The ExOne Company XONE, a leading provider of 3D printing machines & products, materials and services, made a shocking revelation while filing its 10K report for 2014. The company announced facing “material weaknesses” in internal controls over financial reporting, especially in areas of design and operating effectiveness. This disagreeable piece of information came as a direct violation of Section 404(a) of the Sarbanes-Oxley Act, which requires all companies to develop an effective internal control during financial reporting & disclosure of controls and procedures.
How Did the Weakness Creep in?
ExOne management systematically pointed out the weaknesses of the faulty internal control system that ultimately resulted in poor financial reporting. Their analyses reveal that lack of personnel with requisite knowledge and understanding in GAAP triggered error-prone manual and post-close adjustments in consolidated financial statements. Moreover, the internal control system had inherently low design and operating effectiveness, thereby floundering on timely reporting of financial statements.
Decentralized information technology platforms rendered recording, processing and summarizing transactions acutely vulnerable to error. These collective weaknesses also crippled management’s efforts to detect and thwart misstatements, as it was unable to review either subsidiary or consolidated financial results in a timely and precise manner.
What is ExOne Doing?
ExOne management is fully aware that such activities will eventually harm its credibility. Losing investor confidence, dwindling stock prices, wrath of investor groups like Institutional Shareholder Services in terms of re-election of audit committee, attracting unfavorable sanctions or investigations by regulatory authorities like NASDAQ and SEC are some of the problems that will likely surface if the current weaknesses are not rectified quickly.
Management immediately sprung into action with a series of concerted efforts, soon after the anomalies were discovered. Measures like redesigning of internal controls, updating manual control activities to automated versions, internal testing of operating effectiveness are currently being undertaken to enhance the operating effectiveness.
Management is committed to transform its information technology platforms by investing heavily to create a common global platform that will eliminate the weaknesses of the existing systems. Finally, restructuring the human resource pool by hiring knowledgeable financial personnel with adequate experience in GAAP is topping the company’s priority list of amendments.
Company Profile and Peers
ExOne is engaged in manufacturing and selling of 3D printing machines and printing products, primarily for industrial customers, by deploying the installed base of its 3D printing machines. Overall, the company has 8 production service centers (“PSCs”) through which it offers pre-production collaboration and print products for clients spread across diverse geographies. The company also provides consumables, replacement parts, training and technical support related to printing for its clients.
ExOne faces fierce competition from other 3D printing companies that include 3D Systems DDD, which offers one-of-a-kind comprehensive 3D digital design and fabrication solutions, Voxeljet AG VJET, that has built up a solid reputation for providing high-speed & large-format 3D printers and Stratasys Ltd. SSYS, which is a leading proponent of revolutionary desktop 3D printing. Intensifying market rivalry and inherent weakness of ExOne’s internal control systems call for immediate improvement, for the company to maintain its market position in the long run. With current amendment actions, the company seems to be on the right track.
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