward interest rate, and volatility assumptions. the principal considerations for our determination that performing procedures relating to the valuation of interest-rate related derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the discount rate and forward interest rate assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included testing the effectiveness of controls relating to the valuation of interest-rate related derivatives and hedged items, including controls over the method, data and assumptions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rate and forward interest rate assumptions./s/ pricewaterhouse coopers llp pittsburgh, pennsylvania march 9, 2021we have served as the fhl bank’s auditor since 1990. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.acquisitions – customer relationship intangible assets – refer to note 1 (acquisitions and intangible assets), note 3, and note 5 to the financial statements critical audit matter description the company completed various acquisitions during the year ended january 2, 2022 for an aggregate purchase price of approximately $147.2 million. the company accounted for the acquisitions under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer relationship intangible assets of $54.2 million. management estimated the fair value of the customer relationship intangible assets using the multi-period excess earnings method, which is a specific discounted cash flow method. the fair value determination of customer relationship intangible assets required management to make significant estimates and assumptions, including the selection of the discount rates. changes in the discount rates could have a significant impact on the fair value of customer relationship intangible assets.55table of contents we identified the initial valuation of customer relationship intangible assets as a critical audit matter because of the significant estimates and assumptions management makes to determine the fair value of these assets and the sensitivity of the fair value estimate to changes in the discount rates. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s selection of the discount rates used in the determination of the initial fair value of the customer relationship intangible assets.how the critical audit matter was addressed in the audit our audit procedures related to the selection of the discount rates for the determination of fair value of customer relationship intangible assets included the following, among others:•we tested the effectiveness of controls over the fair value of the customer relationship intangible assets, including management’s controls over the selection of the discount rates. •for a sample of acquisitions, with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rates by: 1)testing the source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculation.2)developing a range of independent estimates and comparing those to the discount rates selected by management. /s/ deloitte & touche llp atlanta, georgia february 24, 2022we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. going concern- refer to note 3 of the financial statements critical audit matter description the company raised a substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. the financial statements for the years under audit have been prepared assuming that the company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. see the explanatory paragraph of the opinion paragraph. how the critical audit matter was addressed in the audit - we evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. - we obtained information about management's plans that are intended to mitigate the effect of such conditions or events, and assess the likelihood that such plans can be effectively implemented. - we added explanatory paragraph to the audit report. /s/ weinstein international cpa we have served as the company's auditor since 2021. | 2 |
critical audit matters in the auditor’s report on the financial statements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. as a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. we may choose to take advantage of some, but not all, of the available exemptions. we cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. if some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.in addition, the jobs act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. this allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. we have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.73table of contents future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our operating results and financial condition.we may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our technology platforms, enhance our technical capabilities, or otherwise offer growth opportunities. the pursuit of potential acquisitions or strategic investments may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions or investments, whether or not such transactions are completed. in addition, we have only limited experience in acquiring or investing in other businesses, and we may not successfully identify desirable targets, or if we acquire additional businesses, we may not be able to integrate them effectively. following the acquisition. acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, as well as unfavorable accounting treatment and exposure to claims and disputes by third parties, including intellectual property claims. we also may not generate sufficient financial returns to offset the costs and expenses related to any acquisitions. in addition, if an acquired business fails to meet our expectations, our business, operating results and financial condition may suffer.the requirements of being a public company require our management to devote substantial time to compliance initiatives and corporate governance practices and could divert management’s attention and strain our resources.as a public company, and particularly after we are no longer an emerging growth company, we incur and will continue to incur significant legal, accounting, and other expenses that we did not incur as a private company. section 404, the dodd-frank wall street reform and consumer protection act, the listing requirements and rules of the nasdaq stock market llc (nasdaq listing rules), and other applicable u.s. rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. we continue to need to hire additional accounting, finance and other personnel in connection with our efforts to comply with the requirements of being, a public company, and our management and other personnel will continue to need to devote a substantial amount of time towards maintaining compliance with these requirements. these requirements have and will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. for example, the rules and regulations applicable to us as a public company have made it more expensive for us to obtain director and officer liability insurance. we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. these rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. this could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.under the tax cuts and jobs act of 2017 (the tax act), as modified by the coronavirus aid, relief, and economic security act (the cares act), our net operating losses (no ls) generated in tax years beginning after december 31, 2017, may be carried forward indefinitely, but the deductibility of such federal no ls in tax years beginning after december 31, 2020, is limited to 80% of taxable income. it is uncertain if and to what extent various states will conform to the tax act or the cares act. in addition, under sections 382 and 383 of the u.s. internal revenue code of 1986, as amended (the code), if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change