Kaival Brands Innovations Group, Inc 10-Q for FY2023 Q2
Kaival Brands Innovations Group, Inc. (KAVL)
About this 10-Q
Kaival Brands Innovations Group, Inc filed this 10-Q on June 14, 2023, covering the quarter ended April 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended April 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.02M
- down 1.3% from $3.06M a year earlier
- Net loss
- $3.96M
- compared with a net loss of $5.01M a year earlier
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)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
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 |
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.
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).
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
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of June 14, 2023, there were shares of common stock, $0.001 par value, outstanding.
KAIVAL BRANDS INNOVATIONS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
| Item | Page | |
| Cautionary Note Concerning Forward-Looking Statements | ii | |
| PART I | Financial Information | F-1 |
| Item 1. | Financial Statements | F-1 |
| Unaudited Consolidated Balance Sheets | F-1 | |
| Unaudited Consolidated Statements of Operations | F-2 | |
| Unaudited Consolidated Statements of Changes in Stockholders’ Equity | F-3 | |
| Unaudited Consolidated Statements of Cash Flows | F-5 | |
| Notes to Unaudited Consolidated Financial Statements | F-6 | |
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 1 |
| Liquidity and Capital Resources | 6 | |
| Results of Operations | 7 | |
| Emerging Growth Company | 8 | |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 8 |
| Item 4 | Controls and Procedures | 9 |
| PART II | Other Information | 10 |
| Item 1. | Legal Proceedings | 10 |
| Item 1A. | Risk Factors | 10 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 10 |
| Item 3 | Defaults Upon Senior Securities | 10 |
| Item 4 | Mine Safety Disclosures | 10 |
| Item 5 | Other Information | 10 |
| Item 6 | Exhibits | 11 |
| Signatures | 12 | |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information included in this Quarterly Report on Form 10-Q for the quarter ended April 30, 2023 (this “Report”) contain or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995.
We generally use the words “may,” “should,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “estimate,” “potential,” “continue,” “will,” and similar expressions to identify forward-looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results, including, without limitation, statements related to:
| ● | our substantial reliance on, and efforts to diversify our business from, the business of our affiliate Bidi Vapor, LLC (“Bidi”); |
| ● | our ability to obtain from, and pay for, the products we distribute for Bidi; |
| ● | our ability to integrate and ultimately enter into licenses for or create products relating to the intellectual property assets we acquired from GoFire, Inc. in May 2023; |
| ● | the impact of the August 2022 11th Circuit Court of Appeals decision overturning the U.S. Food and Drug Administration’s (the “FDA”) previous denial of Bidi’s Premarket Tobacco Product Application (“PMTA”) for its non-tobacco flavored BIDI® Stick electronic nicotine delivery system (“ENDS”), which we are permitted to distribute in the U.S. subject to FDA enforcement and maintenance of all state licenses and permits; |
| ● | our substantial reliance on QuikfillRx, LLC (now known as Kaival Marketing Services) to provide key sales, marketing and other support services to us; |
| ● | our relationships with, and reliance on, third parties to broker and distribute our products; |
| ● | the scope of future FDA enforcement of regulations in the ENDS products generally; |
| ● | the market perception of the products we distribute and related impacts on our reputation; |
| ● | 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, and our market and industry expectations; |
| ● | our relationships with key third party commercial collaborators such as Phillip Morris International; |
| ● | our ability or plans to diversify our product offerings; |
| ● | 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, including matters over which we have little or no control such as the COVID-19 pandemic. |
Forward-looking statements, including those concerning our expectations, involve significant risks, uncertainties and other factors, some of which are beyond our control, which may cause our actual results, performance, or achievements, or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section contained in this Report and the section “Risk Factors” in our Annual Report on Form 10-K for the year ended October 31, 2022, for a listing of some of the factors that could cause the results anticipated by our forward-looking statements to differ from actual future results. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Report.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Kaival Brands Innovations Group, Inc.
Consolidated Balance Sheets
(Unaudited)
| April 30, 2023 | October 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivable – related party – short term | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Fixed assets, net | ||||||||
| Other receivable – related party – net of current portion | ||||||||
| Right of use asset- operating lease | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Other payable- related party | ||||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Customer refund due | ||||||||
| Deferred revenue | ||||||||
| Operating lease obligation – short term | ||||||||
| 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 April 30, 2023 and October 31, 2022, respectively) | ||||||||
| Common stock ($ par value, shares authorized, and issued and outstanding as of April 30, 2023, and October 31, 2022, 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 April 30, | For the Six Months Ended April 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Revenues – related party | ||||||||||||||||
| Royalty revenue | ||||||||||||||||
| Excise tax on products | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total revenues, net | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Cost of revenue – related party | ||||||||||||||||
| Cost of revenue – other | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||
| Operating expenses | ||||||||||||||||
| Advertising and promotion | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest income | ||||||||||||||||
| Total other income | ||||||||||||||||
| Loss before income taxes provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net 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 Statement of Changes in Stockholders’ Equity
For the Six Months Ended April 30, 2023
(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, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock option expense | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, January 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock option expense | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, April 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-3
Kaival Brands Innovations Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
For the Six Months Ended April 30, 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 – RSUs | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Stock option expense | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, January 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock issued for services – RSUs | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Exercise of common stock warrants | — | |||||||||||||||||||||||||||
| Stock option expense | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, April 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-4
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months Ended | For the Six Months Ended | |||||||
| April 30, 2023 | April 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Depreciation | ||||||||
| Stock option expense | ||||||||
| Bad debt expense | ||||||||
| ROU operating lease expense | ||||||||
| Writeoff of inventory | ||||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivable – related party | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Inventory deposit – related party | ||||||||
| Income tax receivable | ||||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related party | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Customer refunds due | ( | ) | ||||||
| Right of use liabilities – operating lease | ( | ) | ( | ) | ||||
| Net cash used in Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Stock warrant exercises | ||||||||
| Settled RSU shares with cash | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and restricted cash | $ | ( | ) | $ | ( | ) | ||
| Beginning cash and restricted cash balance | ||||||||
| Ending cash and restricted cash balance | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-5
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,” “our” or similar terminology), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018, in the State of Delaware.
As used herein, the term “Common Stock” means the Company’s common stock, par value $ per share.
Description of Business
In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain electronic nicotine delivery system (“ENDS”) and related components (the “Products”) manufactured by Bidi Vapor, LLC (“Bidi”), a related party company that is owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and a director of the Company. Mr. Patel also controls Kaival Holdings, LLC, a Delaware limited liability company and the Company’s majority stockholder (“Kaival Holdings”).
