UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from ___________ to ____________
Commission
file number
(Exact name of registrant as specified in its charter)
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or other jurisdiction of incorporation or organization) |
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(Address of principal executive offices, including zip code)
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N/A
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
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Indicate by
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
shares of common stock, $0.001 par value, outstanding as of March 15, 2022
KAIVAL BRANDS INNOVATIONS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
i
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q for the three months ended January 31, 2022 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, our ability to obtain the products we distribute from Bidi Vapor, LLC (“Bidi”), the timing and outcome of Bidi’s appeal of the U.S. Food and Drug Administration’s (the “FDA”) Premarket Tobacco Product Application (“PMTA”) determinations, the scope of future FDA enforcement of regulations in the electronic nicotine delivery system (“ENDS”), the FDA’s approach to the regulation and enforcement of synthetic nicotine and our competitors’ use of the substance in their products to avoid the PMTA requirements, the impact of black-market goods on our business, the demand for the products we distribute, anticipated product performance, market and industry expectations, significant changes in our relationships with our distributors or sub-distributors, changes in government regulation or laws that affect our business, and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs of our current and planned business initiatives, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; changes in government regulations or laws that affect our business; significant changes in our relationships with our distributor or sub-distributors; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
ii
Kaival Brands Innovations Group, Inc.
Consolidated Balance Sheets
(Unaudited)
| January 31, 2022 |
October 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Restricted Cash | ||||||||
| Accounts receivable | ||||||||
| Inventory deposit – related party | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Right of use asset- operating lease | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable- related party | ||||||||
| Accrued expenses | ||||||||
| Operating lease obligation – short term | ||||||||
| Customer refund due | ||||||||
| Total current liabilities | ||||||||
| LONG TERM LIABILITIES | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock shares authorized; Series A Convertible Preferred stock ($ par value, shares authorized, issued and outstanding as of January 31, 2022 and October 31, 2021) | ||||||||
| Common stock ($ par value, shares authorized, and issued and outstanding as of January 31, 2022 and October 31, 2021, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Equity | ||||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-1
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended January 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Revenues, net | $ | $ | ||||||
| Revenues - related parties | ||||||||
| Excise tax on products | ( | ) | ( | ) | ||||
| Total revenues, net | ||||||||
| Cost of revenue | ||||||||
| Cost of revenue - related party | ||||||||
| Cost of revenue - other | ||||||||
| Total cost of revenue | ||||||||
| Gross (loss) profit | ( | ) | ||||||
| Operating expenses | ||||||||
| Advertising and Promotion | ||||||||
| General & Administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Other Income | ||||||||
| Interest income | ||||||||
| Total Other Income | ||||||||
| Income (loss) before income taxes provision (benefit) | ( | ) | ||||||
| Provision (benefit) for income taxes | ( | ) | ||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Net income (loss) per common share - basic and diluted | $ | ( | ) | $ | ||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended January 31, 2022
(Unaudited)
| Convertible Preferred Shares (Series A) | Par Value Convertible Preferred Shares (Series A) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Balances, October 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock Issued for Services – RSU | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Stock Option Expenses | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, January 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Kaival Brands Innovations Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
For the Three Months Ended January 31, 2021 (Unaudited)
| Convertible Preferred Shares (Series A) | Par Value Convertible Preferred Shares (Series A) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||
| Balances, October 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common shares for employee compensation | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of common shares for compensation | — | |||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||
| Balances, January 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-3
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended January 31, 2022 | For the Three Months Ended January 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustment to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Stock option expense | ||||||||
| ROU operating lease expense | ||||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable – related parties | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Inventory | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related party | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Income tax accrual | ||||||||
| Customer refund due | ( | ) | ||||||
| Right of use liabilities – operating lease | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Settled RSU shares with cash | $ | ( | ) | $ | ( | ) | ||
| Cash flows used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash and restricted cash | $ | ( | ) | $ | ( | ) | ||
| Beginning cash and restricted cash balance | ||||||||
| Ending cash and restricted cash balance | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-4
KAIVAL BRANDS INNOVATIONS GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Organization and Description of Business
Kaival Brands Innovations Group, Inc. (the “Company,” the “Registrant,” “we,” “us,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.
Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems (“ENDS”) and related components (the “Products”) manufactured by Bidi, a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer of the Company.
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 and again on April 20, 2021 (collectively, the “A&R Distribution Agreement”) in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “BIDI® Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021.
In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”).
On August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary of the Company.
On July 16, 2021, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $ per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Quarterly Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split.
Current Product Offerings
Pursuant to the A&R Distribution Agreement, The Company sells and resells electronic nicotine delivery systems, which it may refer to herein as “ENDS Products”, or “e-cigarettes”, to non-retail level customers. The sole Product the Company resells is the “BIDI® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides the Company with all branding, logos, and marketing materials to be utilized by the Company in connection with its marketing and promotion of the Products.
On July 14, 2021, the Company announced plans to launch its first Kaival-branded product, a Hemp CBD product. In addition to its Kaival-branded formulation, the Company anticipates that it will also provide white label, wholesale solutions for other product manufacturers through its subsidiary, Kaival Labs. The Company has not yet launched any Kaival-branded product, nor has it begun to provide white label wholesale solutions for other product manufacturers. |
F-5
COVID-19 Impact
In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.
The Company’s operations have not been significantly impacted. No impairments have been recorded and no triggering events or changes in circumstances had occurred. While the spread of COVID-19 has slowed and social restrictions have largely been lifted, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain. However, we have encountered some logistical delays related to product launches and distribution in international markets. The Company was also indirectly impacted by supply chain issues and regulatory oversight.
Impact of the FDA PMTA Decision
As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued Marketing Denial Orders (“MDOs”) for more than 1,167,000 flavored ENDS products, while issuing zero marketing authorizations.
Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick, which Bidi believes the FDA mischaracterized as “flavored.” BIDI believes that because its Arctic BIDI® Stick is menthol, it should not be subject to the MDO. Bidi and the Company believe this position is aligned with the FDA’s public statements and press releases stating that tobacco and menthol ENDS are not deemed flavored products subject to the MDOs.
As a result, beginning in September 2021, Bidi pursued three avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. The Company anticipates a decision from the FDA on the internal review in the second or third quarter of 2022, although we cannot provide any assurances as to the timing or outcome.
Separately, on September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires, for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the Tobacco Control Act, to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products. On February 1, 2022, U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding are currently scheduled for May 2022.
Finally, on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021 pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.
In the event that the U.S. Court of Appeals issues for the Eleventh Circuit a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in the Company being unable to distribute such products, the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case.
Note 2 – Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K on February 16, 2022 (the “2021 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the 2021 Annual Report have been omitted.
F-6
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Restricted Cash
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents at January 31, 2022 and October 31, 2021. Cash and restricted cash at January 31, 2022 and October 31,
2021 were $
Cash
and restricted consist of cash and cash held short-term in escrow as required. As of January 31, 2022, and October 31, 2021, the Company
had $
The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.
| January 31, | October 31, | |||||||
| 2022 | 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted
cash |
||||||||
| Total cash and restricted cash shown in statement of cash flows | $ | $ | ||||||
Advertising and Promotion
All advertising, promotion and marketing expenses, including commissions, are expensed when incurred.
Accounts Receivable and Allowance for Doubtful Accounts
Receivables
are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the
allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable
categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current
economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate,
resulting in their inability to make payments, a larger allowance may be required. As of January 31, 2022, based upon management’s
assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for
doubtful accounts was required. As of October 31, 2021, the Company also determined that
Inventories
All product inventory is purchased from a related party, Bidi. Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories are purchased from a related party as of October 31, 2021 and January 31, 2022, the inventories only consisted of finished goods, were significant, and were located in four storage locations, one of which was a related party, Bidi, and the other location was with a customer/sub distributor, Favs Business LLC (“Favs Business”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through the quarter ended January 31, 2022, the Company has determined that no allowance for the inventory valuation was required at January 31, 2022, nor October 31, 2021.
Inventory deposit related party
In the fourth quarter of fiscal 2021, the Company placed an order for BIDI® Sticks in anticipation of the distribution launch in the United Kingdom. In connection with this order, the Company paid $2.9 million from its capital financing raise to Bidi, a related party, in advance to have the BIDI® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI® Sticks to the Company would occur by the end of February 2022. Once delivered the BIDI® Sticks to be distributed in the United Kingdom will be maintained in appropriate warehousing for distribution and sale. As of the date these unaudited consolidated financial statements were issued, this has not been completed and no inventory has been transferred to the Company; thus, this remains a deposit. The parties anticipate that such delivery will occur by the end of the second quarter of 2022 or beginning of the third quarter of 2022, dependent upon the timing of the launch of distribution in the United Kingdom. In the event that delivery of the BIDI® Sticks and corresponding launch of distribution in the United Kingdom is further delayed, the parties intend that Bidi will return the inventory deposit to the Company.
F-7
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors. The Company has evaluated revenues recognized and substantially all of our revenues were derived from sales of flavored BIDI® Sticks, including the Arctic (menthol) BIDI® Stick, sales of which constituted approximately 12.5% and 19.9% of our total sales of BIDI® Sticks for the fiscal quarters ended January 31, 2022 and 2021, respectively. On October 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $2,556,930. At January 31, 2022, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $1,433,730.
Deferred Revenue
The Company accepts partial payments for orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer. As of January 31, 2022 and October 31, 2021, the Company had not received any deposits from customers, respectively, which would be included with the Company’s current liabilities, if they existed.
Customer Refunds
The Company infrequently has a need to adjust the size of an order after it has been shipped, received and paid for, due to the customer oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the customer to return the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As of January 31, 2022 and October 31, 2021, the Company had customer refunds due in the amounts equal to approximately $147,690 and $316,800, respectively, which was the result of one of the Company’s sub-distributor customers returning Product that had become defective in storage. The approximately $147,690 due at January 31, 2022 represents the amount of the refund the Company will make to this customer.
Products Revenue
The Company generates revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the Products have been shipped to the customer. The Company determines that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely.
Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.
Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Concentration of Revenues and Accounts Receivable
For the three months ended January 31, 2022, approximately 45%, or $1,287,180, of the revenue from the sale of Products was generated from Favs Business, approximately 12%, or $352,554, of the revenue from the sale of Products was generated from Lakshmi Distributor Inc., doing business as C Store Master (“C Store Master”), and approximately 12%, or $332,595, of the revenue from the sale of Products was generated from The H.T. Hackney Company.
Favs Business and C Store Master had outstanding balances of approximately $374,400 and $282,414, respectively, which accounted for approximately 29% and 22%, respectively, of the total accounts receivable from customers as of January 31, 2022.