no ls and other pre-change tax attributes (such as research and development tax credits) to offset its post-change income or taxes may be limited. we may have experienced ownership changes in the past and may experience ownership changes as a result of our ipo and/or subsequent shifts in our stock ownership (some of which may be outside our control). as a result, our ability to use our pre-change no ls and tax credits to offset post-change taxable income, if any, could be subject to limitations. similar provisions of state tax law may also apply. in addition, at the state level, there may be periods during which the use of no ls is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. for example, california recently imposed limits on the usability of california state no ls and tax credits to offset california taxable income in tax years beginning after december 31, 2019 and before january 1, 2023. as a result, even if we attain profitability, we may be unable to use a material portion of our no ls and tax credits.our business and operations would suffer in the event of computer system failures or security breaches.our internal computer systems, and those of our partners, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, fire, terrorism, war and telecommunication and electrical failures. we exercise little or no control over these third parties, which increases our vulnerability to problems with their systems. to the extent that 74table of contentsany disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, the further development of our product candidates could be delayed and our business could be otherwise adversely affected.while we have not experienced any material system failure, accident or security breach to date, we cannot assure you that our data protection efforts and our investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems or other cyber incidents that could have a material adverse effect upon our reputation, business, operations or financial condition. for example, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs and the development of our product candidates could be delayed. in addition, the loss of clinical trial data for our product candidates could result in delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the data. furthermore, significant disruptions of our internal information technology systems or security breaches could result in the loss, misappropriation, and/or unauthorized access, use, or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information, and personal information), which could result in financial, legal, business, and reputational harm to us. for example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding our clinical trial subjects or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, data protection and other losses.our agreements with third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement or other liabilities relating to or arising from our contractual obligations. large indemnity payments could harm our business and financial condition. although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability. any dispute with a third party with respect to such obligations could have adverse effects on our relationship with that third party and relationships with other existing or new partners, harming our business.item 1b. unresolved staff comments none.item 2. properties california our current corporate headquarters is located in south san francisco, california, where we lease approximately 108,000 square feet of office and laboratory space, pursuant to a lease agreement that commenced on february 1, 2020 and expires on march 31, 2031.washington we lease approximately 34,000 square feet of office and laboratory space in seattle, washington, pursuant to a lease agreement that commenced on january 1, 2019 and expires on december 31, 2028. we lease approximately 73,000 square feet of manufacturing, office and laboratory space in bothell, washington, pursuant to a lease agreement that commenced on february 1, 2020 and expires on may 31, 2030.we believe that these existing facilities will be adequate for our near-term needs. if required, we believe that suitable additional or alternative space would be available in the future on commercially reasonable terms.item 3. legal proceedings from time to time, we have been or may become involved in material legal proceedings or be subject to claims arising in the ordinary course of our business. for example, although not material to our operations, in february 2021 we filed a demand for arbitration to, among other things, seek rescission of the agreements we entered into with pact in june 2020 and recover the consideration paid to pact thereunder. an arbitration hearing occurred in march 2022. we expect to 75table of contentsreceive the outcome of the arbitration panel in june 2022. litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.we are currently not party to any legal proceedings material to our operations or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by a government authority.regardless of outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.item 4. mine safety disclosures not applicable.76table of contents part ii item 5. market for registrant's common equity, related stockholder matters and issuer purchases of equity securities our common stock has traded on the nasdaq global select market under the symbol “lyel” since june 17, 2021. prior to that date, there was no public trading market for our common stock.holders on march 25, 2022, there were 104 holders of record of our common stock. the number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.dividends since inception, we have not paid dividends on our common stock. we currently intend to retain all future earnings, if any, for use in our business and currently do not plan to pay any cash dividends in the foreseeable future. any future determination to pay dividends will be at the discretion of our board of directors.unregistered sales of equity securities none.repurchases of equity securities none.use of proceeds from our initial public offering of common stock in june 2021, we closed an initial public offering (ipo) and issued and sold 25,000,000 shares of our common stock, at a public offering price of $17.00 per share, for net proceeds of $391.8 million, after deducting underwriting discounts and commissions of $29.8 million and offering expenses of $3.4 million. all of the shares issued and sold in the ipo were registered under the securities act pursuant to a registration statement on form s-1 (file no. 333-256470), which was declared effective by the sec on june 16, 2021. goldman sachs & co. llc, bof a securities, inc., j.p. morgan securities llc and morgan stanley & co. llc, acted as joint bookrunning managers of the ipo and as representatives of the underwriters. no offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates. we are holding a significant portion of the balance of the net proceeds from the offering in money market funds and short-term investments. there has been no material change in the planned use of proceeds from the ipo from that described in the prospectus filed with the sec pursuant to rule 424(b)(4) under the securities act on may 25, 2021.item 6. [reserved]77table of contents item 7. management's discussion and analysis of financial condition and results of operations you should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k. this discussion and analysis and other parts of this annual report on form 10-k contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives and expectations for our business. our actual results and the timing of selected events could differ materially from those described in or implied by these forward-looking