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, which was amended and restated on May 21, 2020, and again on April 20, 2021 (collectively, the “A&R Distribution Agreement”). 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 entirely of the “BIDI® Stick.” The Company ceased all direct-to-consumer sales in February 2021. On June 10, 2022, and again on November 17, 2022, the Company and Bidi entered into a third amended and restated exclusive distribution agreement (the “Third A&R Distribution Agreement”) which memorializes the Company’s current business relationship with Bidi.
On August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (“Kaival Labs”), as a wholly owned subsidiary of the Company, for the purpose of developing Company-branded and white-label products and services. The Company has not yet launched any Kaival-branded products, nor has it begun to provide white label wholesale solutions for other product manufacturers. The Company may also utilize Kaival Labs to acquire or license complimentary businesses or assets. On May 30, 2023 , the Company and Kaival Labs entered into an Asset Purchase Agreement (the “GoFire APA”) with GoFire, Inc. (“GoFire”) to purchase certain vaporizer and inhalation-related intellectual property assets of GoFire in exchange for equity securities of the Company and contingent cash consideration. For a detailed description of this asset acquisition, please refer to “Note 8 – Subsequent Events” below .
On March 11, 2022, the Company formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary of the Company, for the purpose of entering into an international licensing agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”).
Current Product Offerings
Pursuant to the A&R Distribution Agreement with Bidi, 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.
F-6
COVID-19 Impact
In January 2020, the World Health Organization (the “WHO”) announced a global health emergency due to the emergence of a new strain of coronavirus (“COVID-19”) that originated in Wuhan, China. This novel strain of coronavirus posed risks to the international community as it 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.
During the Company’s fiscal year 2021 and the beginning of fiscal 2022, the Company was indirectly impacted by supply chain issues and regulatory oversight arising out of COVID-19. The Company believes that many retailers and distributers relaxed their ENDS 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 additional revenue. While the impact of COVID-19 decreased during the Company’s fiscal 2022 year and both the first and second quarters of its fiscal 2023 year, outbreaks of COVID-19 or its variants, either locally, nationally or globally, as well as related supply chain issues, could adversely impact the Company’s business.
Impact of the FDA PMTA Decision and Subsequent Court Actions
As of January 31, 2022, the FDA announced that it has acted on over 99% of applications and issued Marketing Denial Orders (“MDOs”) for more than 1,167,000 non-tobacco flavored ENDS products, while issuing zero marketing authorizations for such products.
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. As a result, beginning in September 2021, Bidi pursued multiple 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 supervisory review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick as a non-tobacco flavored ENDS product, and not strictly a menthol flavored product.
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (the “11th Circuit”) to review the FDA’s denial of the comprehensive 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 Bidi’s comprehensive applications, as required by the Tobacco Control Act (“TCA”), 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, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.
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. Considering 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, permitting the Company to continue sales. Subsequently, the FDA decided not to rescind the MDO and 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 11th Circuit. On February 1, 2022, the appellate court granted Bidi’s motion to stay (i.e., put on hold) the MDO, again allowing the Company to continue sales pending the litigation on the merits. Oral arguments in the merits-based proceeding were held on May 17, 2022.
On August 23, 2022, the U.S. Court of Appeals for the Eleventh Circuit set aside the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s back to the FDA for further review. Specifically, the Court held that the MDO was “arbitrary and capricious” in violation of the Administrative Procedure Act (“APA”) because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
F-7
The 11th Circuit’s opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the appropriate for the protection of the public health (“APPH”) standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about the company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.
The FDA did not appeal the 11th Circuit’s decision. The FDA had until October 7, 2022 (45 days from the August 23, 2022 decision) to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11th Circuit, not just the 3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court. In the meantime, the Company anticipates continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review.
Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review, and in September 2022 completed a remote regulatory assessment of Bidi and its contract manufacturer in China, SMISS Technology Co. LTD, in relation to the pending PMTA for the Classic BIDI® Stick.
Risks and Uncertainties Regarding FDA Regulation
The FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022, cutoff. Subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTAs, the Company views the risk of FDA enforcement against Bidi as low. The Company anticipates the FDA will move forward with a review of Bidi’s PMTA on remand, as directed by the Court; however, the Company cannot provide any assurances as to the timing or outcome.
Moreover, the Company believes that Bidi’s application is particularly comprehensive, and now includes, among other things, a randomized, crossover, clinical study to assess nicotine pharmacokinetics and subjective effects of the BIDI® Stick, several behavioral, perception and intention studies, as well as a nationally-representative population prevalence study. A complete scientific review of the PMTA would require the FDA to review all this information before making an APPH determination, and while the FDA could narrowly interpret the Court’s ruling as an order to review only Bidi’s marketing and sales-access restrictions plans, the 11th Circuit’s opinion, in the Company’s view, makes clear that all “relevant evidence” in an application must be considered. For applications that are in scientific review, the FDA typically issues a deficiency letter identifying its questions before making a marketing authorization decision and gives the applicant at least 90 days to respond. This further solidifies the Company’s belief that the scientific review of Bidi’s non-tobacco flavored applications could take 1-2 years or longer. However, the Company cannot provide any assurances as to the timing or outcome.
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 subsidiaries, Kaival Labs and KBI. Intercompany transactions are eliminated.
F-8
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 audited financial statements contained within the Company’s Annual Report on Form 10-K, filed with the SEC on January 30, 2023 (the “2022 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 fiscal 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 2022 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 Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash equivalents. There were
The Federal Deposit Insurance Corporation (“FDIC”)
insures deposits according to the ownership category in which the funds are insured and how the accounts are titled. The standard deposit
insurance coverage limit is $
Advertising and Promotion
All advertising, promotion and marketing expenses, including commissions, are expensed when incurred.
F-9
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 receivable. 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 April 30, 2023, and October 31, 2022, based upon management’s assessment
of the accounts receivable aging and the customers’ payment history, the Company has 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 first-in, first-out
(“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. As of April 30, 2023, and October 31, 2022, the inventories only
consisted of finished goods and were located in three locations: the Company’s main warehouse located in Florida and two customer
warehouses whose service agreements are on a consignment basis with the Company. Based upon fiscal year 2022 inventory management procedures,
as well as those inventory management procedures performed during the second fiscal quarter ended April 30, 2023, and their results for
both periods of time, the Company has determined that
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.