For the three months ended January 31, 2021, approximately 37%, or $13,888,376, of the revenue from the sale of Products was generated from Favs Business, approximately 18%, or $6,708,752, of the revenue from the sale of Products was generated from MMS Distribution, LLC (“MMS Distro”), and approximately 13%, or $4,879,427, of the revenue from the sale of Products was generated from C Store Master.
Favs Business, with an outstanding balance of approximately $8,601,200, and GPM Investment, LLC, with an outstanding balance of approximately $1,262,985, accounted for approximately 68% and 10% of the total accounts receivable from customers, respectively, as of January 31, 2021.
F-8
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.
The fair value of each option granted during the fiscal three month period ended January 31, 2022 and at October 31, 2021 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:
| 2022 | 2021 | ||||||
| Expected dividend yield | % | % | |||||
| Expected option term (years) | |||||||
| Expected volatility | %- | % | %- | ||||
| Risk-free interest rate | %- | % | %-% |
The
expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility
was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest
rate for U.S. Treasury bills. The Company stock option expense for the fiscal three months ended January 31, 2022 and for the fiscal
year October 31, 2021 was approximately $
The Company’s stock-based compensation for the fiscal three months ended January 31, 2022 and fiscal year October 31, 2021 was approximately $ and $, respectively.
Income Tax
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
The
Company has Federal net operating loss (“NOL”) carryforwards of approximately $
Fair Value of Financial Instruments
The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| ● | Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| ● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| ● | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of January 31, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses.
F-9
Recent Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Note 3 – Going Concern
A recent court ruling on behalf of Bidi in the U.S. Court of Appeals for the Eleventh Circuit, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling, issued on February 1, 2022, means that all BIDI® Stick flavors remain marketable by the Company in the United States, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. As the FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs or who have MDOs in place, the Company views the risk of FDA enforcement against Bidi as low. Oral arguments in the merits case are currently scheduled in May 2022.
If the U.S. Court of Appeals for the Eleventh Circuit agrees with Bidi in the merits case, the Company anticipates that the FDA will be compelled to place the flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company will be able to fully market and sell the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for flavored ENDS and the FDA issues its decision on each.
If the U.S. Court of Appeals for the Eleventh Circuit disagrees with Bidi on the merits case, or if the FDA otherwise chooses to enforce against Bidi, the Company will be forced to cease sales on the flavored ENDS in the United States market, leaving only the Tobacco and Menthol (Arctic) ENDS products for sale in the United States (pending the outcome of the specific PMTA filings and the administrative review request for the classification of “Arctic” as a standard menthol ENDS). If this is the outcome of the merits case, this combined with the negative cash flows from operations, raises substantial doubt on the Company’s ability to continue as a going concern.
Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally.
These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Note 4 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company adopted the standard in the fourth quarter of fiscal year 2020. The adoption of the amended ASU 2016-02 did not have any impact on the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
Office Space
On
August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease
agreement is with a related party, Just Pick, LLC (“Just Pick”). The Company’s Chief Executive Officer is an
officer of Just Pick. Prior to this, the Company utilized the home office space and warehouse of its management at no cost through
July 31, 2020. The Company does not have financing leases and only one operating lease for
office space, with a related party. The operating lease is for a term of five years, beginning August 1, 2020, with rent of $
| 2022 | 2023 | 2024 | 2025 | Total | ||||||||||||||||
| Lease payments | $ | $ | $ | $ | $ | |||||||||||||||
| Less discount imputed interest | ( | |||||||||||||||||||
| Present value of future payments | ||||||||||||||||||||
| Less current obligations | ( | |||||||||||||||||||
| Long term lease obligations | $ | |||||||||||||||||||
Storage Space
On
November 1, 2021, the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana,
to store product inventory at this satellite location. The Company made four payments on this lease, totaling approximately $
F-10
Note 5 – Stockholder Equity
Additional Paid-In Capital
During
the three months ended January 31, 2022, approximately $
Preferred Shares Issued
The
authorized preferred stock of the Company consists of shares with a par value of $ per share, of which shares
were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred
Stock was initially convertible into 100 shares of Common Stock; however,
Common Shares Issued
The
Company implemented the Reverse Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The Reverse
Stock Split was implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”).
As a result of the Reverse Stock Split at the
The authorized Common Stock of the Company consists of shares with a par value of $. There were shares of Common Stock issued and outstanding as of January 31, 2022.
Warrants Shares Issued
As
part of the Company’s firm underwritten public offering during fiscal 2021, the Company issued warrants to purchase a total of
The following is a summary of the stock warrant plan activity during the fiscal three months ended January 31, 2022 and the year ended October 31, 2021.
| 2022 | 2021 | |||||||||||||||
| Number of Warrants | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Warrants Outstanding at Beginning of the Period | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Canceled, forfeited, expired | ||||||||||||||||
| Warrants Outstanding and Exercisable at End of Period | $ | $ | ||||||||||||||
Restricted Stock Unit Awards
On
November 5, 2021,
Stock Options
During
fiscal year 2021, the
F-11
The
fair values of the options on the grant dates was approximately $
Note 6 – Related-Party Transactions
Revenue and Accounts Receivable
During
the three months ended January 31, 2022, the Company recognized revenue of approximately $
During
the three months ended January 31, 2021, the Company recognized revenue of approximately $
Concentration Purchases and Accounts Payable
During
the three months ended January 31, 2022, the Company did not purchase Products from Bidi, a related party company that is also owned
by Nirajkumar Patel, the Company’s Chief Executive Officer. As of January 31, 2022, the Company had accounts payable to Bidi of
approximately $
During
the three months ended January 31, 2021, the Company purchased Products of approximately $
Leased Office Space and Storage Space
On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick. The Company’s Chief Executive Officer is an officer of Just Pick. During fiscal year 2021, the Company was not charged for the leased space under the terms and conditions of the lease between the Company and Just Pick and was not charged for the separate warehouse space provided by Just Pick; thus, no payments were made on the lease. During the three months ended January 31, 2022, no payments were made on the lease because the Company continued to not be charged under the five-year lease agreement for this office and storage space.
Note 7 – Commitments and Contingencies
The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of January 31, 2022 and January 31, 2021 other than the below:
Patent Contribution Agreement
On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company that a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and patent data, described on Exhibit “A” of the Patent Contribution Agreement (the “Patents”), and to the Company and the Company would subsequently transfer the Patents to Kaival Labs.
Pursuant to the Patent Contribution Agreement, the Company agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which was expected to be paid over-time upon two events. First, the Company expected to pay part of the Purchase Price from proceeds generated from a future securities offering (the “Offering Payment”). Additionally, on the first date that Kaival Labs sold a product that was developed using any portion of the Patents or based on the Patents, the Company agreed to pay Next Generation the difference between the Purchase Price and the Offering Payment.
Pursuant to the terms of the Patent Contribution Agreement, the parties agreed that the Company would file a Form 1-A offering statement no later than January 31, 2021, unless extended in writing by the Company in good faith to no later than March 15, 2021 (the “Filing Date”). The Patent Contribution Agreement further provided that in the event the Company or Kaival Labs materially breached the terms of the Patent Contribution Agreement and the material breach is not cured within fifteen (15) business days after Next Generation provides written notice of such material breach, then a reversion event would occur, and the Patents would revert from Kaival Labs to Next Generation.
The Company did not undertake a securities offering by filing a Form 1-A offering statement by the Filing Date. The Company attempted to negotiate an amendment to the Patent Contribution Agreement, which would allow the Company additional time to undertake a securities offering. However, on April 8, 2021, Next Generation notified the Company that it was in material breach of the Patent Contribution Agreement and that the Company would have fifteen (15) business days, or April 30, 2021, to cure such breach. Ultimately, the Company decided not to cure such breach within the requisite time and, on May 4, 2021, Next Generation notified the Company that a reversion event occurred.
F-12
The Company has completed the process of completing the necessary documentation to transfer the Patents from Kaival Labs to Next Generation. Neither the Company, nor Kaival Labs, has developed or otherwise relied on the Patents to date and does not expect the reversion of the Patents to materially affect the Company’s business.
Cash and Equity Bonus Awards
On
May 28, 2020, the Board approved cash bonus awards to each of the Company’s Chief Executive Officer and its Chief Operating Officer.
With respect to the Chief Executive Officer, the Board approved a
During
the quarter ended January 31, 2022, the $
Service Agreement
On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company.
On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx. Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second Amendment” and, collectively with the Amended Service Agreement, the “Further Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the Further Amended Service Agreement, the parties agreed to the following “General Compensation” payments: (i) for the Services provided in
March 2020,
| ● | An amount equal to 0.9% of the Applicable Gross Quarterly Sales (as defined in the Amended Service Agreement), which amount shall, at the Company’s option be paid in (a) cash or (b) shares of the Company’s common stock, or (c) a combination of cash and Common Stock. | |
| ● | An amount equal to 0.27% of the Applicable Gross Quarterly Sales, which amount must be paid in cash. |
On March 17, 2021, the Company entered into a consulting agreement
with Russell Quick which granted stock options to purchase 41,667 shares of the Company’s common stock in exchange for
consulting services. The shares underlying the stock option fully vested on December 1, 2021. The exercise price per share is
$28.68. The Company recognized approximately $190,000 in expense to account for the stock options. Russell Quick is the Chief
Executive Officer of QuikfillRx. The Company accrued approximately $
Note 8 – Subsequent Events
Share-based Compensation
On
February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to
which the
F-13
On February 5, 2022, the Company issued shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees. Of the shares issued to employees, shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $23,336.
On February 27, 2022, the Company’s Compensation Committee (the “Committee”) and the Board approved the grant of a stock option award to Mark Thoenes, Interim Chief Financial Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
On February 27, 2022, the Committee and the Board approved the grant of a stock option award to Russell Quick, as an independent consultant providing strategic advising and negotiation assistance for potential international distribution agreements, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 50,000 option shares became immediately vested, with the remaining 50,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
On March 5, 2022, the Committee and the Board approved the grant of a stock option award to Nirajkumar Patel, Chief Executive Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
Previously,
the Company granted Mr. Patel
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to Eric Mosser, Chief Operating Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
Similarly,
the Company previously granted Mr. Mosser
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to 5 employees, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The options have a ten-year term.
Previously,
we granted these 5 employees
On
March 9, 2022, the Committee approved an annual base salary equal to $
Further,
the Board previously approved a cash bonus award to
On February 28, 2022 and on March 3, 2022 the Company issued shares and shares, respectively, of the Company’s Common Stock to Mr. Rudy Singh as payment for the EDGAR filing services.