statements as a result of several factors, including those set forth in the section titled “risk factors” in part i, item 1a of this annual report on form 10-k. see also the section titled “special note regarding forward-looking statements.”this section under management’s discussion and analysis of financial condition and results of operations generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this annual report on form 10-k can be found in the section titled “management’s discussion and analysis of financial condition and results of operations” in the prospectus we filed with the sec pursuant to rule 424(b)(4) under the securities act of 1933, as amended, on june 21, 2021.overview we are a t-cell reprogramming company dedicated to the mastery of t cells to cure patients with solid tumors. we believe the key to effective cell therapy is the mastery of the identity, fate and function of cells to create living medicines. we take a systematic, interrogative, cell biology-driven approach to overcome what we view as the two major barriers to successful act – (1) t-cell exhaustion and (2) lack of durable stemness – through the application of our proprietary ex vivo genetic and epigenetic reprogramming technologies, gen-r™ and epi-r™. our technologies are designed to be applied in a target and modality agnostic manner to chimeric antigen receptor (car), tumor-infiltrating lymphocytes (til) and t-cell receptor (tcr) therapies to fundamentally improve the properties of t cells needed to eradicate solid tumors. we believe our autologous t-cell therapies will generate improved, durable clinical outcomes that are potentially curative for patients with solid tumors. we are building a multi-modality product pipeline across several solid tumor indications with high unmet needs. we are advancing a product pipeline of promising living cell product candidates across multiple act modalities that incorporate our gen-r and epi-r technology platforms. each of our programs provide opportunities to expand into additional indications beyond the patient populations we are initially targeting.for additional information regarding our business, see “business” in part i, item 1 of this annual report on form 10-k.pipeline programs and operational updates pipeline programs phase 1 clinical development of two product candidates (lyl797, lyl132) has commenced and additional product candidates are in preclinical development (lyl845, lyl331). lyl797 and lyl845 are wholly‑owned by lyell, and lyl132 and lyl331 are being developed in collaboration with gsk.lyl797 – car t-cell therapy targeting ror1+ solid tumors, incorporating gen-r and epi-r•announced fda clearance of the ind for lyl797, a chimeric antigen receptor (car) t-cell therapy for patients with solid tumors expressing receptor tyrosine kinase-like orphan receptor 1 (ror1+). •screening initiated for the phase 1 open label dose escalation and expansion trial with relapsed/refractory triple-negative breast cancer or non-small cell lung cancer who have failed at least two lines of therapy, initial data expected in 2023.78table of contents lyl132 – tcr therapy targeting ny-eso-1 solid tumors, incorporating epi-r•announced fda clearance of the ind for lyl132, a t-cell receptor (tcr) therapy developed in collaboration with gsk for patients with solid tumors expressing new york esophageal squamous cell carcinoma 1 (ny-eso-1).lyl845 - til therapy designed to target multiple solid tumor indications, incorporating epi-r•on track to submit an ind in the second half of 2022 for lyl845, a tumor infiltrating lymphocyte (til) therapy.•initially targeting melanoma, with plans to expand into additional solid tumor indications.lyl331 - tcr therapy targeting ny-eso-1 solid tumors, incorporating gen-r•gsk has communicated to us that due to updated manufacturing timing, the ind for lyl331 is likely to be submitted in late 2022/early 2023.•lyl331 is a tcr therapy developed in collaboration with gsk for patients with solid tumors expressing new york esophageal squamous cell carcinoma 1 (ny-eso-1).•lyl331 incorporates gen-r and, along with lyl132, is under investigation as a potential next-generation enhancement to lete-cel.operational updates •announced c gmp qualification of ly fe™, lyell’s manufacturing facility designed to produce cell products at scale for upcoming clinical trials across its car, til and tcr products.covid-19 update the global covid-19 pandemic continues to evolve rapidly, and we will continue to monitor it closely. the extent of the impact of the covid-19 pandemic on our business, operations and development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial plans, cr os, contract manufacturing organizations and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. while the implications of the covid-19 pandemic on our operations remain uncertain, to date, we have not experienced delays in our discovery and development activities as a result of the covid-19 pandemic. however, there can be no assurance that we will be able to avoid materially adverse impacts from the evolving effects of the covid-19 pandemic. in this regard, site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the covid-19 pandemic, which may delay enrollment in our current and planned clinical trials, and some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services, and we may be unable to obtain blood samples for testing. for example, limitations or modifications in surgery scheduling for oncology patients at collaborating institutions has limited and may continue to limit supply of patient tumor samples that we use in our research. we have closely monitored the covid-19 pandemic and have strived to follow recommended containment and mitigation measures, including the guidance from the centers for disease control and prevention (cdc) as well as the states of california and washington and applicable counties. for most of the pandemic, essential laboratory and support employees worked in our facilities to continue and progress experiments. we implemented preventative measures at our facilities in order to minimize the risk of employee exposure to the virus, including the following requirements: that each employee who entered a facility agreed to comply with social distancing, frequent hand washing and the requirement to wear masks. we also increased cleaning of high touch areas, provided hand sanitizing stations and implemented an employee questionnaire to ensure employee health status and to provide for limited on-site tracing if needed. finally, commencing in early march 2020, we suspended all non-essential business travel and adopted a work from home policy in which work that can be done from home is encouraged and allowed to be done from home. we expect to continue such measures for the near foreseeable future, though we may allow certain designated groups of employees to return to our facilities on an as-needed basis if we determine that we may do so while continuing to maintain a safe work environment. we will continue to actively monitor the situation related to the covid-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business.79table of contents collaboration, license and success payment agreements for a detailed description of our collaboration, license and success payment agreements, see the section titled “business—collaboration, license and success payment agreements” in part i, item 1 of this annual report on form 10‑k and notes 2 and 3 to our audited consolidated financial statements included in part ii, item 8 of this annual report on form 10-k.components of results of operations revenue we have no products approved for sale and have never generated any revenue from product sales.to date, we have generated revenue primarily from the recognition of a