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 the time of shipment to the customer. As of April 30, 2023, and October 31,
2022, the Company has $
Customer Refunds
In the normal course of business, the Company issues
credits for product returns and certain customer incentives related to rebates, discounts and promotions. When such credits exceed amounts
receivable from customers, the Company recognizes such excess amounts as customer refunds which will be applied against future product
purchases. As of April 30, 2023, and October 31, 2022, the Company had customer refunds due in the amounts equal to $
F-10
Products Revenue
The Company generates products 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 determined that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. However, when the Company enters a consignment agreement with a new customer, once it ships and delivers the requested amount of ordered Products to its distribution center for its retail sales locations, the Company retains ownership of the delivered Products until they are delivered to the actual retail stores (as opposed to the Company’s consignment customer). The Company’s shipping and handling costs are fulfillment costs, and such amounts are classified as part of cost of sales. 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 receivable 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, as noted above.
Royalty Revenue
On June 13, 2022, KBI entered into a Deed of Licensing Agreement (the “PMI License Agreement”), by and between KBI and PMPSA, effective as of May 13, 2022 (the “PMI Commencement Date”). Pursuant to the PMI License Agreement, KBI granted PMPSA an exclusive irrevocable license to use its technology, documentation, and intellectual property to make, distribute, and sell disposable nicotine e-cigarette Products based on the intellectual property in certain international markets set forth in the PMI License Agreement (the “PMI Markets”). The Company has the exclusive international distribution rights to the Products and, in order to allow KBI to fulfill its obligations set forth in the PMI License Agreement, has contributed the international distribution rights for the PMI Markets to KBI as set forth in a Capital Contribution Agreement, dated June 10, 2022. The sublicense granted to PMPSA is exclusive in the PMI Markets and neither KBI nor any of its affiliates can sell, promote, use, or distribute any competing products in the PMI Markets for the duration of the term of the PMI License Agreement and any Sell-Out Period (as defined in the PMI License Agreement). PMSPA will be responsible for any regulatory filings necessary to sell the Products in the PMI Markets. Both KBI and PMPSA agree to work together in the registration and maintenance of the Intellectual Property, but KBI will bear all cost and expense to implement the registration strategy. Finally, PMPSA has agreed to potential future development services with KBI in the PMI Markets and has been granted certain rights with respect to potential future products.
The initial term of the PMI License Agreement is five (5) years and automatically renews for an additional five-year period unless PMPSA has failed to meet the agreed upon minimum key performance indicators set forth in the PMI License Agreement, in which case the PMI License Agreement will automatically terminate at the end of the initial license term.
In consideration for the grant of the licensed rights, PMPSA agreed to pay to KBI a royalty equal to a percentage of the base price of the first sale of each unit of Product manufactured. In addition, before the launch of the first product in a market and each anniversary of such launch, PMPSA agrees to pre-pay to KBI a guaranteed minimum royalty based on the estimated royalties payable by PMPSA to KBI in relation to all markets in the twelve (12)-month period following the first launch or each successive anniversary of the first launch, subject to an aggregate maximum guaranteed royalty payment for all markets for each applicable twelve (12)-month period. PMPSA may require modification of certain products to be sold under the PMI Licensing Agreement to be modified for a PMI Market. Pursuant to the PMI Licensing Agreement, PMPSA has absolute discretion over sales, marketing, product branding and packaging pertaining to sales in the PMI Markets, as well as the right to select the specific PMI Markets in which to launch commercialization and determine what product types are to be promoted in each market, subject to sales and marketing plans and annual business plans set by PMPSA and certain expansion criteria agreed between PMPSA and KBI. Royalty revenue earned from the PMI License Agreement is recognized in the period the sales of the Product manufactured occurs.
F-11
The PMI License Agreement contains customary representations,
warranties, covenants, and indemnification provisions; however, KBI’s liability under the PMI License Agreement is capped at the
greater of: (i) Ten Million Dollars ($
On June 10, 2022, Bidi entered into a License Agreement (the “KBI License Agreement”) with KBI, pursuant to which KBI has the exclusive irrevocable license to use Bidi’s licensed intellectual property to the extent necessary for KBI to fulfill its obligations set forth in the PMI Licensing Agreement. Such irrevocable license includes: (i) the right of KBI to grant sub-licenses to PMPSA under the PMI License Agreement for the express purposes set forth in the PMI License Agreement, but for no other purpose; (ii) the right of KBI to grant to PMPSA the right to grant sub-sub-licenses in the manner set forth in the PMI License Agreement, but for no other purpose; and (iii) certain branding rights to the extent (but only to the extent) necessary to permit KBI to perform its obligations to PMPSA as set forth in the PMI License Agreement.
The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. While PMPSA announced the launch of a product (called VEEBA) under the PMI License Agreement in March 2023, the Company has determined that no license fees are owed to Bidi as of April 30, 2023.
Concentration of Revenues and Accounts Receivable
For the six months ended April 30, 2023, (i) 21% or
$
For the six months ended April 30, 2022, 40%, or $
H.T.
Hackney Co, with an outstanding balance of $
F-12
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, referred to herein as “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 performance 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 based on certain assumptions which include the expected term, expected volatility and discount rate.
The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility is based on the volatility in the trading of the Common Stock over the expected term of the award. The assumed discount rate is the default risk-free ten-year interest rate for U.S. Treasury bills.
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 April 30, 2023. 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, accounts receivable, inventory, accounts payable and accrued expenses. As of April 30, 2023, and October 31, 2022, the Company did not have any financial assets or liabilities measured and recorded at fair value on a recurring basis.
F-13
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. However, In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. This is not effective for the Company until November 1, 2023.
Note 3 – Going Concern
The Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flow from operations, which raises substantial doubt about the Company’s ability to continue as a going concern.
In response to the above, the Company assessed its
management’s plans to alleviate that doubt. The Company has positive working capital as of April 30, 2023, of $
The Company believes that its available cash and the cash to be provided by future operating activities should enable the Company to meet its estimated liquidity needs for the next 12 months after the date that the accompanying financial statements are issued. The Company believes that the above factors alleviate the substantial doubt regarding the Company’s ability to continue as a going concern.
However, there is no assurance that the Company’s plans will be able to generate expected or greater amounts of revenues or ever achieve profitability, due to the current economic climate in the United States and globally, the regulation and public perception of ENDS products and the various other risks faced by the Company. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these or other risks or uncertainties.
Note 4 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize right-of-use (“ROU”) 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 does not have financing leases and only one operating lease for office space and inventory storage space with Just Pick, LLC (“Just Pick”), a related party owned and controlled by Nirajkumar Patel, the Chief Science and Regulatory Officer and a director of the Company, as of April 30, 2023, and October 31, 2022. Certain of the Company’s leases, have and may in the future, include renewal options, which have been and might be in the future, included in the calculation of the lease liabilities and right of use assets when the Company is reasonably certain to exercise the option.