Warrants Shares Exercised
Between
February 14, 2022 and March 1, 2022, shares of Common Stock were issued upon the exercise of warrants, and the Company received
approximately $
F-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the unaudited Financial Statements and notes thereto for the three months ended January 31, 2022 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31, 2021 contained in 2021 Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
Impact of COVID-19
In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational; however, we were indirectly negatively impacted by COVID-19.
We were indirectly impacted by supply chain issues and regulatory oversight. First, COVID-19 impacted Bidi’s ability to quality test and develop its new product, the BIDI® Pouch, in line with its targeted release date, which negatively impacted our ability to begin distribution of the BIDI® Pouch. Secondly, we believe that many retailers and distributers relaxed their compliance standards as an indirect result of COVID-19 for two reasons: (i) government enforcement of regulations was very limited due to imposed social restrictions, resulting in less in-person monitor enforcement by government officials and (ii) retail stores experienced light foot traffic from customers due to COVID-19 restrictions and fears, which resulted in relaxed compliance in an effort to generate revenue. We believe this relaxation of standards by certain retailers significantly impacted our revenues.
Impact of the FDA PMTA Decision
In September 2021, in connection with the PMTA process, the FDA effectively “banned” flavored ENDS by denying nearly all then-pending PMTAs for such products. Following the issuance of an MDO, manufacturers are required to stop selling non-tobacco flavored ENDS product. As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued MDOs for more than 1,167,000 flavored ENDS products, while issuing zero marketing authorizations.
Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick, which Bidi believes the FDA mischaracterized as “flavored.” BIDI believes that because its Arctic BIDI® Stick is menthol, it should not be subject to the MDO. Bidi and the Company believe this position is aligned with the FDA’s public statements and press releases stating that tobacco and menthol ENDS are not deemed flavored products subject to the MDOs.
As a result, beginning in September 2021, Bidi pursued three avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. The Company anticipates a decision from the FDA on the internal review in the second or third quarter of 2022, although we cannot provide any assurances as to the timing or outcome.
Separately, on September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the APA, as well as ultra vires, for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the Tobacco Control Act, to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products. On February 1, 2022, U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding are currently scheduled for May 2022.
Finally, on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021 pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.
In the event that the U.S. Court of Appeals issues for the Eleventh Circuit a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in the Company being unable to distribute such products, the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case.
Future Strategic Opportunities
In addition to the continued domestic opportunity, we believe that international markets provide an exciting growth opportunity for us. The estimated total addressable global market for ENDS products is approximately $36.7 billion. Bidi has received approval to market and distribute products within 11 international markets, including the United Kingdom, France, Russia, and the Czech Republic. Bidi has also secured significant intellectual property protections similar to those received in the United States from the European Union, China, and several other regions and countries. It is also important to note that the nicotine formulation in the Bidi® Stick has been modified and approved at the 2% level to meet the criteria for distribution in the United Kingdom and Europe.
1
These international market approvals Bidi has previously secured are for the full formulation lineup, including all flavors. Because the FDA’s PMTA restrictions and guidelines do not pertain to international markets, Bidi intends to continue manufacturing its full product lineup, for distribution by us in these international markets. Accordingly, in light of the pending MDO appeal and uncertainty regarding the FDA’s review of the PMTA, as well as the ongoing threat of the FDA enforcement, Bidi intends to expedite the planned product launches into foreign markets starting with the United Kingdom. We are also actively exploring potential partnerships with international distribution companies in order to possibly expand Product distribution more rapidly in these international markets.
Corporate History
We were incorporated on September 4, 2018 in the State of Delaware. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.
Change of Control
On February 6, 2019, we entered into a Share Purchase Agreement (the “Share Purchase Agreement”), by and among us, GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), our then-controlling stockholder, and Kaival Holdings, LLC, a Delaware limited liability company (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted common stock, representing approximately 88.06 percent of our then issued and outstanding shares of common stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Share Purchase Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, with KH becoming our largest controlling stockholder. Nirajkumar Patel and Eric Mosser are the sole voting members of KH.
Description of Business
We are focused on growing and incubating innovative and profitable products into mature, dominant brands. Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. We ceased all retail/direct-to-consumer sales in February 2021. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all the branding, logos, and marketing materials to be utilized by us in connection with our marking and promotion of the Products. We do not manufacture any of the Products we resell. Currently, the Products consist of the “BIDI® Stick,” a disposable, tamper-resistant ENDS Product and, once launched, of which there can be no assurances, the “BIDI® Pouch,” which provides a tobacco-derived nicotine formulation, containing natural fibers and a chew-base filler.
In connection with the A&R Distribution Agreement, we entered into Sub-Distribution Agreements, whereby we appointed the counterparties as non-exclusive sub-distributors. Pursuant to the Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the Territory
We process all sales made only to non-retail customers, with all sales to non-retail customers made through Bidi’s age-restricted website, www.wholesale.bidivapor.com. We ceased all retail/direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette Trafficking (“PACT”) Act. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. We maintain adequate inventory levels of the Products in order to meet the demands of our non-retail customers, and deliver the Products sold to these customers.
Current Product Offerings
Pursuant to the A&R Distribution Agreement, we sell and resell ENDS Products, also referred to as (“e-cigarettes”), to non-retail level customers. Our primary Product we resell is the “BIDI® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. All of our flavor options will continue to be available to the 11 European Markets we have received marketing and distribution approvals. We are wholly dependent on Bidi to supply the BIDI® Sticks to us for distribution. Accordingly, any supply or other issues that impact Bidi, indirectly impacts us and our ability to operate our business.
In addition to the BIDI® Stick, we anticipated launching distribution of the “BIDI® Pouch,” initially outside of the United States. The initial planned February 2021 roll-out of the BIDI® Pouch was delayed due to COVID-19 based manufacturing and supply chain constraints. Due to these complications, and in effort to prevent future bottlenecks, Bidi decided to move manufacturing in-house. In 2021, Bidi modified the planned formulation of the BIDI® Pouch. The original BIDI® Pouch formulation intended to utilize a tobacco-free (synthetic) nicotine formulation, along with natural fibers and a chew-base filler in six different flavors. However, the BIDI® Pouch product is now being placed on temporary hold domestically due to the likelihood of the FDA enforcement of synthetic nicotine products as drugs, which will require a PMTA determination from the FDA. More specifically, while the BIDI® Pouch, which made with synthetic (tobacco-free) nicotine, would not fall within the meaning of a tobacco product as set forth in the Food, Drug and Cosmetic Act (“FDCA”), the FDA could take the position that such product is a drug. A drug is defined in Section 201(g) of the FDCA, in pertinent part, as “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals” (i.e., the “disease” or “therapeutic benefit” prong) or “articles (other than food) intended to affect the structure or function of the body of man or other animals” (i.e., the “structure/function” prong). Given nicotine’s well-known structure/function effect on the body there is a chance the FDA will take the position that synthetic nicotine products, such as the BIDI® Pouch, are subject to the FDA’s drug authority and can only be marketed with an approved New Drug Application (even if no disease or therapeutic benefit claims are made). Indeed, prior to the enactment of the Tobacco Control Act (the “Tobacco Control Act”), the FDA historically took the position that any product with added nicotine (other than traditional tobacco products) was a drug, even when marketed for recreational use and without specific claims of smoking cessation or other therapeutic benefit. It is, of course, illegal to distribute a drug without the FDA’s approval. Given these concerns, Bidi has decided not to launch the synthetic-nicotine BIDI® Pouch at this time, but will instead seek a PMTA marketing authorization from the FDA for the BIDI® Pouch made with tobacco-derived nicotine.
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On July 14, 2021, we announced plans to launch our first Kaival-branded product, a Hemp CBD product. In addition to our Kaival-branded formulation, we anticipate that we will also provide white label, wholesale solutions for other product manufacturers through our subsidiary, Kaival Labs. However, as of the date of this Quarterly Report, we have not launched any Kaival-branded products, nor have we begun to offer white label, wholesale solutions to other product manufacturers.
Going Concern
A recent court ruling on behalf of Bidi in the Eleventh Circuit Court of Appeals, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling, which was issued on February 1, 2022, means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits case are currently scheduled in May 2022.
If the Eleventh Circuit Court of Appeals agrees with Bidi in the merits case, we anticipate that the FDA will be compelled to place the flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for flavored ENDS and the FDA issues its decision on each.
If the Eleventh Circuit Court of appeals disagrees with Bidi on the merits case, or if the FDA re-issues the MDO after completing its scientific review process for each of Bidi’s PMTAs for its flavored ENDS, or if The DA otherwise chooses to enforce against Bidi, we will be forced to cease sales on the flavored BIDI® Sticks in the United States market, leaving only the Tobacco (Classic) and Menthol (Arctic) BIDI® Sticks products for sale in the United States (which, with respect to the Menthol (Arctic) BIDI® Stick, depends on the outcome of the specific PMTA filings and the administrative review request for the classification of “Arctic” as a standard menthol ENDS). If this is the outcome of the merits case, this combined with a negative cash flow from operations, would raise substantial doubt on our ability to continue as a going concern.
Management plans to continue similar operations with increased marketing, which we believe will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally.
The unaudited consolidated financial statements filed as part of this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Liquidity and Capital Resources
We believe we have sufficient cash on hand as of March 17, 2022. However, we are awaiting the outcome of Bidi’s merit-based case pending in the Eleventh Circuit Court of Appeals with respect to the MDO issued by the FDA in September 2021. If the Eleventh Circuit Court of Appeals rules against Bidi, our business and financial condition will be materially adversely affected, including our ability to generate revenues and our liquidity. Other than the ongoing MDO matters, we have no known current demands or commitments and are not aware of any events or uncertainties as of January 31, 2022 that will result in or that are reasonably likely to materially increase or decrease our current requirements for cash and resulting improved liquidity.
At January 31, 2022, we had working capital of approximately $13.9 million and total cash of approximately $5.7 million.
We intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of the FDA’s PMTA process and Bidi’s receipt of a MDO from the FDA; however, an extended impact, or a negative ruling in Bidi’s merits-based litigation case or the FDA ultimately not approving Bidi’s PMTA if it is re-evaluated could have a material and adverse effect on our sales, earnings, and liquidity. At this time, we do not foresee the need for further strategic financing for the next twelve months, given the financing we completed in September 2021, as indicated below, and our continual sales efforts and results.
