Item 4. Controls and Procedures
ITEM
4. CONTROLS AND PROCEDURES (restated)
Evaluation
of Disclosure Controls and Procedures
Management,
which includes our President, Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief
Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were not effective due to
multiple material weaknesses discussed below. Notwithstanding such material weaknesses, we believe the financial information
presented herein is materially correct and fairly presents the financial position and operating results of the quarter ended January
31, 2021.
As
previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, management has identified
material weaknesses as of that date. The identified material weaknesses related to the accounting for stock-based compensation
awards and inventories at one of our subsidiaries.
We further concluded, based
upon our restatement, that our annual financial statements during the fiscal
year ended October 31, 2020 inaccurately accounted for certain intercompany eliminations in our consolidated statements of operations.
As a result, we determined that there was an overstatement of net sales and cost of sales in the consolidated statement of operations
in our condensed consolidated financial statements for the three month period January 31, 2020. This was due to inadequate design and implementation of
controls to evaluate and monitor the presentation and compliance with accounting principles generally accepted in the United States of
America related to the statement of operations.
A “material weakness” is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or detected on a timely basis. To remediate the material
weakness, we are initiating controls and procedures in order to:
●
Reinforce
the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented
and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies
and procedures; and
●
Review
the processes for documenting and alerting key personnel, including our board members, officers, auditors and outside accountants,
of non-reoccurring events related to stock-based compensation awards to ensure such events are timely and adequately recorded
and communicated to the appropriate parties.
●
We
have replaced and hired new employees in the accounting department at the subsidiary where the inventory analysis issue occurred
and have made upgrades to the computer systems at the subsidiary. Further, we hired a new director of finance at the subsidiary
that is responsible for overseeing inventory counts and we are enhancing controls in the inventory business process over (i)
inventory count procedures by requiring more frequent physical audits of our inventory, and (ii) review of inventory adjustments
and approvals.
The
material weaknesses identified above will not be considered remediated until our remediation efforts have been fully implemented
and we have concluded that these controls are operating effectively.
Management
does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective
control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
Changes
in Internal Control over Financial Reporting
Other
than the changes intended to remediate the material weaknesses as discussed above and in Part II, Item 9A of our Annual Report on
Form 10-K for the year ended October 31, 2020, there was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended January 31, 2021 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART
II - OTHER INFORMATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.