F-14
Office and Storage Space
On November 1, 2021,
On November 11, 2021,
On June 10, 2022, the Company entered into a Lease
Agreement (the “2022 Lease”) with Just Pick for approximately 21,332 rentable square feet combined in the office building
and warehouse located at 4460 Old Dixie Highway, Grant-Valkaria, Florida 32949 (the “Premises”), together with all improvements
thereon. The Company must pay Just Pick base rent equal to $
Cash flow information related to leases was as follows:
| Schedule of cash flow information related to leases | ||||||||
| April 30, 2023 | April 30, 2022 | |||||||
| Other Lease Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | ( | ) | $ | ( | ) | ||
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets as of April 30, 2023, and October 31, 2022:
| Schedule Of Condensed Balance Sheet | ||||||||
| Lease Position | April 30, 2023 | October 31, 2022 | ||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Right of use liability operating lease current portion | $ | $ | ||||||
| Right of use liability operating lease long term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
The following table provides the maturities of lease liabilities at April 30, 2023:
| Schedule of Lessee Operating Lease Liability Maturity | |||||
| Operating Leases | |||||
| Maturity of Lease Liabilities on April 30, 2023 | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 and thereafter | |||||
| Total future undiscounted lease payments | $ | ||||
| Less: Interest | ( | ) | |||
| Present value of lease liabilities | $ | ||||
F-15
At April 30, 2023, the Company had no additional leases which had not yet commenced.
Note 5 – Stockholders’ Equity
Common Stock
shares of Common Stock were issued during the three and six months ended April 30, 2023.
Preferred Stock Converted
The authorized preferred stock of the Company consists
of shares with a par value of $ 0.001 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,
Stock Options
Summary of stock options information is as follows:
| Schedule of stock options | ||||||||||||||||
| Weighted | ||||||||||||||||
| Aggregate | Aggregate | Exercise Price | Average | |||||||||||||
| Number | Exercise Price | Range | Exercise Price | |||||||||||||
| Outstanding, October 31, 2022 | - | |||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled, forfeited, or expired | ( | ) | ( | ) | ||||||||||||
| Outstanding, April 30, 2023 | $ | $ | - | $ | ||||||||||||
| Exercisable, April 30, 2023 | $ | $ | - | $ | ||||||||||||
During the three months ended April 30, 2023, and
2022, the Company recognized $
On November 9, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one supplier of the Company. These stock options have a ten-year term from the
grant date, with the shares fully vested on the issue date. The fair value of the options on the grant date was $
F-16
On November 9, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one supplier of the Company. These stock options have a ten-year term from
the grant date, with the shares fully vesting based on the achievement of certain net revenue and profit margin targets up to $
On February 6, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to five employees of the Company. These stock options have a ten-year term from
the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $
On February 6, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to two senior executives of the Company. These stock options have a ten-year term
from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $
On February 6, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to three independent board members of the Company. These stock options have a ten-year
term from the grant date, with the shares fully vesting on February 6, 2024. The fair value of the options on the grant date was $
On February 6, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one consultant acting as a sales broker for the Company. These stock options
have a ten-year term from the grant date, with the shares fully vesting based on the achievement of certain net revenue targets up to
$
On March 3, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to one interim senior executive of the Company. These stock options have a ten-year
term from the grant date, with the shares fully vesting on June 30, 2023. The fair value of the options on the grant date was $
On March 19, 2023, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to two independent board members of the Company. These stock options have a ten-year
term from the grant date, with the shares fully vesting on March 19, 2024. The fair value of the options on the grant date was $
Warrants
Warrant information as of the periods indicated is as follows:
| Schedule of warrant information | ||||||||||||||||
| Weighted | ||||||||||||||||
| Aggregate | Aggregate | Exercise Price | Average | |||||||||||||
| Number | Exercise Price | Range | Exercise Price | |||||||||||||
| Outstanding, October 31, 2022 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled, forfeited, or expired | ||||||||||||||||
| Outstanding, April 30, 2023 | $ | $ | $ | |||||||||||||
| Exercisable, April 30, 2023 | $ | $ | $ | |||||||||||||
The weighted average remaining contractual life is approximately years for Common Stock warrants outstanding as of April 30, 2023. As of April 30, 2023, there was no intrinsic value of outstanding stock warrants.
F-17
Note 6 – Related-Party Transactions
In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain ENDS and related components (the “Products”) manufactured by Bidi, a related party company that is also owned by Nirajkumar Patel, the Chief Science and Regulatory Officer and a director of the Company. Mr. Patel also controls Kaival Holdings, the Company’s majority stockholder.
Other Receivable
On August 1, 2022, the Company and Bidi agreed to
a price credit for short-coded or expiring inventory against the related-party accounts payable balance due to Bidi. A credit of $
As of April 30, 2023 and October 31, 2022, the Company
has a related-party receivable balance due from Bidi of $
Revenue and Accounts Receivable
During the six months ended April 30, 2023, the Company
recognized revenue of $
During the six months ended April 30, 2022, the Company
recognized revenue of approximately $
Concentration Purchases and Accounts Payable
During the six months ended April 30, 2023, 100% of
the inventories of Products, consisting solely of the BIDI® Stick, were purchased from Bidi, a related party controlled by Nirajkumar
Patel, in the amount of $
During the six months ended April 30, 2022, the Company
did not purchase Products from Bidi, a related party. Sales of Products during the first six months of fiscal year 2022 were drawn from
the inventory purchase made on September 6, 2021. As of April 30, 2022, the Company had accounts payable to Bidi of approximately $
The KBI License Agreement provides that KBI shall pay Bidi license fees equivalent to 50% of the adjusted earned royalty payments, after any offsets due to jointly agreed costs such development costs incurred for entry to specific international markets. Consequently, the Company has determined that no license fees are owed to Bidi as of April 30, 2023 and October 31, 2022.
Leased Office Space and Storage Space
The Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize right-of-use (“ROU”) 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. On June 10, 2022, the Company entered into the 2022 Lease with Just Pick for approximately 21,332 rentable square feet combined in the office building and warehouse located at the Premises, together with all improvements thereon. Just Pick is considered a related party to the Company because the Company’s Chief Science and Regulatory Officer and director, Mr. Nirajkumar Patel, owns and controls Just Pick.