In September 2021, we completed a firm commitment underwritten offering, which offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-258339) (the “Registration Statement”). The SEC declared the Registration Statement effective on August 10, 2021. We sold 4,700,000 shares of our Common Stock and warrants to purchase an additional 3,525,000 shares of our Common Stock. We sold each share of our Common Stock and warrants to purchase 0.75 shares of our Common Stock at a combined public offering price of $1.70. We also granted the underwriter the option to purchase an additional 705,000 shares of our Common Stock and warrants to purchase an additional 528,750 shares of our Common Stock. We received net proceeds from the offering of approximately $8.3 million. We have also received approximately $1.7 million from the exercise of the warrants. We used the proceeds for general corporate purposes.
Cash Flows:
Cash flow used in operations was approximately $(2.1) million for the first three months of fiscal year 2022, compared to $(5.4) million used in operations for the first three months of fiscal year 2021. The decrease in cash flow used in operations for the first three months of fiscal year 2022 compared to the first three months of fiscal 2021 was primarily due to the use of cash resulting from a very significant increase in accounts receivable of approximately ($11.3) million as the result of very significant sales that occurred during the first three months of fiscal year 2021, offset to a lesser degree by the growth of accounts payable – related party of approximately $4.8 million and stock based compensation of approximately $1.1 million.
Cash flow used in financing activities was approximately $35,759 for the first three months of fiscal year 2022, compared to approximately $30,511 for the first three months of fiscal year 2021. The cash used in financing activities for the first three months of fiscal year of 2022 and fiscal year 2021 consisted of cash used for the settlement of RSUs issued to employees.
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Results of Operations
Three months ended January 31, 2022, compared to three months ended January 31, 2021
Revenues:
Revenues, net for the first quarter of fiscal year 2022 were approximately $2.8 million, compared to approximately $37.4 million in the same period of the prior fiscal year. Revenues decreased in the first quarter of fiscal year 2022, generally due to (i) Bidi’s receipt of the MDO, which limited our ability during the first quarter of fiscal year 2022 to sell flavored BIDI® Sticks in the United States and (ii) increased competition, which we believe was the result of the lack of enforcement by federal and state authorities against sub-par and low-priced vaping products that continued to enter the market illegally without FDA authorization. A recent court ruling in favor of Bidi granted a judicial stay on the MDO previously issued by the FDA banning the marketing and sale of flavored BIDI® Sticks, amongst banning these flavored sticks with other industry competitors. As a result of the judicial stay of Bidi’s MDO, we revenues to continue to resume an upward trajectory as renewed distribution ramps up and sales of flavored BIDI® Sticks products increase, which sales remain subject to FDA’s enforcement discretion (and assuming that Bidi is successful in its currently pending merits-based case). We also anticipate that if the FDA begins enforcement against illegally-marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping products, such as the BIDI® Stick.
Cost of Revenue, net and Gross Profit (Loss):
Gross loss in the first quarter of fiscal year 2022 was approximately ($700,000), or approximately (24.3%), of revenues, net, compared to approximately $4.8 million gross profit, or approximately11.2%, of revenues, net, for the first quarter of fiscal year 2021. Total cost of revenue, net was approximately $3.5 million, or approximately 124.3%, of revenue, net for the first quarter of fiscal year 2022, compared to approximately $32.6 million, or approximately 87.2%, of revenue, net for the first quarter of fiscal year 2021. The decrease in gross profit is primarily driven by the decrease in overall sales and the recognition of accumulated year-to-date credits/discounts/rebates given to customers, totaling approximately $854,000, resulting in an offset to revenue, net, during the first quarter of fiscal year 2022.
Operating Expenses:
Total operating expenses were approximately $2.1 million for the first quarter of fiscal year 2022, compared to approximately $4.4 million for the first quarter of fiscal year 2021. For the first quarter of fiscal year 2022, operating expenses consisted primarily of advertising and promotion fees of approximately $593,000, professional fees totaling approximately $481,000 and general and administrative expenses of approximately $1.0 million. General and administrative expenses in the first quarter of fiscal year 2022 consisted primarily of salaries and wages, stock option expense, insurance, lease expense, banking fees, business fees and state and franchise taxes. For the first quarter of fiscal year 2021, operating expenses consisted primarily of advertising and promotion fees of approximately $958,000, professional fees totaling approximately $2.5 million and, general and administrative expenses of approximately $942,000. General and administrative expenses in the first quarter of fiscal year 2021 consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees. We expect future operating expenses to continue to increase while we increase the footprint of our business and generate increased sales growth.
Income Taxes:
During the first quarter of fiscal year 2022, we did not accrue for income taxes, due to the pre-tax loss of approximately ($2.8) million, compared to a tax provision of approximately $106,000 for the first quarter of fiscal year 2021, due to the amount of pre-tax income for that three-month period. The reduction from the first quarter of fiscal year 2021 was due to the pre-tax operating loss recognized during the first quarter of fiscal year 2022.
Net Income (Loss):
As a result of the items noted above, the net loss for the first quarter of fiscal year 2022 was approximately ($2.8) million, or ($0.09) basic and diluted loss per share, compared to net income of approximately $0.3 million, or $0.01 basic and diluted earnings per share, for the first quarter of fiscal year 2021. The decrease in net income for the first quarter of fiscal year 2022, as compared to the first quarter of fiscal year 2021, is primarily attributable to the decreased revenues and increase in customer credits/discounts/rebates, as noted above.
Critical Accounting Policies and Estimates
Other than the policy changes disclosed in Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the three months ended January 31, 2022 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2021 Annual Report for the year ended October 31, 2021.
Recently Adopted Accounting Pronouncements
See Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.
Emerging Growth Company
We are an “emerging growth company,” that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have not elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process, including policies and procedures, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our management assessed our internal control over financial reporting using the criteria in Internal Control – Integrated Framework (2013 Framework), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Based on our evaluation under the framework in COSO, our management concluded that our internal control over financial reporting remained ineffective as of January 31, 2022 based on such criteria. Material weaknesses existed in the design or operation of certain of our internal controls over financial reporting that adversely affect our internal controls. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements may not be prevented or detected. Management determined that there was a lack of resources to provide segregation of duties consistent with control objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process that includes multiple levels of review over financial disclosure and reporting processes.
The weaknesses and the related risks are not uncommon in a company of our size because of the limitations in the location, size and number of our staff. To address these material weaknesses, and subject to the receipt of additional financing or cash flows, we have undertaken certain remediation measures to date to address the material weaknesses described in this Quarterly Report, including implementing procedures pursuant to which we can ensure segregation of duties and hire additional resources to ensure appropriate review and oversight, as well as more timely formal communications processes, more diligent review and approval of all disbursements and more timely review of all banking transactions sales orders and inventory management.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met under all potential conditions, regardless of how remote, and may not prevent or detect all errors and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Exchange Act) that have occurred during the fiscal there months ended January 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
Item 1A. Risk Factors
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share-based Compensation
During the three months ended January 31, 2022, we issued the following securities as compensation to certain of our employees and consultants:
On November 5, 2021, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of approximately $110,250 of share-based compensation. Of the shares issued to employees, 19,866 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $35,759. As of January 31, 2022, there remained 437,917 unvested RSUs with approximately $900,769 of related unvested compensation.
Following the end of the three months ended January 31, 2022, we issued the following securities as compensation:
On February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to which the Company engaged Oakhill Europe to provide strategic advising and negotiation assistance for potential international distribution agreements (collectively, the “Oakhill Services”), in exchange for a cash monthly retainer, incentive compensation bonuses, and an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events.
On February 5, 2022, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees. The RSUs were a portion of the compensation paid to such employees for their services to us. Of the shares issued to employees, 24,058 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $23,336. The issuances were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On February 27, 2022, the Company granted a stock option award to Mark Thoenes, Interim Chief Financial Officer, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Thoenes’ services. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On February 27, 2022, the Company granted a stock option award to Russell Quick, as an independent consultant providing strategic advising and negotiation assistance for potential international distribution agreements, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Executive Officer. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Company granted stock option awards to Eric Mosser, Chief Operating Officer, to acquire up to 500,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Operating Officer. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to 5 employees, to acquire up to 285,600 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On February 28, 2022 and on March 3, 2022 the Company issued 10,000 shares and 2,963 shares, respectively, of the Company’s Common Stock to Mr. Rudy Singh as payment for the EDGAR filing services performed for the filing of the Company’s Fiscal Year 2021 10K report.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed herewith as a part of this Quarterly Report.
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| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
| (1) | Schedules and Exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished |
*filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| Date: March 17, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President and Chief Executive Officer | ||
| Date: March 17, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
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Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Nirajkumar Patel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kaival Brands Innovations Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 17, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President, and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Mark Thoenes, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kaival Brands Innovations Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: March 17, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Kaival Brands Innovations Group, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarterly period ended January 31, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 17, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President and Chief Executive Officer |
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Kaival Brands Innovations Group, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarterly period ended January 31, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 17, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares |
Jan. 31, 2022 |
Oct. 31, 2021 |
|---|---|---|
| Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 1,000,000,000 | 1,000,000,000 |
| Common stock, shares issued | 30,236,696 | 30,195,312 |
| Common stock, shares outstanding | 30,236,696 | 30,195,312 |
| Series A Preferred Stock [Member] | ||
| Preferred stock, shares authorized | 3,000,000 | 3,000,000 |
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares issued | 3,000,000 | 3,000,000 |
| Preferred stock, shares outsanding | 3,000,000 | 3,000,000 |
Organization and Description of Business |
3 Months Ended | |
|---|---|---|
Jan. 31, 2022 | ||
| Accounting Policies [Abstract] | ||
| Organization and Description of Business | Note 1 – Organization and Description of Business
Kaival Brands Innovations Group, Inc. (the “Company,” the “Registrant,” “we,” “us,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.
Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery systems (“ENDS”) and related components (the “Products”) manufactured by Bidi, a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer of the Company.
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, a related party company, which Distribution Agreement was amended and restated on May 21, 2020 and again on April 20, 2021 (collectively, the “A&R Distribution Agreement”) in order to clarify some of the provisions. Pursuant to the A&R Distribution Agreement, Bidi granted the Company an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist primarily of the “BIDI® Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021.
In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”).
On August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary of the Company.
On July 16, 2021, the Company filed a Certificate of Amendment to the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $ per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Quarterly Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split.
COVID-19 Impact
In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.
The Company’s operations have not been significantly impacted. No impairments have been recorded and no triggering events or changes in circumstances had occurred. While the spread of COVID-19 has slowed and social restrictions have largely been lifted, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain. However, we have encountered some logistical delays related to product launches and distribution in international markets. The Company was also indirectly impacted by supply chain issues and regulatory oversight.
Impact of the FDA PMTA Decision
As of September 10, 2021, the FDA announced that it has taken action on over 93% of applications and issued Marketing Denial Orders (“MDOs”) for more than 1,167,000 flavored ENDS products, while issuing zero marketing authorizations.