portion of the upfront payment under the gsk agreement that we entered into in may 2019. as we continue to conduct research under the gsk agreement, we will recognize revenue based upon our estimate of the progress made. in the future, we may generate additional revenue from other collaborations, strategic alliances, licensing agreements, product sales or a combination of these.operating expenses (income)research and development to date, research and development expenses consist of costs incurred by us for the discovery and development of our technology platforms and product candidates, and includes costs incurred in connection with strategic collaborations, costs to license technology, personnel-related costs, including stock-based compensation expense, facility and technology related costs, research and laboratory expenses, as well as other expenses, which include consulting fees and other costs. upfront payments and milestones paid to third parties in connection with technology platforms that have not reached technological feasibility and do not have an alternative future use are expensed as incurred.research and development expenses also include non-cash expense related to the change in the estimated fair value of the liabilities associated with our success payments granted to fred hutch and stanford. see the subsection titled “critical accounting policies and estimates—success payments” below. research and development expenses related to our success payment liabilities are unpredictable and may vary significantly from quarter to quarter and year to year due to changes in our assumptions used in the calculation.we deploy our employee and infrastructure resources across multiple research and development programs for identifying and developing product candidates and establishing manufacturing capabilities. due to the stage of development and number of ongoing programs and our ability to use resources across several programs, most of our research and development costs are not recorded on a program-specific basis. these include costs for personnel, laboratory and other indirect facility and operating costs.research and development activities account for a significant portion of our operating expenses. we anticipate that our research and development expenses will increase over the foreseeable future as we expand our research and development efforts including completing preclinical studies, commencing planned clinical trials, conducting and completing current and planned clinical trials, seeking regulatory approval of our product candidates, identifying new product candidates and incurring costs to acquire and license technology platforms. a change in the outcome of any of these variables could mean a significant change in the costs and timing associated with the development of our product candidates. because we are early in our research and development efforts and just beginning clinical development of our product candidates, and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the preclinical development, clinical development and commercialization of product candidates or whether, or when, we may achieve profitability.our research and development expenses may vary significantly based on factors such as:•the number and scope of preclinical and ind-enabling studies;•per patient trial costs;•the number of trials required for approval;•the number of sites included in the trials;•the countries in which the trials are conducted;•the length of time required to enroll eligible patients;80table of contents•the number of patients that participate in the trials;•the drop-out or discontinuation rates of patients;•potential additional safety monitoring requested by regulatory agencies;•the duration of patient participation in the trials and follow-up;•the cost and timing of manufacturing our product candidates;•the phase of development of our product candidates;•the efficacy and safety profile of our product candidates;•the extent to which we establish additional collaboration or license agreements; and•whether we choose to partner any of our product candidates and the terms of such partnership.a change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. we may never succeed in obtaining regulatory approval for any of our product candidates. we may obtain unexpected results from our preclinical studies and future clinical trials.general and administrative general and administrative costs include personnel-related expenses, including stock-based compensation expense for personnel in executive, legal, finance and other administrative functions, legal costs, transaction costs related to collaboration and licensing agreements, as well as fees paid for accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. legal costs include those related to corporate and patent matters.we anticipate that our general and administrative expenses will increase over the foreseeable future to support our continued research and development activities, operations generally, future business development opportunities, consulting fees, as well as due to the increased costs of operating as a public company such as costs related to accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and sec requirements, director and officer insurance costs and investor and public relations costs.other operating income, net other operating income, net consists primarily of service and occupancy fees received associated with subleases as well as gains or losses on the sales of property and equipment.interest income, net interest income, net consists primarily of interest earned on our cash, cash equivalents and marketable securities balances.other (expense) income, net other (expense) income, net consists primarily of changes in the fair value of an equity warrant investment held.impairment of other investments impairment of other investments consists of impairment of the pact series c-1 convertible preferred stock investment.deemed dividends upon issuance or repurchase of convertible preferred stock deemed dividends upon issuance or repurchase of convertible preferred stock consists of the amount by which the fair value of the convertible preferred stock exceeded the cash proceeds from the sale and issuance of such convertible preferred stock or the amount by which the cash paid for the repurchase of convertible preferred stock exceeded the carrying value of such convertible preferred stock. upon the closing of our ipo, all our convertible preferred stock was converted into our common stock.81table of contents results of operations years ended december 31, 2021, 2020 and 2019the following table summarizes our results of operations for the periods presented (in thousands): year ended december 31,change 2021202020192021 vs 20202020 vs 2019revenue$10,650 $7,756 $657 $2,894 $7,099 operating expenses (income):research and development138,693 182,243 63,595 (43,550)118,648 general and administrative89,057 46,881 39,151 42,176 7,730 other operating income, net(2,324)(9,431)— 7,107 (9,431)total operating expenses225,426 219,693 102,746 5,733 116,947 loss from operations(214,776)(211,937)(102,089)(2,839)(109,848)interest income, net1,165 5,939 8,121 (4,774)(2,182)other (expense) income, net(161)1,526 (35,409)(1,687)36,935 impairment of other investments(36,447)— — (36,447)— total other (loss) income, net(35,443)7,465 (27,288)(42,908)34,753 net loss(250,219)(204,472)(129,377)(45,747)(75,095)deemed dividends upon issuance or repurchase of convertible preferred stock— (3,582)(1,144)3,582 (2,438)net loss attributed to common stockholders$(250,219)$(208,054)$(130,521)$(42,165)$(77,533)revenue revenue was $10.7 million and $7.8 million for the years ended december 31, 2021 and 2020, respectively, primarily related to the recog | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.other long-lived assets – asset group determination – refer to note 2 and note 5 to the consolidated financial statements critical audit matter description an impairment of long-lived assets exists when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. recoverability is determined by comparing the carrying amount of the asset (or asset group) to the undiscounted cash flows which are expected to be generated from its use. impairment losses are recorded when the carrying amount of the impaired asset is not recoverable. management estimates future cash flows based on historical experience and management’s expectations of relevant customers and markets and other operational factors, and these estimated future cash flows can be affected by factors such as competition, inflation, and other economic conditions. management uses judgment in determining the asset groups. the determination of asset groupings primarily considers revenue inter-dependencies related to larger chain customer agreements which are serviced by multiple distribution centers. the company has assessed its asset groups and determined in 2020 that it has six asset groups. although no impairment was recognized, a significant change in asset groups could potentially result in a material impairment charge.42table of contents given the materiality of the company’s long-lived assets and the judgment involved in determining asset groups, including the review of assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, performing audit procedures to evaluate the reasonableness of the determination of asset groups required a high degree of auditor judgment. how the critical audit matter was addressed in the audit our audit procedures related to the asset group approach used by management included the following, among others:•we tested the effectiveness of the control over management’s review and determination of the asset groups. •we evaluated the reasonableness of management’s asset group determination by assessing the basis for the identification of the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities and considering the relevant criteria specified by the accounting standards.•we tested management’s revenue dependency analysis, including the inter-dependencies of customers serviced by multiple distribution centers and assessed the reasonableness of the company’s asset groupings./s/ deloitte & touche llp dallas, texas march 1, 2021we have served as the company’s auditor since 2006. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the f-3communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of interest-rate derivatives and hedged items as described in notes 14 and 17 to the financial statements, the bank uses derivatives to manage its exposure to changes in interest rates and to reduce funding costs, among other things. the total notional amount of derivatives as of december 31, 2020 was $39 billion, of which 87% were designated as hedging instruments, and the net estimated fair value of derivative assets and liabilities as of december 31, 2020 was $8 million and $25 million, respectively. the fair values of interest-rate derivatives and hedged items are estimated using a pricing model that employs discounted cash flows or other similar pricing techniques. the pricing model uses inputs observable in the market, such as interest rate curves and volatility assumptions.the principal considerations for our determination that performing procedures relating to the valuation of interest-rate derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the interest rate curves and volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included testing the effectiveness of controls relating to the valuation of interest-rate derivatives and hedged items, including controls over the model, data and assumptions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest rate derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the interest rate curves and volatility assumptions./s/ pricewaterhouse coopers llp dallas, texas march 24, 2021we have served as the bank’s auditor since 1990. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audits of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. going concern as described further in note b to the financial statements, the company has incurred losses each year from inception through november 30, 2020 and expects to incur additional losses in the future. we determined the company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows. our audit procedures related to the company’s assertion on its ability to continue as a going concern included the following, among others:we reviewed the company’s working capital and liquidity ratios and forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. this testing included inquiries with management, comparison of prior period forecasts to actual results, consideration of positive and negative evidence impacting management’s forecasts, the company’s financing arrangements in place as of the report date, market and industry factors and consideration of the company’s relationships with its financing partners.going concern the accompanying financial statements have been prepared assuming the company will continue as a going concern. as discussed in note b to the financial statements, although the company has limited operations it has yet to attain profitability. this raises substantial doubt about its ability to continue as a going concern. management’s plan in regard to these matters is also described in note b. the financial statements do not include any adjustments that might result from the outcome of this uncertainty. basis for opinion these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s financial statements based on our audit. we are a public accounting firm registered with the public company accounting oversight board (united states) (pcaob) and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. the company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. as part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. accordingly, we express no such opinion.our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audit provide a reasonable basis for our opinion. /s/ michael gillespie & associates, pllc we have served as the company’s auditor since 2018. | 3 |
critical audit matters the critical auditmatters communicated below are matters arising from the current period audit of the financial statements that were communicated orrequired to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to thefinancial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of criticalaudit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicatingthe critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures towhich they relate. americaninstitute of certified public accountants ● center for audit quality ● private companies practice section ●prime global ● registered with the public company accounting oversight board f-2 rosenberg rich baker berman & company to the board of directors and stockholders of creatd, inc. and subsidiaries revenue recognition asdescribed in note 2 to the consolidated financial statements, the company recognizes revenue in accordance with fasb accounting standards codification 606, revenue from contracts with customers (“asc 606”). asc 606 requires the company to apply thefollowing steps: (1) identify the contract with the customers; (2) identify performance obligations in the contract; (3) determinethe transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenuewhen, or as, the company satisfies the performance obligations. for subscriptionrevenue recognized by the company, the transaction price is reduced for consideration payable to customers. because such