F-18
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 April 30, 2023, and October 31, 2022, other than the below:
QuikfillRx Service Agreement Amendment
Effective as of November 9, 2022, the Company entered into its latest amendment to the Service Agreement with QuikfillRx (collectively with prior amendments, the “Amended Service Agreement”). The November 9, 2022 amendment to the Service Agreement was captioned as the “Fourth Amendment” although it was the fifth amendment to the Service Agreement. Pursuant to the Amended Service Agreement:
(a) the term of the Amended Service Agreement was extended (unless earlier terminated pursuant to the terms of the Amended Service Agreement) from November 1, 2022 (the “Effective Date”) until October 31, 2025, following which the term shall automatically renew for successive one (1) year periods beginning November 1, 2025;
(b) QuikfillRx agreed to change its “doing business as” name to “Kaival Marketing Services” within thirty (30) days following the Effective Date;
(c) It was provided that either party may terminate the Amended Service Agreement without cause upon not less than ninety (90) days prior written notice to the other party;
(d) QuikfillRx was granted a one-time, fully vested, ten-year non-qualified option award to purchase up to 250,000 shares of Company common stock with an exercise price of $0.9869 per share (the closing price of the Company’s common stock on November 9, 2022)”)., which option grant was memorialized pursuant to a Nonqualified Option Agreement, dated November 9, 2022, between the Company and QuikfillRx; and
(e) the parties agreed to revise the compensation
for services as follows:
The Company accrued $
Effective February 6, 2023, the Company
and Futura, LLC (“Broker”) entered into an agreement for the sale of the Company’s BIDI vapor sticks to certain
retail customers. The term of the agreement is one year, which shall automatically renew for successive terms of one year each,
if only the minimum net sales required for each covered retail customer, as set forth in the sales broker agreement, is met. As
compensation, the Company shall pay to the broker a
F-19
Note 8 – Subsequent Events
On May 30, 2023 (the “Closing Date”), the Company and Kaival Labs entered into the GoFire APA with GoFire. Pursuant to the terms of the GoFire APA, the Company and Kaival Labs purchased certain intellectual property assets of GoFire consisting of various patents, patent applications and trademarks (the “Purchased Assets”) in exchange for equity securities of the Company and certain contingent cash consideration . The Purchased Assets consist of 12 existing patents and 46 pending patents with novel technologies related to vaporization and inhalation technologies . The patents and patent applications cover the U.S. and several international territories. The Purchased Assets also include four registered and two pending trademarks. The Company has determined that the acquisition of the Purchased Assets does not constitute the acquisition of a “business” (as defined in Rule 11-01(d) of Regulation S-X).
Pursuant to the terms of the GoFire
APA, the Company paid to GoFire, in addition to certain contingent cash consideration described below, consideration in the form of equity
securities of the Company consisting of (i) an aggregate of shares of Common Stock (the “APA Shares”); (ii)
shares of newly-designated Series B Convertible Preferred Stock, par value $ per share, (the “Series B Preferred Stock”
and the shares of Common Stock underlying the Series B Preferred, the “Series B Conversion Shares”), the rights, preferences
and terms of which are set forth in a Certificate of Designation of Rights and Preferences of the Series B Preferred Stock (the
“Certificate of Designation”), and (iii) a common stock purchase warrant to purchase
Pursuant to the GoFire APA, the Company is required to use commercially reasonable efforts to register the APA Shares and Warrant Shares with the SEC for distribution to GoFire’s stockholders and/or public resale by such stockholders within 180 days of the Closing Date. In addition, if any Series B Preferred Stock remains outstanding nineteen (19) months after the Closing Date, the Company shall use commercially reasonable efforts to file with the SEC a subsequent registration statement registering the distribution to GoFire’s stockholders and/or public resale Series B Conversion Shares by such stockholders. If such subsequent registration statement is required, the Company will use its commercially reasonable efforts to obtain effectiveness of such subsequent registration statement within nineteen (19) months of the Closing Date, and if the Company does not so register the Series B Conversion Shares within nineteen (19) months of the Closing Date, the Company will issue to GoFire or its designee an additional ten percent (10%) of all of the Series B Conversion Shares underlying the then-outstanding shares of Series B Preferred Stock.
All of the securities issued as consideration for the Purchased Assets are subject to a lock-up agreement that terminates one hundred eighty (180) days from the Closing Date; provided, however, that it is anticipated that the Company’s securities issued in consideration of the purchase of the Purchased Assets will be assigned by GoFire to a trust for the benefit of GoFire’s stockholders. It is anticipated that the agreement governing such trust would require the trust to hold the Company’s securities subject to such lock-up agreement.
Terms of the Series B Convertible Preferred Stock
The Series B Convertible
Preferred Stock carries no voting rights except: (i)
with respect to the ability of the holders of a majority of the then outstanding Series B Preferred Stock (the “Majority
Holders”), to nominate a director to the Company’s board of directors, and (ii) that the vote of the Majority Holders is
necessary for effecting any amendment to the Company’s Certificate of Incorporation or Certificate of Designation that affects
the Series B Preferred Stock. The Series B Convertible Preferred Stock
is redeemable at the option of the Company at a
redemption price of $per
share, subject to potential downward adjustments based on the trading price of the Common Stock. Subject to additional limitations
in the GoFire APA, the Series B Convertible Preferred Stock holds seniority over the Common Stock and each other class of series of
securities now existing or hereafter authorized with respect to dividend rights, the distribution of assets upon liquidation, and
dissolution and redemption rights . Upon a liquidation and
winding up of the Company, the holders of Series B Convertible Preferred Stock are entitled to a liquidation preference of $
The Majority Holders have the
ability to cause a voluntary conversion of the Series B Convertible Preferred Stock into Common Stock at a conversion rate of
Terms of the Warrant
The Warrant is exercisable for
an aggregate of
F-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This 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 six months ended April 30, 2023 included under Item 1 – Financial Statements in this Report and our audited financial statements and notes thereto for the year ended October 31, 2022 contained in the 2022 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 Report regarding forward-looking statements.
Capitalized terms used but not defined in this discussion have the meanings ascribed to them in the notes to the accompanying unaudited financial statements.
Overview
We are focused on growing and incubating innovative and profitable products into mature, dominant brands, with a current focus on the distribution of electronic nicotine delivery systems (“ENDS”), also known as “e-cigarettes.” Our business plan is to seek to diversify into distributing other nicotine and non-nicotine delivery system products (including those related to hemp-derived cannabidiol (known as CBD) products.
Pursuant to the A&R Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute Bidi’s ENDS as well as non-electronic nicotine delivery systems and related components (as more particularly set forth in the A&R Distribution Agreement, the “Products”) for sale and resale to both retail level customers and non-retail level customers. Currently, the Products consist solely of the “BIDI® Stick”, Bidi’s disposable, tamper resistant ENDS product made with medical-grade components, a UL-certified battery and technology designed to deliver a consistent vaping experience for adult smokers 21 and over. We presently distribute Products to wholesalers and retailers of ENDS products, having ceased all direct-to-consumer sales in February 2021. Nirajkumar Patel, our Chief Science and Regulatory Officer and director and an indirect controlling stockholder of our company, owns Bidi.