Bidi, along with nearly every other company in the ENDS industry, received a MDO for its non-tobacco flavored ENDS products. With respect to Bidi, the MDO covered all non-tobacco flavored BIDI® Sticks, including its Arctic (menthol) BIDI® Stick, which Bidi believes the FDA mischaracterized as “flavored.” BIDI believes that because its Arctic BIDI® Stick is menthol, it should not be subject to the MDO. Bidi and the Company believe this position is aligned with the FDA’s public statements and press releases stating that tobacco and menthol ENDS are not deemed flavored products subject to the MDOs.
As a result, beginning in September 2021, Bidi pursued three avenues to challenge the MDO. First, on September 21, 2021, separate from the judicial appeal of the MDO in its entirety, Bidi filed a 21 C.F.R. § 10.75 internal FDA review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. The Company anticipates a decision from the FDA on the internal review in the second or third quarter of 2022, although we cannot provide any assurances as to the timing or outcome.
Separately, on September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires, for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the Tobacco Control Act, to determine whether the BIDI® Sticks are “appropriate for the protection of the public health”. Bidi further argued that the FDA violated due process and the APA by failing to provide fair notice of the FDA’s new requirement for ENDS companies to conduct long-term comparative smoking cessation studies for their flavored products. On February 1, 2022, U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, or whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding are currently scheduled for May 2022.
Finally, on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021 pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.
In the event that the U.S. Court of Appeals issues for the Eleventh Circuit a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in the Company being unable to distribute such products, the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case.
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Basis of Presentation and Significant Accounting Policies |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation and Significant Accounting Policies | Note 2 – Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K on February 16, 2022 (the “2021 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the 2021 Annual Report have been omitted.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at January 31, 2022 and October 31, 2021. Cash and restricted cash at January 31, 2022 and October 31, 2021 were $5,655,962 and $7,825,235, respectively.
Cash and restricted consist of cash and cash held short-term in escrow as required. As of January 31, 2022, and October 31, 2021, the Company had $65,542 and $65,007 in restricted cash, respectively, for amounts held in escrow.
The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.
Advertising and Promotion All advertising, promotion and marketing expenses, including commissions, are expensed when incurred. Accounts Receivable and Allowance for Doubtful Accounts Receivables are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. As of January 31, 2022, based upon management’s assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for doubtful accounts was required. As of October 31, 2021, the Company also determined that no allowance for doubtful accounts was required. Inventories All product inventory is purchased from a related party, Bidi. Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories are purchased from a related party as of October 31, 2021 and January 31, 2022, the inventories only consisted of finished goods, were significant, and were located in four storage locations, one of which was a related party, Bidi, and the other location was with a customer/sub distributor, Favs Business LLC (“Favs Business”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through the quarter ended January 31, 2022, the Company has determined that no allowance for the inventory valuation was required at January 31, 2022, nor October 31, 2021. Inventory deposit related party In the fourth quarter of fiscal 2021, the Company placed an order for BIDI® Sticks in anticipation of the distribution launch in the United Kingdom. In connection with this order, the Company paid $2.9 million from its capital financing raise to Bidi, a related party, in advance to have the BIDI® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI® Sticks to the Company would occur by the end of February 2022. Once delivered the BIDI® Sticks to be distributed in the United Kingdom will be maintained in appropriate warehousing for distribution and sale. As of the date these unaudited consolidated financial statements were issued, this has not been completed and no inventory has been transferred to the Company; thus, this remains a deposit. The parties anticipate that such delivery will occur by the end of the second quarter of 2022 or beginning of the third quarter of 2022, dependent upon the timing of the launch of distribution in the United Kingdom. In the event that delivery of the BIDI® Sticks and corresponding launch of distribution in the United Kingdom is further delayed, the parties intend that Bidi will return the inventory deposit to the Company.
Revenue Recognition The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors. The Company has evaluated revenues recognized and substantially all of our revenues were derived from sales of flavored BIDI® Sticks, including the Arctic (menthol) BIDI® Stick, sales of which constituted approximately 12.5% and 19.9% of our total sales of BIDI® Sticks for the fiscal quarters ended January 31, 2022 and 2021, respectively. On October 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $2,556,930. At January 31, 2022, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $1,433,730.
Deferred Revenue The Company accepts partial payments for orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer. As of January 31, 2022 and October 31, 2021, the Company had not received any deposits from customers, respectively, which would be included with the Company’s current liabilities, if they existed. Customer Refunds The Company infrequently has a need to adjust the size of an order after it has been shipped, received and paid for, due to the customer oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the customer to return the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As of January 31, 2022 and October 31, 2021, the Company had customer refunds due in the amounts equal to approximately $147,690 and $316,800, respectively, which was the result of one of the Company’s sub-distributor customers returning Product that had become defective in storage. The approximately $147,690 due at January 31, 2022 represents the amount of the refund the Company will make to this customer. Products Revenue The Company generates revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the Products have been shipped to the customer. The Company determines that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue. Concentration of Revenues and Accounts Receivable For the three months ended January 31, 2022, approximately 45%, or $1,287,180, of the revenue from the sale of Products was generated from Favs Business, approximately 12%, or $352,554, of the revenue from the sale of Products was generated from Lakshmi Distributor Inc., doing business as C Store Master (“C Store Master”), and approximately 12%, or $332,595, of the revenue from the sale of Products was generated from The H.T. Hackney Company. Favs Business and C Store Master had outstanding balances of approximately $374,400 and $282,414, respectively, which accounted for approximately 29% and 22%, respectively, of the total accounts receivable from customers as of January 31, 2022. For the three months ended January 31, 2021, approximately 37%, or $13,888,376, of the revenue from the sale of Products was generated from Favs Business, approximately 18%, or $6,708,752, of the revenue from the sale of Products was generated from MMS Distribution, LLC (“MMS Distro”), and approximately 13%, or $4,879,427, of the revenue from the sale of Products was generated from C Store Master. Favs Business, with an outstanding balance of approximately $8,601,200, and GPM Investment, LLC, with an outstanding balance of approximately $1,262,985, accounted for approximately 68% and 10% of the total accounts receivable from customers, respectively, as of January 31, 2021.
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.
The fair value of each option granted during the fiscal three month period ended January 31, 2022 and at October 31, 2021 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:
The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest rate for U.S. Treasury bills. The Company stock option expense for the fiscal three months ended January 31, 2022 and for the fiscal year October 31, 2021 was approximately $309,700 and $1,773,947, respectively.
The Company’s stock-based compensation for the fiscal three months ended January 31, 2022 and fiscal year October 31, 2021 was approximately $ and $, respectively.
Income Tax
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
The Company has Federal net operating loss (“NOL”) carryforwards of approximately $4,000,000 and state NOL carryforwards of approximately $1,800,000. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After evaluation of the evidence, management determined that a valuation allowance of approximately $1,256,059 for the year ended on October 31, 2021, and the fiscal three month period ended January 31, 2022, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized pursuant to ASC 740.
Fair Value of Financial Instruments
The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of January 31, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses.
Recent Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
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Going Concern |
3 Months Ended |
|---|---|
Jan. 31, 2022 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Going Concern | Note 3 – Going Concern
A recent court ruling on behalf of Bidi in the U.S. Court of Appeals for the Eleventh Circuit, granted a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling, issued on February 1, 2022, means that all BIDI® Stick flavors remain marketable by the Company in the United States, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. As the FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs or who have MDOs in place, the Company views the risk of FDA enforcement against Bidi as low. Oral arguments in the merits case are currently scheduled in May 2022.
If the U.S. Court of Appeals for the Eleventh Circuit agrees with Bidi in the merits case, the Company anticipates that the FDA will be compelled to place the flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company will be able to fully market and sell the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for flavored ENDS and the FDA issues its decision on each.
If the U.S. Court of Appeals for the Eleventh Circuit disagrees with Bidi on the merits case, or if the FDA otherwise chooses to enforce against Bidi, the Company will be forced to cease sales on the flavored ENDS in the United States market, leaving only the Tobacco and Menthol (Arctic) ENDS products for sale in the United States (pending the outcome of the specific PMTA filings and the administrative review request for the classification of “Arctic” as a standard menthol ENDS). If this is the outcome of the merits case, this combined with the negative cash flows from operations, raises substantial doubt on the Company’s ability to continue as a going concern.
Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally.
These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
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Leases |
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| Leases | Note 4 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use assets and lease liability, initially measured at present value of the lease payments, on its balance sheet for leases with terms longer than 12 months and classified as either financing or operating leases. The Company excludes short-term leases having initial terms of 12 months or less from Topic 842 as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term. The Company adopted the standard in the fourth quarter of fiscal year 2020. The adoption of the amended ASU 2016-02 did not have any impact on the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
Office Space
On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick, LLC (“Just Pick”). The Company’s Chief Executive Officer is an officer of Just Pick. Prior to this, the Company utilized the home office space and warehouse of its management at no cost through July 31, 2020. The Company does not have financing leases and only one operating lease for office space, with a related party. The operating lease is for a term of five years, beginning August 1, 2020, with rent of $1,000 payable monthly. Certain of the Company’s leases include renewal options and have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the option. As the operating lease does not provide for an implicit interest rate, we estimated a current borrowing rate of 4.5% in determining the present value of the lease. As of January 31, 2022 and October 31, 2021, the right-to-use (“ROU”) lease asset, net of accumulated amortization, was approximately $51,955 and $55,604, respectively. The initial recognition of the ROU operating lease was approximately $73,749 for both the ROU asset and ROU liability. The amortization expense for ROU asset for the twelve months ended October 31, 2021 was approximately $14,529 and no payments were made on the ROU liability. The amortization expense for the ROU asset for the three months ended January 31, 2022 was approximately $3,649 and no payments were made on the ROU liability. At October 31, 2021, short-term ROU lease liability was approximately $13,020 and long-term liability was approximately $46,185, totaling approximately $59,205. At January 31, 2022, short-term ROU lease liability was approximately $13,349 and long-term liability was approximately $42,686, totaling approximately $56,035.
Storage Space
On November 1, 2021, the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana, to store product inventory at this satellite location. The Company made four payments on this lease, totaling approximately $10,139, during the three months ended January 31, 2022. On November 11, 2021, the Company entered into a month-to-month lease agreement with FFE Solutions Group, located in Salt Lake City Utah, to store additional product inventory at this satellite location. The Company made one payment in the amount of approximately $10,713 on December 15, 2021 for the rent on this lease during the three months ended January 31, 2022.