considerationis paid to both customers and “freemium” subscribers, it requires significant estimates as to the allocation and timing ofthese reductions in the transaction price. these estimates required auditor judgment and consideration of some subjective factors in evaluatingthe estimates. how the critical matter was addressed in the audit the primary audit procedures we performed to address thiscritical audit matter included: ●gained detailed understanding of processes related to subscription revenue, including evaluation ofcontrols within the company and the results of an audit of internal controls at the external payment processing organization. ●verified the validity of customer payment data by testing the completeness and accuracy of the populationof customer payments and by subscriber type. ●critically evaluated management’s estimated allocations based on supportable information, includingrefined methodologies and estimates based on historical data for consideration paid to customers. evaluation of variable interest entities for consolidation as describedin note 2 to the consolidated financial statements, the company’s management performs an ongoing assessment of its noncontrollinginterests from investments in unrelated entities to determine if those entities are variable interest entities (vi es), and if so, whetherthe company is the primary beneficiary. if an entity in such a transaction, by design, meets the definition of a vie and the company determinesthat it, or a consolidated subsidiary is the primary beneficiary, the company will include the vie in its consolidated financial statements.if such an entity is deemed to not be consolidated, the company records only its investment in equity securities as a marketable securityor investment under the equity method, as applicable. we identified management’s accounting for variable interest entitiesas a critical audit matter because there is significant judgment required by management to evaluate the contractual arrangements underthe variable interest entity consolidation model. auditing such considerations involved especially challenging auditor judgment in evaluatingthe appropriateness of the company’s assessment and an increased audit effort. f-3 rosenberg rich baker berman & company to the board of directors and stockholders of creatd, inc. and subsidiaries how the critical matter was addressed in the audit the primary audit procedures we performed to address thiscritical audit matter included: ●evaluating the reasonableness and appropriateness of management’s evaluation of each vie and determinationof primary beneficiary of the vie through a decision-making workflow. ●reading pertinent supporting organizational documents and agreements associated with each vie and relevant business plans and documentationto agree key terms with those used in management’s evaluation of each vie. ●performed corroborative interviews with personnel involved in each entity analyzed to determine thebusiness purpose of the transactions in the time frame the initial equity interests were acquired. rosenberg rich baker berman, p.a. we have served as the company’s auditor since 2018. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. goodwill – refer to notes 1(i) and 5 to the consolidated financial statements critical audit matter description goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired. goodwill is subject to annual impairment tests, and if it is determined to be impaired, goodwill is written down to fair value. we identified the company's goodwill as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of its reporting units, especially considering the acquisition of new product lines and recent impact of the covid-19 pandemic. this required a high degree of auditor judgment and an increased extent of effort was required when performing the audit procedures to evaluate the methodology and the reasonableness of related assumptions, as well as the inputs and calculations related to the forecasts of future net sales and earnings and the allocation of fair value to the company’s reporting units. how the critical audit matter was addressed in the audit our audit procedures related to management’s annual goodwill impairment test included the following, among others:17 •we obtained an understanding of management’s process to estimate the fair value of its reporting units and ensure the accuracy of key data used in their estimation process. we also evaluated the design of key controls used by management to develop their fair value estimates. •we evaluated management's knowledge and skill to accurately forecast net sales and earnings. •we evaluated management's forecasts including net sales and cost of goods sold for reasonableness by comparing the forecasts to historical results, obtaining supporting evidence for assumptions and estimates related to management's forecasts, and comparing forecast assumptions and estimates with information included in company press releases. •with the assistance of our internal valuation specialists, we assessed the sensitivity of the company's impairment conclusions to changes in the forecasts, discount rates, and earnings multiples. we evaluated the assumptions used by management, including testing the underlying source information and the mathematical accuracy of the calculations by developing a range of independent estimates and comparing those to the rates, including weighted average cost of capital and discount rates, selected by management. business combination – refer to notes 1(k) and 4 to the consolidated financial statements critical audit matter description the company applied the acquisition method of accounting for the cr brands business combination. this methodology requires the company to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. in connection with the cr brands acquisition the company also recorded a liability for contingent consideration related to an earn-out payable upon the achievement of future sales to a specific customer. we identified the company's business combination as a critical audit matter because of the significant estimates and judgment in determining the fair values assigned to the acquired assets and assumed liabilities especially considering management’s assumptions surrounding estimated future cash flows. the company determines fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. these types of analyses require assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates, net sales growth rates, gross margins, operating expenses, income and future cash flows. how the critical audit matter was addressed in the audit our audit procedures related to the cr brands business combination included the following, among others: •we obtained an understanding of management’s process to estimate the fair value of the acquired assets and assumed liabilities and ensure the accuracy of key data used in their fair value calculations. we also evaluated the design of key controls used by management to develop their fair value estimate. •we evaluated the appropriateness of specific key inputs supporting management’s estimate, including the net sales growth rates, gross margins, operating expenses, income and future cash flows. •with the assistance of our internal valuation specialists, we evaluated the appropriateness of unobservable inputs such as weighted average cost of capital, discount rates, future revenue growth, future margin amounts, and terminal values. income taxes – refer to notes 1(l) and 8 to the consolidated financial statements critical audit matter description income taxes reflect the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. a valuation allowance is established when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. taxes are reported