How to Navigate Ethical Dilemmas in Financial Management

Ethics The Personal Dilemma How to know the line is about to be crossed MARC P. PALKER, CMA, RTRP IMA CHAIR 2016-2017

About Me 30+ years of experience in senior financial management positions Currently Principal at MPP Associates, Inc., Long Island, N.Y. Previously managing director of the Finance and Accounting Practice Group of Madison Davis Professional Services, LLC IMA Chair (2016-2017) - Chair of IMA s Governance Committee IMA Chair-Elect (2015-2016) - Chair of IMA s Planning and Development Committee - Chair of the Nominating Committee. Active IMA member for 40+ years, previously served as : - Member of IMA s Global Board of Directors - Member of IMA s Small Business Financial and Regulatory Affairs Committee - President of the IMA Long Island Chapter Board of Directors. 2

Background Information Publicly traded company on NASDAQ Financially unstable and considering bankruptcy Conflicts between management and the Board of Directors on direction Has the ability to raise funds in the capital markets Numerous delisting notices from NASDAQ but never delisted Inability to attract new personnel Lender getting nervous 3

Ability to Raise Capital In twelve months raised in excess of $2.7 million in various transactions 4

Sales of Securities Private Placements $807,000 gross proceeds from the sale of common stock and purchase warrants $700,000 gross proceeds from the sale of common stock and purchase warrants $750,000 gross proceeds from the sale of convertible notes and common stock purchase warrants Total Capital Raised $2,257,000 5

Sale and Leaseback Transaction Equipment and Building Lease All manufacturing equipment appraised by licensed third party Lease for manufacturing facility assigned to related party debt holder Loan due to related party debt holder reduced by $500,000 6

What To Do Now Notice of NASDAQ Delisting Requires Long Term Solution Maybe Out of Options 7

Plan of Action Board of Directors Meets Develop a plan to meet long term needs of NASADQ listing Raise sufficient capital to fund operations for at least 3 years Sign agreement for capital raise prior to NASDAQ deadline Present agreements and corresponding plan to NASDAQ Close sale of securities to satisfy NASDAQ 8

The Deal Cumulative Convertible Redeemable Preferred Stock Sale of up to 1,300,000 shares @ $5 per share ($6.500,000) $3,000,000 minimum at closing Incudes previous investors from private placements Change in Board Control (two resign, three appointed by investors) Close within time limit imposed by NASDAQ 9

Timeline Sign Wait for decision of hearing panel Testify before NASDAQ agreement before Nasdaq hearing Favorable decision with deadline to close Change in Control 2nd quarter ends Deal Closes 10

Closing of 2nd Quarter Fact Pact Standard closing procedures begin Evaluation of operating division indicates possible impairment Valuation ordered from firm used for the last 7 years Variable is investment in inventory as per NASDAQ testimony General manager of operating division states , No inventory, no profit New Board of Directors shuts down software development with $365K capitalized Lead investor is not a member of the audit committee 11

Closing of 2ndQuarter Contd Fact Pact Cont d CFO presents preliminary results with $1.0 million impairment charge Lead investor begins talking about replacing independent accountants Audit partner calls regarding inquiries from the audit committee regarding impairment and capitalized software costs Audit committee meets and dismisses current firm and hires firm connected to lead investor and audit committee chair from another public company. CFO refuses to sign Form 8-K announcing change in certifying accountants claiming opinion shopping Valuation report received the next day stating there is an impairment of $1.0 million without significant inventory investment New firm declares there is no impairment regardless of valuation report 12

Opinion Shopping NASDAQ defines opinion shopping as: Attempts by a corporation to attain reporting objectives by following questionable accounting principles, with the help of an auditor willing to sanction the practices. Prohibited by the SEC. 13

CFO Dilemma CFO is presented with the Form 8-K announcing the change in certifying accountants CFO requests the minutes of the Audit Committee and the Board of Directors approving the change in certifying accountants CFO request is denied by Chairs of the Audit Committee and Board of Directors. No explanation is given. 14

CFO Dilemma New accounting firm, prior to accepting the engagement, did not contact the CFO or Controller of the company The current firm had completed its field work for the review of the current quarter under review The new firm was hired prior to the dismissal of the current firm The new firm tried to begin the review of the quarter prior to the dismissal of the current firm Question: Does the CFO sign the Form 8-K based on the facts presented? cu 15

Sarbanes Oxley When there is doubt as to definitive knowledge of the accuracy of statements the signer can rely on sub- certifications to obtain comfort. CFO prepares a certification to be signed by all Board of Directors certifying to the following: 16

Sarbanes Oxley Final paragraph of the Form 8-K states: During the fiscal years ended XXXXX 30, 2014 and 2013, and the subsequent interim periods through XXXXXXX 26, 2014, neither we nor anyone on our behalf consulted with NEW FIRM regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us that NEW FIRM concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K. 17

Sarbanes Oxley 4 out of 5 Directors refused to sign the sub-certification containing that paragraph. As the CFO, do you sign the Form 8-K? Note: Subsequent legal discovery uncovered emails that the new firm agreed not to require an impairment charge if they were hired. 18

WHAT ARE YOUR OPTIONS? Sign the Form 8-K Resign Refuse to sign the Form 8-K and not resign Contact the SEC and not resign Sign the Form 10-Q when it will be filed 19

Laws to Protect Sarbanes Oxley State Laws Department of Labor OSHA Division. Protects employee against retaliation including termination Penalties Reinstatement Back Pay Forward Pay Legal Costs Punitive Damages State Employee Protection Acts Penalties Reinstatement Back Pay Forward Pay Legal Costs Punitive Damages 20

Contact Information Marc P. Palker, CMA, MBA, RTRP Principal MPP Associates, Inc. 78 Horton Drive S Huntington, NY 11746 P. 631- 425-6374 F. 631- 425-7296 C. 516 -769-1666 Email mppalker@cs.com