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Stockholder Equity |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholder Equity | Note 5 – Stockholder Equity
Additional Paid-In Capital
During the three months ended January 31, 2022, approximately $309,700 of stock option expense was recognized and contributed an addition to Additional Paid-In Capital. Also, during the three months ended January 31, 2022, on November 1, 2021, RSUs previously granted to employees vested and shares of Common Stock were issued, which contributed approximately $74,451 to Additional Paid-In Capital, resulting in a total increase in Additional Paid-In Capital during the three months ended January 31, 2022 of approximately $384,151.
Preferred Shares Issued
The authorized preferred stock of the Company consists of shares with a par value of $ per share, of which shares were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock was initially convertible into 100 shares of Common Stock; however, as a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock is convertible into approximately 8.33 shares of Common Stock. All shares of Series A Preferred Stock were issued and outstanding as of January 31, 2022.
Common Shares Issued
The Company implemented the Reverse Stock Split, effective prior to the opening of the market on Tuesday, July 20, 2021. The Reverse Stock Split was implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of the Reverse Stock Split at the 1-for-12 ratio, every 12 shares of the Common Stock were exchanged for one share of the Common Stock. The Company has retroactively adjusted all share amounts and per share data herein to give effect to the Reverse Stock Split.
The authorized Common Stock of the Company consists of shares with a par value of $. There were shares of Common Stock issued and outstanding as of January 31, 2022.
Warrants Shares Issued
As part of the Company’s firm underwritten public offering during fiscal 2021, the Company issued warrants to purchase a total of 4,053,750 shares of Common Stock at an exercise price of $ per share. These warrants expire in the year 2026. During the year ended October 31, 2021, warrants for 879,828 shares were exercised for $1,665,113. No warrants were exercised during the three-month period ended January 31, 2022. The aggregate intrinsic value of the outstanding Common Stock warrants as of January 31, 2022 and October 31, 2021 was $. The weighted average remaining term of the outstanding Common Stock warrants is years as of January 31, 2022.
The following is a summary of the stock warrant plan activity during the fiscal three months ended January 31, 2022 and the year ended October 31, 2021.
Restricted Stock Unit Awards
On November 5, 2021, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of approximately $110,250 of share-based compensation. Of the shares issued to employees, 19,866 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $35,759. As of January 31, 2022, there remained 437,917 unvested RSUs with approximately $900,769 of related unvested compensation.
Stock Options
During fiscal year 2021, the Company granted options exercisable for up to 150,000 shares of Common Stock of which 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 68,333 vest over the next 2 years on March 17, 2022, and 2023, and 17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $9.12 to $28.68 per share. These options have a weighted average remaining life of 9.43 years as of October 31, 2021 and of 9.08 years as of January 31, 2022. The options expire in the year 2031. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of 50,000 shares of Common Stock, were modified to accelerate the full vesting period from 3 years to 2 years. The Company granted no new options during the three months ended January 31, 2022. The aggregate intrinsic value of these outstanding options as of October 31, 2021 and January 31, 2022 was $0.
The fair values of the options on the grant dates was approximately $3,088,002 using a Black-Scholes option pricing model with the following assumptions: stock price range of $ to $ per share (based on the quoted trading price on the date of grant), volatility range of to , expected term of years, and a risk-free interest rate range of to . The Company is amortizing the expense over the vesting terms of each option. The total stock option expense for the three months ended January 31, 2022 was approximately $309,700. The fiscal year 2021 total unamortized stock option expense at October 31, 2021 was approximately $1,314,056. The fiscal year 2022 unamortized stock option expense at January 31, 2022 was approximately $1,004,356.
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Related-Party Transactions |
3 Months Ended |
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Jan. 31, 2022 | |
| Related Party Transactions [Abstract] | |
| Related-Party Transactions | Note 6 – Related-Party Transactions
Revenue and Accounts Receivable
During the three months ended January 31, 2022, the Company recognized revenue of approximately $23,765 from four companies owned by Nirajkumar Patel, the Chief Executive Officer of the Company, and/or his wife. As of January 31, 2022, the Company has accounts receivable from this related party in the amount of approximately $245.
During the three months ended January 31, 2021, the Company recognized revenue of approximately $50,300 from three companies owned by Nirajkumar Patel, the Chief Executive Officer of the Company, and/or his wife.
Concentration Purchases and Accounts Payable
During the three months ended January 31, 2022, the Company did not purchase Products from Bidi, a related party company that is also owned by Nirajkumar Patel, the Company’s Chief Executive Officer. As of January 31, 2022, the Company had accounts payable to Bidi of approximately $9,129,759 and Products valued at approximately $11,841,750 were held in inventory.
During the three months ended January 31, 2021, the Company purchased Products of approximately $32,479,100 from Bidi, a related party company. As of January 31, 2021, the Company had accounts payable to Bidi of approximately $6,247,882. During the three months ended January 31, 2021, 100% of all Product purchases were made by the Company from Bidi.
Leased Office Space and Storage Space
On August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick. The Company’s Chief Executive Officer is an officer of Just Pick. During fiscal year 2021, the Company was not charged for the leased space under the terms and conditions of the lease between the Company and Just Pick and was not charged for the separate warehouse space provided by Just Pick; thus, no payments were made on the lease. During the three months ended January 31, 2022, no payments were made on the lease because the Company continued to not be charged under the five-year lease agreement for this office and storage space.
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Commitments and Contingencies |
3 Months Ended | ||||||
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Jan. 31, 2022 | |||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||
| Commitments and Contingencies | Note 7 – Commitments and Contingencies
The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of January 31, 2022 and January 31, 2021 other than the below:
Patent Contribution Agreement
On May 4, 2021, Next Generation Labs, LLC (“Next Generation”) notified the Company that a “reversion event” had occurred under that certain Patent Contribution Agreement, dated September 28, 2020 (the “Patent Contribution Agreement”). Pursuant to the Patent Contribution Agreement, Next Generation agreed to contribute certain patents, patent applications, and patent data, described on Exhibit “A” of the Patent Contribution Agreement (the “Patents”), and to the Company and the Company would subsequently transfer the Patents to Kaival Labs.
Pursuant to the Patent Contribution Agreement, the Company agreed to pay Next Generation a purchase price of $3 million for the Patents (the “Purchase Price”), which was expected to be paid over-time upon two events. First, the Company expected to pay part of the Purchase Price from proceeds generated from a future securities offering (the “Offering Payment”). Additionally, on the first date that Kaival Labs sold a product that was developed using any portion of the Patents or based on the Patents, the Company agreed to pay Next Generation the difference between the Purchase Price and the Offering Payment.
Pursuant to the terms of the Patent Contribution Agreement, the parties agreed that the Company would file a Form 1-A offering statement no later than January 31, 2021, unless extended in writing by the Company in good faith to no later than March 15, 2021 (the “Filing Date”). The Patent Contribution Agreement further provided that in the event the Company or Kaival Labs materially breached the terms of the Patent Contribution Agreement and the material breach is not cured within fifteen (15) business days after Next Generation provides written notice of such material breach, then a reversion event would occur, and the Patents would revert from Kaival Labs to Next Generation.
The Company did not undertake a securities offering by filing a Form 1-A offering statement by the Filing Date. The Company attempted to negotiate an amendment to the Patent Contribution Agreement, which would allow the Company additional time to undertake a securities offering. However, on April 8, 2021, Next Generation notified the Company that it was in material breach of the Patent Contribution Agreement and that the Company would have fifteen (15) business days, or April 30, 2021, to cure such breach. Ultimately, the Company decided not to cure such breach within the requisite time and, on May 4, 2021, Next Generation notified the Company that a reversion event occurred.
The Company has completed the process of completing the necessary documentation to transfer the Patents from Kaival Labs to Next Generation. Neither the Company, nor Kaival Labs, has developed or otherwise relied on the Patents to date and does not expect the reversion of the Patents to materially affect the Company’s business.
Cash and Equity Bonus Awards
On May 28, 2020, the Board approved cash bonus awards to each of the Company’s Chief Executive Officer and its Chief Operating Officer. With respect to the Chief Executive Officer, the Board approved a cash bonus award equal to $30,000 for every $25 million in gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved a cash bonus award equal to $20,000 for every $25 million in gross revenues generated by the Company. On May 28, 2020, the Board also approved an equity bonus award for each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board approved an award of 7,500 restricted shares of the Common Stock for every $50 million in accumulated gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved an award of 6,250 restricted shares of the Common Stock for every $50 million in accumulated gross revenues generated by the Company. The Company’s accumulated gross revenues will be evaluated on a quarterly basis, beginning with the second quarter of fiscal year 2020. At October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $165,000, should be accrued as it was deemed likely that the $50 million revenue target would be met. The Company issued these shares to the Chief Executive Officer and Chief Operating Office on January 1, 2021. During the quarter ended January 31, 2021, the $75 million and $100 million accumulated revenue targets were both achieved and the Company determined that the fair market value of the 13,750 shares, or approximately $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021.
During the quarter ended January 31, 2022, the $125 million accumulated revenue targets were achieved and the Company determined that cash bonuses totaling $50,000 should be accrued at January 31, 2022.
Service Agreement
On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company.
On June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment” and, collectively with the Service Agreement, the “Amended Service Agreement”) with QuikfillRx. Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second Amendment” and, collectively with the Amended Service Agreement, the “Further Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the Further Amended Service Agreement, the parties agreed to the following “General Compensation” payments: (i) for the Services provided in March 2020, the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) for each calendar month between November 1, 2020 and October 31, 2021, the Company paid QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month; and (v) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2022, then for the period between November 1, 2022 and October 31, 2021, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month. On November 1, 2021, the parties agreed to extend the term for an additional one-year period. In addition, the Company will pay the following quarterly bonuses:
On March 17, 2021, the Company entered into a consulting agreement with Russell Quick which granted stock options to purchase 41,667 shares of the Company’s common stock in exchange for consulting services. The shares underlying the stock option fully vested on December 1, 2021. The exercise price per share is $28.68. The Company recognized approximately $190,000 in expense to account for the stock options. Russell Quick is the Chief Executive Officer of QuikfillRx. The Company accrued approximately $34,524 for a quarterly bonus payable to QuikfillRx, based on the Applicable Gross Quarterly Sales results of the three months ended January 31, 2022.
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Subsequent Events |
3 Months Ended |
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Jan. 31, 2022 | |
| Subsequent Events [Abstract] | |
| Subsequent Events | Note 8 – Subsequent Events
Share-based Compensation
On February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to which the Company engaged Oakhill Europe to provide strategic advising and negotiation assistance for potential international distribution agreements (collectively, the “Oakhill Services”), in exchange for a $15,000 monthly retainer, incentive compensation bonuses of up to $175,000, and an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events.