BIDI® Stick comes in a variety of flavor options for adult cigarette smokers. We do not manufacture any of the Products we resell. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides us with all branding, logos, and marketing materials to use with our commercial partners use in connection with our marketing and promotion of the Products.
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 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. We set 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.
A key third party collaborator of ours is QuikfillRx, LLC, (“QuikfillRx”) a Florida limited liability company which recently began doing business as “Kaival Marketing Services” to better reflect its contributions to our company. QuikfillRx provides us 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. QuikfillRx provides these services to us pursuant to a Services Agreement, most recently amended on November 9, 2022, which has a current term ending on October 31, 2025 (subject to potential one-year extensions) and pursuant to which QuikfillRx receives monthly cash compensation and was granted certain equity compensation in the form of options.
We have also entered into key international licensing agreements with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”).
On August 31, 2020, we formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary for the purpose of developing our own branded and white-label products and services, of which none has commenced as of the date of this Report. On March 11, 2022, we formed Kaival Brands International, LLC, a Delaware limited liability company (herein referred to as “KBI”), as a wholly owned subsidiary for the purpose of entering into an international licensing agreement with PMPSA.
1
GoFire Asset Acquisition
On May 30, 2023, we and Kaival Labs entered into the GoFire APA with GoFire. Pursuant to the terms of the GoFire APA, we purchased certain intellectual property assets of GoFire consisting of various patents and patent applications (the “Purchased Assets”) in exchange for equity securities of our company and certain contingent cash consideration . The Purchased Assets will be housed in Kaival Labs and consist of 12 existing and 46 pending patents with novel technologies related to vaporization and inhalation technologies. The patents and patent applications cover the U.S. and several international territories. The Purchased Assets also include four registered and two pending trademarks. The goal of this acquisition is to diversify our product offerings and create near and longer term revenue opportunities in the form of potential licenses of the acquired technology and our development of new products based on the Purchased Assets. In the near term, we expect to seek third-party licensing opportunities in the cannabis, hemp/CBD, nicotine and nutraceutical markets. Longer term, we believe we can utilize the Purchased Assets to create innovative and market-disruptive products, including patent protected vaporizer devices and related hardware and software applications. No assurances can be given, however, that the Purchased Assets will generate revenue for us in the future or otherwise create the value for our company that we anticipate.
FDA PMTA Determinations, 11th Circuit Decision and Impact on Our Business
In September 2021, in connection with the Bidi’s Premarket Tobacco Product Application (“PMTA”) process for BIDI® Stick, the U.S. Food and Drug Administration’s (the “FDA”) effectively “banned” non-tobacco flavored ENDS by denying nearly all then-pending PMTAs for such products (including Bidi’s). Following the issuance of by the FDA of a related Marketing Denial Order (“MDO”) regarding these ENDS products, manufacturers were required to stop selling non-tobacco flavored ENDS products. 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. As a result, beginning in September 2021, Bidi pursued multiple 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 supervisory review request specifically of the decision to include the Arctic (menthol) BIDI® Stick in the MDO. In May 2022, the FDA issued a determination that it views the Arctic BIDI® Stick as a non-tobacco flavored ENDS product, and not strictly a menthol flavored product.
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit (the “11th Circuit”) to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS (including the Arctic BIDI® Stick), 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 Bidi’s comprehensive applications, as required by the Tobacco Control Act (“TCA”), 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 non-tobacco flavored products compared to tobacco-flavored ENDS products, and that the FDA should have gone through the notice and comment rulemaking process for this requirement.
On August 23, 2022, the 11th Circuit set aside (i.e., vacated) the MDO issued to the non-tobacco flavored BIDI® Sticks and remanded Bidi’s PMTA back to the FDA for further review. Specifically, the 11th Circuit held that the MDO was “arbitrary and capricious” in violation of the APA because the FDA failed to consider the relevant evidence before it, specifically Bidi’s aggressive and comprehensive marketing and sales-access-restrictions plans designed to prevent youth appeal and access.
The 11th Circuit’s opinion further indicated that the FDA did not properly review the data and evidence that it has long made clear are critical to the appropriate for the protection of the public health (“APPH”) standard for PMTAs set forth in the Tobacco Control Act including, in Bidi’s case, “product information, scientific safety testing, literature reviews, consumer insight surveys, and details about the company’s youth access prevention measures, distribution channels, and adult-focused marketing practices,” which “target only existing adult vapor product users, including current adult smokers,” as well as our retailer monitoring program and state-of-the-art anti-counterfeit authentication system. Because a MDO must be based on a consideration of the relevant factors, such as the marketing and sales-access-restrictions plans, the denial order was deemed arbitrary and capricious, and vacated by the FDA.
The FDA did not appeal to the 11th Circuit’s decision. The FDA had until October 7, 2022 (45 days from the August 23, 2022 decision) to either request a panel rehearing or a rehearing “en banc” (a review by the entire 11th Circuit, not just the 3-judge panel that issued the decision), and until November 21, 2022 (90 days after the decision) to seek review of the decision by the U.S. Supreme Court. No request for a rehearing was filed, and no petition for a writ of certiorari was made to the Supreme Court.
In light of the 11th Circuit decision, we anticipate having the continued ability to market and sell the non-tobacco flavored BIDI® Sticks, subject to the FDA’s enforcement discretion, for the duration of the PMTA scientific review. The FDA has indicated that it is prioritizing enforcement of unauthorized ENDS against companies (1) that never submitted PMTAs, (2) whose PMTAs have been refused acceptance or filing by the FDA, (3) whose PMTAs remain subject to MDOs, and (4) that are continuing to market unauthorized synthetic nicotine products after the July 13, 2022 cutoff. As none of these scenarios apply to Bidi, we believe the current risk of FDA enforcement is low.
Since the PMTA was remanded, Bidi has continued to update its application with the results of new studies, including a nationwide population prevalence study on the BIDI® Stick that is currently undergoing peer review for publication.
Separately, on or about May 13, 2022, the FDA placed the tobacco-flavored Classic BIDI® Stick into the final Phase III scientific review, and in September 2022 completed a remote regulatory assessment of Bidi and its contract manufacturer in China, SMISS Technology Co. LTD, in relation to the pending PMTA for the Classic BIDI® Stick.
2
Material Items, Trends and Risks Impacting Our Business
We believe that the following items and trends may be useful in better understanding our results of operations.
Dependence on Bidi and Nirajkumar Patel
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 impact us and our ability to operate our business. Moreover, and while we are seeking to diversify our product offerings, the loss of our relationship with Bidi would substantially harm the viability of our business, which constitutes an on-going risk factor to our business.