based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits or expense. we identified accounting for income taxes as a critical audit matter because of the degree of subjectively involved in evaluating tax positions, the future realization of deferred tax assets and the complexity of tax laws and regulations. performing audit procedures and evaluating audit evidence obtained related to these considerations required a high degree of judgment and effort. how the critical audit matter was addressed in the audit18 our audit procedures related to the accounting for income taxes included the following, among others: •we obtained an understanding of management’s process for calculating their estimated deferred tax assets and liabilities as well as future realization of deferred tax assets. we also evaluated the design of key controls used by management to develop these estimates. •with the assistance of our internal tax specialists, we evaluated the reasonableness of the methods, judgments and assumptions used by management in developing their estimated deferred tax assets and liabilities as well as future realization of deferred tax assets. •with the assistance of our internal tax specialists, we evaluated the nature of each of the deferred tax assets, including the expiration dates of loss and credit carryforwards and their projected utilization when compared to projections of future taxable income. •we tested the provision for income taxes with the assistance of our internal tax specialists, including the effective tax rate reconciliation and permanent and temporary differences by testing the underlying data for completeness and accuracy. •we evaluated the adequacy of the company’s disclosure in notes 1 and 8 in relation to income taxes. /s/ plante & moran, pllc we have served as the company’s auditor since 2003. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising fromthe current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the auditcommittee and that: (1) relates to accounts or disclosures that arematerial to the consolidated financial statements and (2) involvedour especially challenging, subjective, or complex judgments. thecommunication of critical audit matters does not alter in any wayour opinion on the consolidated financial statements, taken as awhole, and we are not, by communicating the critical audit mattersbelow, providing separate opinions on the critical audit matters oron the accounts or disclosures to which they relate. revenue recognition — refer to note 2 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promisedproducts or services to customers in an amount that reflects theconsideration the company expects to receive in exchange for thoseproducts or services. the company offers customers the ability toacquire multiple licenses of products and services. significant judgment is exercised by the company in determiningrevenue recognition for these customer agreements, and includes thefollowing: ●determination ofwhether products and services are considered distinct performanceobligations that should be accounted for separately versustogether, such as hard goods and related services that are soldwith telephony contracts.●determination ofstand-alone selling prices for each distinct performance obligationand for products and services that are not soldseparately.●the pattern ofdelivery (i.e., timing of when revenue is recognized) for eachdistinct performance obligation. 38 given these factors, the related audit effort in evaluatingmanagement’s judgments in determining revenue recognition forthese customer agreements required a high degree of auditorjudgment. how the critical audit matter was addressed in the audit our principal audit procedures related to the company’srevenue recognition for these customer agreements included thefollowing: ●we gained anunderstanding of internal controls related to the identification ofdistinct performance obligations, the determination of the timingof revenue recognition, and the relative sellingvalue.●we evaluatedmanagement’s significant accounting policies related to thesecustomer agreements for reasonableness.●we selected asample of customer agreements and performed the followingprocedures:o obtained and readcontract source documents for each selection and other documentsthat were part of the agreement, if applicable.o testedmanagement’s identification of significant terms forcompleteness, including the identification of distinct performanceobligations and relative selling price.o assessed the termsin the customer agreement and evaluated the appropriateness ofmanagement’s application of their accounting policies, alongwith their use of estimates, in the determination of revenuerecognition conclusions.o we evaluated thereasonableness of management’s estimate of stand-aloneselling prices for products and services that are not soldseparately.o we tested themathematical accuracy of management’s calculations of revenueand the associated timing of revenue recognized in the financialstatements. income taxes — valuation allowances on deferred tax assets— refer to note 15 to the financial statements critical audit matter description the company’s consolidated net deferred tax assethistorically included a full valuation allowance, primarily relatedto the deferred tax assets established for u.s. net operating losscarryforwards. management records valuation allowances to reducethe carrying value of deferred tax assets to amounts that are morelikely than not to be realized. management assesses existingdeferred tax assets by jurisdiction and expectations of the company’s ability to utilize these tax attributes through areview of past, current and estimated future taxable income,reversals of temporary differences and establishment of taxplanning strategies. for the year-ended december 31, 2020, the company recorded a net valuation allowance release of$7,487,000. the principal considerations for our determination that performingprocedures relating to the income tax valuation allowance ondeferred tax assets is a critical audit matter as there wassignificant judgment by management when estimating future income.this in turn led to a high degree of auditor judgment, subjectivityand effort in performing procedures and in evaluating auditevidence relating to future income. in addition, the audit effortinvolved the use of professionals with specialized skill andknowledge to assist in performing these procedures and evaluatingthe audit evidence obtained. how the critical audit matter was addressed in the audit our principal audit procedures to evaluate the valuation allowanceson deferred tax assets, among others, included thefollowing:●we gained anunderstanding of internal controls related to the valuationallowances on deferred tax assets, including controls over thereview of management’s analysis by jurisdiction of cumulativeincome (loss).●we tested theunderlying historical data used in calculating the cumulativeincome (loss).●we assessed effectsof other events, including past company transactions.●we testedmanagement’s estimate of future taxable income, whichincluded evaluating the reasonableness of significant assumptionsand appropriateness of available tax planningstrategies.●utilizedprofessionals with specialized skill and knowledge to assist inevaluating management’s analysis, including cumulative income(loss) as well as the reasonableness of the estimates. /s/ urish popeck & co., llc we have served as the company's auditor since 2016. | 2 |