On February 5, 2022, the Company issued shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees. Of the shares issued to employees, shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $23,336.
On February 27, 2022, the Company’s Compensation Committee (the “Committee”) and the Board approved the grant of a stock option award to Mark Thoenes, Interim Chief Financial Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
On February 27, 2022, the Committee and the Board approved the grant of a stock option award to Russell Quick, as an independent consultant providing strategic advising and negotiation assistance for potential international distribution agreements, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, 50,000 option shares became immediately vested, with the remaining 50,000 option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
On March 5, 2022, the Committee and the Board approved the grant of a stock option award to Nirajkumar Patel, Chief Executive Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
Previously, the Company granted Mr. Patel 250,000 RSUs , which vest over a three-year period (the “Patel Time Vesting RSUs”), and 500,000 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Patel Event Vesting RSUs”). On March 5, 2022, the Company and Mr. Patel agreed to terminate the (i) 120,833 unvested Patel Time Vesting RSUs and (ii) 500,000 unvested Patel Event Vesting RSUs.
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to Eric Mosser, Chief Operating Officer, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The option has a ten-year term.
Similarly, the Company previously granted Mr. Mosser 250,000 RSUs, which vest over a three-year period (the “Mosser Time Vesting RSUs”), and 333,334 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Mosser Event Vesting RSUs”). On March 5, 2022, the Company and Mr. Mosser agreed to terminate the (i) 120,833 unvested Mosser Time Vesting RSUs and (ii) 333,334 unvested Mosser Event Vesting RSUs.
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to 5 employees, to acquire up to shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $ per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. At the grant date, option shares became immediately vested, with the remaining option shares vesting on the one-year anniversary of the grant date. The options have a ten-year term.
Previously, we granted these 5 employees 317,499 RSUs, which vest over a three-year period (the “Employee Vesting RSUs”), and 317,499 RSUs that vest only upon a change of control of the Company or if the Company achieves in excess of $1 billion in accumulated total gross revenues (the “Employee Event Vesting RSUs”). On March 5, 2022, the Company and the 5 employees each agreed to terminate the (i) 135,001 unvested Employee Time Vesting RSUs and (ii) 317,499 unvested Employee Event Vesting RSUs.
On March 9, 2022, the Committee approved an annual base salary equal to $300,000 for Mr. Patel and $240,000 for Mr. Mosser. The annual base salaries will be reviewed by the Committee on an annual basis.
Further, the Board previously approved a cash bonus award to (i) Mr. Patel equal to $30,000 for every $25 million in gross revenues generated by us (the “Patel Cash Bonus Award”) and (ii) Mr. Mosser equal to $20,000 for every $25 million in gross revenues generated by us (the “Mosser Cash Bonus Award” and, together with the Patel Cash Bonus Award, the “Cash Bonus Awards”). On March 9, 2022, the Committee terminated the Cash Bonus Awards.
On February 28, 2022 and on March 3, 2022 the Company issued shares and shares, respectively, of the Company’s Common Stock to Mr. Rudy Singh as payment for the EDGAR filing services.
Warrants Shares Exercised
Between February 14, 2022 and March 1, 2022, shares of Common Stock were issued upon the exercise of warrants, and the Company received approximately $1,520,693 in proceeds. |
Basis of Presentation and Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation | Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiary, Kaival Labs. Intercompany transactions are eliminated.
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| Basis of Presentation | Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K on February 16, 2022 (the “2021 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the 2021 Annual Report have been omitted.
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| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
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| Cash and Restricted Cash | Cash and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at January 31, 2022 and October 31, 2021. Cash and restricted cash at January 31, 2022 and October 31, 2021 were $5,655,962 and $7,825,235, respectively.
Cash and restricted consist of cash and cash held short-term in escrow as required. As of January 31, 2022, and October 31, 2021, the Company had $65,542 and $65,007 in restricted cash, respectively, for amounts held in escrow.
The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.
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| Advertising and Promotion |
Advertising and Promotion All advertising, promotion and marketing expenses, including commissions, are expensed when incurred. |
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| Accounts Receivable and Allowance for Doubtful Accounts | Accounts Receivable and Allowance for Doubtful Accounts Receivables are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. As of January 31, 2022, based upon management’s assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for doubtful accounts was required. As of October 31, 2021, the Company also determined that no allowance for doubtful accounts was required. |
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| Inventories | Inventories All product inventory is purchased from a related party, Bidi. Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories are purchased from a related party as of October 31, 2021 and January 31, 2022, the inventories only consisted of finished goods, were significant, and were located in four storage locations, one of which was a related party, Bidi, and the other location was with a customer/sub distributor, Favs Business LLC (“Favs Business”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through the quarter ended January 31, 2022, the Company has determined that no allowance for the inventory valuation was required at January 31, 2022, nor October 31, 2021. |
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| Inventory deposit related party | Inventory deposit related party In the fourth quarter of fiscal 2021, the Company placed an order for BIDI® Sticks in anticipation of the distribution launch in the United Kingdom. In connection with this order, the Company paid $2.9 million from its capital financing raise to Bidi, a related party, in advance to have the BIDI® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI® Sticks to the Company would occur by the end of February 2022. Once delivered the BIDI® Sticks to be distributed in the United Kingdom will be maintained in appropriate warehousing for distribution and sale. As of the date these unaudited consolidated financial statements were issued, this has not been completed and no inventory has been transferred to the Company; thus, this remains a deposit. The parties anticipate that such delivery will occur by the end of the second quarter of 2022 or beginning of the third quarter of 2022, dependent upon the timing of the launch of distribution in the United Kingdom. In the event that delivery of the BIDI® Sticks and corresponding launch of distribution in the United Kingdom is further delayed, the parties intend that Bidi will return the inventory deposit to the Company.
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| Revenue Recognition | Revenue Recognition The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), in the second quarter of fiscal year 2020, as this was the first quarter that the Company generated revenues. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration that the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. Under ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue and cash flows affected by economic factors. The Company has evaluated revenues recognized and substantially all of our revenues were derived from sales of flavored BIDI® Sticks, including the Arctic (menthol) BIDI® Stick, sales of which constituted approximately 12.5% and 19.9% of our total sales of BIDI® Sticks for the fiscal quarters ended January 31, 2022 and 2021, respectively. On October 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $2,556,930. At January 31, 2022, the value of the Products stored at Favs Business under the Consignment Agreement was approximately $1,433,730.
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| Deferred Revenue | Deferred Revenue The Company accepts partial payments for orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer. As of January 31, 2022 and October 31, 2021, the Company had not received any deposits from customers, respectively, which would be included with the Company’s current liabilities, if they existed. |
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| Customer Refunds | Customer Refunds The Company infrequently has a need to adjust the size of an order after it has been shipped, received and paid for, due to the customer oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the customer to return the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As of January 31, 2022 and October 31, 2021, the Company had customer refunds due in the amounts equal to approximately $147,690 and $316,800, respectively, which was the result of one of the Company’s sub-distributor customers returning Product that had become defective in storage. The approximately $147,690 due at January 31, 2022 represents the amount of the refund the Company will make to this customer. |
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| Products Revenue | Products Revenue The Company generates revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the Products have been shipped to the customer. The Company determines that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely. Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue. |
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| Concentration of Revenues and Accounts Receivable | Concentration of Revenues and Accounts Receivable For the three months ended January 31, 2022, approximately 45%, or $1,287,180, of the revenue from the sale of Products was generated from Favs Business, approximately 12%, or $352,554, of the revenue from the sale of Products was generated from Lakshmi Distributor Inc., doing business as C Store Master (“C Store Master”), and approximately 12%, or $332,595, of the revenue from the sale of Products was generated from The H.T. Hackney Company. Favs Business and C Store Master had outstanding balances of approximately $374,400 and $282,414, respectively, which accounted for approximately 29% and 22%, respectively, of the total accounts receivable from customers as of January 31, 2022. For the three months ended January 31, 2021, approximately 37%, or $13,888,376, of the revenue from the sale of Products was generated from Favs Business, approximately 18%, or $6,708,752, of the revenue from the sale of Products was generated from MMS Distribution, LLC (“MMS Distro”), and approximately 13%, or $4,879,427, of the revenue from the sale of Products was generated from C Store Master. Favs Business, with an outstanding balance of approximately $8,601,200, and GPM Investment, LLC, with an outstanding balance of approximately $1,262,985, accounted for approximately 68% and 10% of the total accounts receivable from customers, respectively, as of January 31, 2021.
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| Share-Based Compensation |
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.
The fair value of each option granted during the fiscal three month period ended January 31, 2022 and at October 31, 2021 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:
The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest rate for U.S. Treasury bills. The Company stock option expense for the fiscal three months ended January 31, 2022 and for the fiscal year October 31, 2021 was approximately $309,700 and $1,773,947, respectively.
The Company’s stock-based compensation for the fiscal three months ended January 31, 2022 and fiscal year October 31, 2021 was approximately $ and $, respectively.
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| Income Tax | Income Tax
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
The Company has Federal net operating loss (“NOL”) carryforwards of approximately $4,000,000 and state NOL carryforwards of approximately $1,800,000. With the changes instituted by the CARES Act, the Federal NOLs have an indefinite life and will not expire. The Company’s federal and state tax returns for the 2018 and 2019 tax years generally remain subject to examination by U.S. and various state authorities. A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. After evaluation of the evidence, management determined that a valuation allowance of approximately $1,256,059 for the year ended on October 31, 2021, and the fiscal three month period ended January 31, 2022, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized pursuant to ASC 740.
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| Fair Value of Financial Instruments | Fair Value of Financial Instruments
The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of January 31, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses.