Bidi is controlled by Nirajkumar Patel, our Chief Science and Regulatory Officer and a director of the Company. Moreover, Kaival Holdings, an entity controlled by Mr. Patel, is our majority stockholder. In addition, our corporate headquarters is leased to us by an affiliate of Mr. Patel. Therefore, Mr. Patel has the power and ability to control or influence our business.
Dependence on QuikfillRx, LLC and Distributors
We are substantially dependent on QuikfillRx, LLC (d/b/a Kaival Marketing Services, or KMS) to provide key marketing, sales and other support services to us. In addition, we rely on third-party brokers and distributors to introduce and place our products into our historic foundation of convenience-stores and more recently into new retail channels, including dollar, grocery and mass-merchandisers. The loss of one or more of these key relationships would have a material adverse effect on our business.
Ability to Develop and Monetize the GoFire Intellectual Property
We purchased certain vaporizer and inhalation-related technology from GoFire in May 2023 with the goal of diversifying our business and lessening our dependence on BIDI Vapor. We do not expect that the acquired assets will generate immediate revenue for us, and while we believe this to be a transformative acquisition for us and we are already seeking to develop and monetize the acquired assets, we can give no assurances at this time that either (i) the patent applications we acquired will eventuate in issued patents or (ii) we will be able to enter into successful monetizing arrangements with respect to these assets.
Nature of our Products and Regulation
Competition in the market for e-cigarettes from illicit sources may have an adverse effect on our overall sales volume, restricting our ability to increase selling prices and damaging our brand equity and reputation. Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products, and locally manufactured products on which applicable taxes or regulatory requirements are evaded, represent a significant and growing threat to the legitimate tobacco industry, including the products we sell.
Although we combat counterfeiting of our Products by engaging in certain tactics, such as requiring all sales force personnel to randomly collect our Products from retailers in order to be tested by our quality control team, maintaining a quality control group that is responsible for identifying counterfeit products and surveillance of retailers we suspect are selling counterfeit Products through our own secret shopper force, no assurance can be given that we will be able to detect or stop sales of all counterfeit products. In addition, while we may bring suits against retailers and distributors that sell certain counterfeit products, no assurance can be given that we will be successful in any such suits or that such suits will be successful in stopping other retailers or distributors from selling counterfeit products.
Our Products (included in this context any products that we may develop from the GoFire Purchased Assets) are and will be heavily regulated by the FDA, which has broad regulatory powers. The market for ENDS products is subject to a great deal of uncertainty and is still evolving. ENDS products, having recently been introduced to market over the past 10 to 15 years, are at a relatively early stage of development, and represent core components of a market that is evolving rapidly, highly regulated, and characterized by a number of market participants. Rapid growth in the use of, and interest in, ENDS products is recent, and may not continue on a lasting basis. With respect to the GoFire Purchase Assets, the underlying technology touches on hemp/cannabis, nutraceutical and healthcare applications in addition to nicotine, all of which are heavily regulated by the FDA and other federal and state agencies. The demand and market acceptance for all of these products is subject to a high level of uncertainty. Therefore, we are subject to all the business risks associated with a new enterprise in an evolving market.
Some of our Product offerings through Bidi are subject to developing and unpredictable regulation. Our Products are sold through our distribution network and may be subject to uncertain and evolving federal, state, and local regulations, including hemp, non-THC cannabidiol (CBD) and other non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. With respect to CBD in particular, on January 26, 2023, the FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed and has further indicated that it is prepared to work with Congress to create a new regulatory pathway for CBD through legislation.
3
In addition to the de facto FDA flavor ban that has resulted from the denial of nearly all PMTAs for flavored ENDS, ENDS products that are non-tobacco flavored continue to face the threat of prohibition at the local level, as many state and local authorities and attorneys general push for bans or request the FDA to deny PMTAs for flavored ENDS. In addition, a number of states and localities have banned the sale of non-tobacco flavored tobacco products. Recently, for example, California passed Proposition 31, which prohibits the sale of non-tobacco flavored tobacco products, including e-cigarettes, in retail locations. Thus, the non-tobacco flavored BIDI® Sticks are not permitted to be sold in California retail locations. We anticipate more states and localities will take this approach. Several other states have banned flavored ENDS, including New York, New Jersey, Rhode Island, and Massachusetts, with several more considering similar bans (e.g., Maryland, and Connecticut).
Ability to Meet Demand for our Products
We believe that the matters described under “FDA PMTA Determinations, 11th Circuit Decision and Impact on Our Business” have increased demand for our Products and has opened new distribution channels for us through which we can sell our Products. However, a sharp increase in demand for the Products will require us to use cash and/or obtain financing in order to purchase Products from Bidi for resale in the marketplace. As a result, we are faced with the risk that such cash or financing will not be available in sufficient amounts or on terms acceptable to us (or at all) to meet the market demand for the Products. Our inability to fulfill this demand will damage our reputation and could materially impact our ability to increase sales of the Products which, in turn, would adversely impact our results of operations.
Inflation
Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. The U.S. has been experiencing an environment of material inflation in recent quarters, and this condition may impact discretionary consumer purchases, such as the BIDI® Stick. Demand for our Products may also decline during recessionary periods or at other times when disposable income is lower, and taxes may be higher.
Supply Chain
The spread of COVID-19 throughout the world as well as increasing tensions with China over the past several years and Russia’s February 2022 invasion of Ukraine has created global economic uncertainty, which may cause partners, suppliers, and potential customers to closely monitor their costs and reduce activities. Any of the foregoing could materially adversely affect the supply chain for Bidi and our Products, and any supply chain distribution for the Products could have a materially adverse effect on our results of operations.
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, pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted common stock, representing approximately 88.06% of our then issued and outstanding shares of common stock, to Kaival Holdings, and Kaival Holdings 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 Kaival Holdings becoming our majority stockholder. Nirajkumar Patel and Eric Mosser members of Kaival Holdings, and Mr. Patel controls Kaival Holdings.
4
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.
Other Potential Product Offerings
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 an 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 (which never came to market) intended to utilize a tobacco-free (synthetic) nicotine formulation, along with natural fibers and a chew-base filler in six different flavors. However, production of the BIDI® Pouch was placed on hold domestically due to concerns about the safety of synthetic nicotine and the likelihood of the FDA enforcement of synthetic nicotine products either as unapproved drugs or unauthorized tobacco products. Subsequently, the Consolidated Appropriations Act of 2022, signed by President Biden on March 15, 2022, amended the definition of a “tobacco product” in the Food, Drug and Cosmetic Act and gave the FDA authority to regulate products containing nicotine from any source, including synthetic nicotine. The legislation also gave manufacturers of synthetic nicotine products 60 days to prepare and submit PMTAs by May 14, 2022. Synthetic nicotine products subject to timely submitted PMTAs were allowed to remain on the market without the threat of enforcement for another 60 days, until July 13, 2022. After July 13, 2022, all synthetic nicotine products, regardless of PMTA status, are illegal and subject to FDA enforcement (unless the product has been authorized and is subject to a PMTA Marketing Grant Order).