critical audit matters the critical audit matter communicatedbelow is matter arising from the priorperiod audit of the consolidated financial statements that were communicated or requiredto be communicated to the audit committee andthat: (1) relate to accounts or disclosures thatare material to the consolidated financial statements and (2) involved our especially challenging,subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the consolidated financialstatements, taken as a whole, and we arenot, by communicating the critical audit matters below, providing separate opinionson the critical audit matters or on the accountsor disclosures towhich they relate. evaluation of the accountsreceivable and the allowance for doubtful accounts the critical audit matter related to the company’saccounts receivable. the principal considerations in determining that this was a criticalaudit matter was that the company had a substantial amount of accounts receivable, andthe allowance for doubtful accounts are subject to estimation, which involves judgment. theability of the company to collect the accountsreceivable is impacted by multiple factors.the audit engagement team addressed this critical accounting matter by reviewing the company’saccounting policies, and perform extended proceduresincluding corroborated with enquiry, examination ofcontracts, and independent analysis of the company customers historical payment records.the engagement team’s testing provided adequate evidence to supportour audit opinion and to mitigate the risk ofmaterial misstatement to an acceptable level. the accounts that are affected by thiscritical audit matter is accounts receivable, and the allowance for doubtful accounts thatis charged to general and administration expenses,if any. /s/ wwc, p.c.wwc, p.c.certified public accountants we have served as the company’s auditor since 2021 | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.properties – direct costs that are capitalized to self-constructed assets – refer to notes 1, 12 and 19 to the financial statements critical audit matter description the company recognizes direct costs as capitalized additions to self-constructed assets, within properties, based on expenditures necessary to make an asset ready for its intended use. the capitalization of self-constructed assets requires management to make significant estimates and assumptions related to the capitalization of direct cost additions to self-constructed assets based on whether the expenditures meet capitalization criteria under us gaap. we identified the capitalization of direct cost additions to self-constructed assets as a critical audit matter because the judgments and assumptions management makes could have a significant impact on the capitalization of direct cost additions. as such auditing the capitalization of direct cost additions involves a high degree of auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to the capitalization of direct cost additions to self-constructed assets included the following, among others:•evaluated the effectiveness of controls over self-constructed assets, including those over the capitalization of direct cost additions to self-constructed assets.•selected a sample of direct costs and obtained evidence to support the capitalized additions to self-constructed assets and assessed whether these expenditures met the capitalization criteria under us gaap.79 cp 2020 annual report defined benefit pension – refer to notes 1 and 22 to the financial statements critical audit matter description the company’s accounting of its defined benefit pension plans involves the measurement of the projected benefit obligation and fair value of fund assets. the measurement of the projected-benefit obligation requires management to make significant estimates and assumptions in the determination of the discount rate, which is based on blended market interest rates of high-quality corporate debt instruments with matching cash flows. the measurement of the fair value of fund assets requires management to make significant estimates and assumptions in the determination of the expected return on fund assets, which is calculated using the market-related value of assets. we identified the determination of the discount rate (for the projected benefit obligation), and the determination of the expected return on fund assets (for the determination of the net period benefit cost) as the critical audit matters because of the significant estimates and assumptions management makes could have a significant impact on the projected benefit obligation and the fair value of fund assets. as such auditing the determination of the discount rate and the expected return on fund assets involves a high degree of auditor judgment as the estimates and assumptions made by management contains significant measurement uncertainty and resulted in an increased extent of effort, which included the need to involve an actuarial specialist.how the critical audit matter was addressed in the audit our audit procedures related to the determination of the discount rate (for the projected benefit obligation), and the expected return on fund assets (for the determination of the fair value of fund assets) included the following, among others:•evaluated the effectiveness of controls over defined benefit pension plans, including those over the determination of the discount rate and the expected return on fund assets.•with the assistance of an actuarial specialist, we evaluated the reasonableness of the discount rate by:–assessing the methodology used in management’s determination of the discount rate,–testing the underlying source information, and –developing a range of independent estimates and comparing those to the discount rate selected by management.•with the assistance of an actuarial specialist, we evaluated the reasonableness of the expected return on fund assets by:–assessing the methodology used in management’s determination of the expected return on fund assets,–testing the underlying source information, and–comparing management’s assumptions to historical data and available market trends. •evaluated management’s ability to accurately forecast the discount rate and expected return on fund assets by comparing actual results to management’s historical forecasts. /s/ deloitte llp chartered professional accountants calgary, canada february 18, 2021 we have served as the company's auditor since 2011. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.preliminary measurement of fair value of acquired developed technology assets related to a business combination as discussed in note 3 to the consolidated financial statements, on may 5, 2021, the company acquired gw pharmaceuticals plc (‘gw’) in a business combination for a purchase price of $7,190.7 million. in allocating the purchase price, the company recognized intangible assets at fair value in the amount of $5,640.0 million, including acquired developed technology of $5,480.0 million.we identified the assessment of the preliminary measurement of fair value of acquired developed technology assets acquired in the gw acquisition as a critical audit matter. a high degree of auditor judgment was required in evaluating the key fair value assumptions, specifically revenue forecasts. changes to these assumptions could have a significant effect on the initial measurement of fair value. the following are the primary procedures we performed to address this critical audit matter:–we evaluated the design and tested the operating effectiveness of certain internal controls related to the business combinations process, including the control over the development of the key assumptions; f-1table of contents–we evaluated the reasonableness of the company’s revenue forecasts by comparing certain underlying assumptions to (1) company-specific operational information and management’s communications to the board of directors and (2) available industry or other third-party reports or data./s/ kpmg we have served as the company’s auditor since 2012. | 2 |
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