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
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Basis of Presentation and Significant Accounting Policies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restrictions on Cash and Cash Equivalents |
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| Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions |
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Leases (Tables) |
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| Schedule of Future Minimum Rental Payments for Operating Leases |
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Stockholder Equity (Tables) |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement, Option, Activity |
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Organization and Description of Business (Details Narrative) |
Jan. 31, 2022
$ / shares
|
|---|---|
| Accounting Policies [Abstract] | |
| Common stock, par value | $ 0.001 |
Basis of Presentation and Significant Accounting Policies (Details - Restricted on Cash) - USD ($) |
Jan. 31, 2022 |
Oct. 31, 2021 |
Jan. 31, 2021 |
Oct. 31, 2020 |
|---|---|---|---|---|
| Accounting Policies [Abstract] | ||||
| Cash | $ 5,590,420 | $ 7,760,228 | ||
| Restricted cash | 65,542 | 65,007 | ||
| Total cash and restricted cash shown in statement of cash flows | $ 5,655,962 | $ 7,825,235 | $ 1,963,854 | $ 7,421,701 |
Basis of Presentation and Significant Accounting Policies (Details - Black-Scholes option) |
3 Months Ended | |
|---|---|---|
Jan. 31, 2022 |
Jan. 31, 2021 |
|
| Property, Plant and Equipment [Line Items] | ||
| Expected dividend yield | 0.00% | 0.00% |
| Expected option term (years) | 10 years | 10 years |
| Minimum [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Expected volatility | 294.57% | 294.57% |
| Risk-free interest rate | 1.19% | 1.19% |
| Maximum [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Expected volatility | 301.53% | 301.53% |
| Risk-free interest rate | 1.63% | 1.63% |
Basis of Presentation and Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Jan. 31, 2022 |
Jan. 31, 2021 |
Oct. 31, 2021 |
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| Accounting Policies [Abstract] | |||
| Cash and cash equivalents | $ 5,655,962 | $ 7,825,235 | |
| Restricted cash | 65,542 | 65,007 | |
| Allowance for doubtful accounts | $ 0 | ||
| Stock option expense | 309,700 | $ 1,773,947 | |
| Stock-based compensation | 110,250 | 9,449,421 | |
| Net operating loss | 4,000,000 | $ 1,800,000 | |
| Valuation allowance | $ 1,256,059 | ||
Leases (Details) |
Jan. 31, 2022
USD ($)
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|---|---|
| Leases | |
| 2021 | $ 13,500 |
| 2022 | 15,300 |
| 2023 | 18,000 |
| 2024 | 13,500 |
| Total | 60,300 |
| Less discount | (4,265) |
| Present value of future payments | 56,035 |
| Less current obligations | (13,349) |
| Long term lease obligations | $ 42,686 |
Leases (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
Jan. 31, 2022 |
Oct. 31, 2021 |
Dec. 15, 2021 |
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| Leases | |||
| Lease term | 5 years | ||
| Rent per month | $ 1,000 | ||
| Current borrowing rate | 4.50% | ||
| Right to use lease asset | $ 51,955 | $ 55,604 | |
| Recognition of ROU operating lease | 73,749 | ||
| Recognition of ROU liability | 14,529 | ||
| Amortization expense for right to use asset | 3,649 | ||
| Short-term ROU lease liability | 13,349 | 13,020 | |
| Long term lease liability | 42,686 | 46,185 | |
| Lease liability | $ 59,205 | ||
| Lease liability | 56,035 | ||
| Operating lease expense | $ 10,139 | ||
| Lease amount | $ 10,713 |
Stockholder Equity (Details) - Warrants [Member] - $ / shares |
3 Months Ended | 12 Months Ended | |
|---|---|---|---|
Jan. 31, 2022 |
Jan. 31, 2021 |
Oct. 31, 2020 |
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||
| Warrants Outstanding at Beginning | 3,173,922 | 0 | |
| Weighted Average Exercise Price at Beginning | $ 1.90 | $ 1.90 | |
| Number of warrants, Granted | 0 | 4,053,750 | |
| Weighted Average Exercise Price, Granted | $ 0 | $ 1.90 | |
| Number of warrants, Exercised | 0 | (879,828) | 0 |
| Weighted Average Exercise Price, Exercised | $ 1.90 | ||
| Number of warrants, Cancelled, forfeited, expired | 0 | 0 | |
| Weighted Average Exercise Price, Cancelled, forfeited, expired | $ 1.90 | ||
| Warrants Outstanding at Ending | 3,173,922 | 3,173,922 | 0 |
| Weighted Average Exercise Price at Ending | $ 1.90 | $ 1.90 | $ 1.90 |
Stockholder Equity (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Jul. 16, 2021 |
Jan. 31, 2022 |
Jan. 31, 2021 |
Oct. 31, 2021 |
Jul. 31, 2021 |
|
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Stock option expense | $ 309,700 | $ 0 | $ 1,314,056 | ||
| Additional paid-in capital | $ 384,151 | ||||
| Preferred stock, shares authorized | 5,000,000 | 5,000,000 | 5,000,000 | ||
| Preferred Stock, Par or Stated Value Per Share | $ 0.001 | ||||
| Reverse stock split description | as a result of the Reverse Stock Split, the conversion rate was adjusted such that each share of the Series A Preferred Stock is convertible into approximately 8.33 shares of Common Stock | ||||
| Reverse stock split | 1-for-12 | ||||
| Common Stock, Shares Authorized | 1,000,000,000 | 1,000,000,000 | 1,000,000,000 | ||
| Common Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 | $ 0.001 | ||
| Common Stock, Shares, Outstanding | 30,236,696 | 30,195,312 | 30,236,696 | ||
| Common stock shares, issued | 30,236,696 | 30,195,312 | |||
| Issuance of warrants | 4,053,750 | ||||
| Exercise price | $ 1.90 | ||||
| Warrants exercised | $ 1,665,113 | ||||
| Aggregate intrinsic value | $ 0 | $ 0 | |||
| Restricted stock unit awards description | the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees, resulting in the recognition of approximately $110,250 of share-based compensation. Of the shares issued to employees, 19,866 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $35,759. As of January 31, 2022, there remained 437,917 unvested RSUs with approximately $900,769 of related unvested compensation. | ||||
| Stock option awards, description | Company granted options exercisable for up to 150,000 shares of Common Stock of which 15,000 fully vested on March 17, 2021, 7,500 fully vested on June 30, 2021, 41,667 fully vested on December 1, 2021, 68,333 vest over the next 2 years on March 17, 2022, and 2023, and 17,500 vest over the next 2 years on June 30, 2022 and 2023. The options have exercise prices ranging from $9.12 to $28.68 per share. These options have a weighted average remaining life of 9.43 years as of October 31, 2021 and of 9.08 years as of January 31, 2022. The options expire in the year 2031. On July 19, 2021, two of the stock option agreements, exercisable for an aggregate of 50,000 shares of Common Stock, were modified to accelerate the full vesting period from 3 years to 2 years. The Company granted no new options during the three months ended January 31, 2022. The aggregate intrinsic value of these outstanding options as of October 31, 2021 and January 31, 2022 was $0. | ||||
| Fair valued of options granted | $ 3,088,002 | ||||
| Stock price | $ 9.12 | ||||
| Expected term | 10 years | ||||
| Unamortized stock option expense | $ 1,004,356 | ||||
| Maximum [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Stock price | $ 27.36 | ||||
| Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate | 301.53% | 301.53% | |||
| [custom:ShareBasedCompensationArrangementByShareBasedPaymentAwardFairValueAssumptionsRiskFreeInterestRates] | 1.63% | ||||
| Minimum [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate | 294.57% | 294.57% | |||
| [custom:ShareBasedCompensationArrangementByShareBasedPaymentAwardFairValueAssumptionsRiskFreeInterestRates] | 1.19% | ||||
| Warrant [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Issuance of warrants | 879,828 | ||||
| Common Stock Warrants [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Weighted average remaining term | 4 years 8 months 4 days | ||||
| Restricted Stock Units (RSUs) [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Additional paid-in capital | $ 74,451 | ||||
| Series A Preferred Stock [Member] | |||||
| Accumulated Other Comprehensive Income (Loss) [Line Items] | |||||
| Preferred stock, shares authorized | 3,000,000 | ||||
| Preferred Stock, Shares Outstanding | 3,000,000 | ||||
| Preferred stock, shares issued | 3,000,000 | ||||
Related-Party Transactions (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Jan. 31, 2022 |
Jan. 31, 2021 |
|
| Related Party Transaction [Line Items] | ||
| Revenue from related parties | $ 23,765 | $ 50,300 |
| Revenues | 2,841,883 | 37,361,519 |
| Accounts receivable from related parties | 50,300 | |
| Nirajkumar Patel [Member] | ||
| Related Party Transaction [Line Items] | ||
| Revenue from related parties | 23,765 | |
| Seven Companies [Member] | ||
| Related Party Transaction [Line Items] | ||
| Revenues | 245 | |
| Bidi Vapor [Member] | ||
| Related Party Transaction [Line Items] | ||
| Accounts payable | 9,129,759 | 6,247,882 |
| M M S Distro [Member] | ||
| Related Party Transaction [Line Items] | ||
| Sale of Products | $ 11,841,750 | $ 32,479,100 |
Commitments and Contingencies (Details Narrative) |
3 Months Ended |
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Jan. 31, 2022
USD ($)
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| Commitments and Contingencies Disclosure [Abstract] | |
| Bonus description | cash bonus award equal to $30,000 for every $25 million in gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved a cash bonus award equal to $20,000 for every $25 million in gross revenues generated by the Company. On May 28, 2020, the Board also approved an equity bonus award for each of the Chief Executive Officer and the Chief Operating Officer. With respect to the Chief Executive Officer, the Board approved an award of 7,500 restricted shares of the Common Stock for every $50 million in accumulated gross revenues generated by the Company. With respect to the Chief Operating Officer, the Board approved an award of 6,250 restricted shares of the Common Stock for every $50 million in accumulated gross revenues generated by the Company. The Company’s accumulated gross revenues will be evaluated on a quarterly basis, beginning with the second quarter of fiscal year 2020. At October 31, 2020, the Company determined that the fair value of the equity bonus shares, or $165,000, should be accrued as it was deemed likely that the $50 million revenue target would be met. The Company issued these shares to the Chief Executive Officer and Chief Operating Office on January 1, 2021. During the quarter ended January 31, 2021, the $75 million and $100 million accumulated revenue targets were both achieved and the Company determined that the fair market value of the 13,750 shares, or approximately $70,785, and the cash bonuses totaling $100,000 should be accrued at January 31, 2021. |
| Accumulated revenue | $ 125,000,000 |
| Cash bonuses | $ 50,000 |
| General Compensation | the Company paid QuikfillRx an amount equal to $86,000; (ii) for the Services provided in April 2020, the Company paid QuikfillRx an amount equal to $100,000; (iii) each calendar month commencing May 2020 through October 2020, the Company paid QuikfillRx an amount equal to $125,000 per month for the Services to be performed during such calendar month; (iv) for each calendar month between November 1, 2020 and October 31, 2021, the Company paid QuikfillRx $125,000 per month for the Services to be performed during such calendar month; (iv) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2021, then for the period between November 1, 2021 and October 31, 2022, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month; and (v) if the parties agree to extend the term of the Further Amended Service Agreement beyond October 31, 2022, then for the period between November 1, 2022 and October 31, 2021, the Company will pay QuikfillRx $150,000 per month for the Services to be performed during such calendar month. |
| Acquired quqrterly bonus | $ 34,524 |