Also, on July 14, 2021, we announced plans to launch its first Kaival-branded product, a hemp CBD vaping product. In addition to our branded formulation, we anticipate that we will also provide white label, wholesale solutions for other product manufacturers through its subsidiary, Kaival Labs. We have not yet launched any branded product, nor has have begun to provide white label wholesale solutions for other product manufacturers, but the diversification of the types of products we distribute is an important part of our growth strategy.
Assuming we launch a hemp CBD product, of which there can be no assurances, we intend that all CBD products will be produced and distributed strictly in compliance under the Agriculture Improvement Act of 2018 (known as the 2018 Farm Bill), which defines hemp as the plant cannabis sativa and any part of the plant with a delta-9 THC concentration of not more than 0.3 percent by dry weight. According to the 2018 Farm Bill, hemp-derived products can be offered for retail sale in many forms: smoke, pouch, tinctures, topicals, capsules, vape oil and gummies/edibles. We plan to utilize Bidi’s patented BIDI® Stick delivery mechanism in order to provide a similar, premium experience in the initial CBD product line. We expect our industrial-grade hemp CBD formula to provide greater bioavailability than many market peers, resulting in a better consumer experience in less usage. On January 26, 2023, the FDA announced that it would not initiate rulemaking to regulate CBD as a dietary food ingredient. Rather, after careful review, the FDA has concluded that a new regulatory pathway for CBD is needed that balances individuals’ desire for access to CBD products with the regulatory oversight needed to manage risks. The FDA further indicated that it is prepared to work with Congress on this matter.
In addition, in May 2023 we acquired 12 existing and 46 pending patents with novel technologies related to vaporization and inhalation technologies from GoFire and related trademarks and trademark applications. As described above, we hope to generate revenue from this acquired intellectual property via licensing and product development activities . However, there can be no assurance that we will be able to implement this strategy.
PMI Licensing Agreement and International Distribution
On June 13, 2022, we, through our wholly owned subsidiary, KBI, entered into the PMI License Agreement with PMPSA, a wholly owned affiliate of PMI, for the development and distribution of ENDS products in certain markets outside of the United States, subject to market (or regulatory assessment). The PMI License Agreement grants to PMPSA a license of certain intellectual property rights relating to Bidi’s ENDS device, known as the BIDI® Stick in the United States, as well as potentially newly developed devices, to permit PMPSA to manufacture, promote, sell, and distribute such ENDS device and newly developed devices, in international markets, outside of the United States.
On July 25, 2022, we announced the launch of PMPSA’s custom-branded self-contained e-vapor product, pursuant to the licensing agreement. The product, a self-contained e-vapor device, VEEBA, has been custom developed and is now being distributed in Canada. VEEBA was then commercially launched by PMPSA in Europe in February 2023 and we expect to generate royalty revenues pursuant to the licensing agreement beginning in our fiscal fourth quarter of 2023 (quarter ending October 31, 2023), with additional market launches planned this year.
Going Concern
Our financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses, which raises substantial doubt about the Company’s ability to continue as a going concern.
In response to the above, our management assessed our plans to alleviate that doubt. We had positive working capital as of April 30, 2023, of $3,714,959. Management considered that the Company’s losses were due to various factors such as: (i) uncertainty surrounding the PMTA process with the FDA and (ii) the MDO that was issued to Bidi Vapor on its non-tobacco flavored ENDS products. However, the MDO was set aside and vacated by the 11th Circuit in August 2022, and the ability to appeal such decision has passed, thereby facilitating the continued sales of the non-tobacco flavored BIDI® Sticks for sale in the United States (pending the FDA’s review of the pending PMTAs and subject to FDA enforcement). Concurrently, the PMTA for the tobacco-flavored (Classic) BIDI® Sticks for sale in the United States continues to move through the PMTA scientific review phase (pending the FDA’s review of that PMTA). Management’s assessment included the preparation of cash flow forecasts which considered increases in revenues considering the favorable ruling obtained on the MDO as disclosed above.
5
We believe that our available cash and the cash to be provided by future operating activities (including anticipated sales of BIDI® Sticks and royalty revenue under the PMI License Agreement), should enable the Company to meet its estimated liquidity needs for the next 12 months after the date that the financial statements included within this Report are issued. We believe that the above factors alleviate the substantial doubt regarding our ability to continue as a going concern.
However, there is no assurance that the Company’s plans will be able to generate expected or greater amounts of revenues or ever achieve profitability, due to the current economic climate in the United States and globally, the regulation and public perception of ENDS products and the various other risks faced by the Company. The consolidated financial statements included in this Report do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these or other risks or uncertainties.
Liquidity and Capital Resources
We believe we have sufficient cash on hand as of the date of this Report to support our operations for at least 12 months. As of April 30, 2023, we had working capital of approximately $3.7 million and total cash of approximately $1.1 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, a lack of anticipated sales growth, increased costs and our potential plan to redeem for cash the shares of our Series B Preferred Stock issued in connection with our GoFire asset purchase in May 2023. Our efforts are directed toward generating positive cash flow and, ultimately, profitability. If these efforts are not successful, we will very likely 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, which has now been set aside and remanded by the 11th Circuit. At this time, we do foresee the likely need for further strategic financing for the next twelve months, given the financing we completed in September 2021 and our continual sales growth efforts and our operating cash results.
Cash Flows:
Cash flow used in operations was approximately $(2.6) million for the six months of fiscal year 2023, compared to $(4.6) million used in operations for the six months of fiscal year 2022. The decrease in cash flow used by operations for the six months of fiscal year 2023 compared to the six months of fiscal 2022 was primarily due to build up of planned inventory for anticipated sales, changes in related party accounts payable, and income tax receivable.
Cash flow used in investing activities of approximately $3,400 for the six months of fiscal year 2023, compared to no cash flow used in investing activities for the six months of fiscal year 2022. The cash used in investing activities for the six months of fiscal year 2023 consisted of cash used for the purchase of warehouse equipment.
The Company had no cash flow from financing activities for the six months of fiscal year 2023, compared to cash flow provided by financing activities of approximately $1.5 million for the six months of fiscal year 2022. The cash provided by financing activities for the six months of fiscal year of 2022 consisted of cash provided for the exercise of stock warrants.
6
Results of Operations
Three months ended April 30, 2023, compared to three months ended April 30, 2022
Revenues:
Revenues for the second quarter of fiscal year 2023 were approximately $3.0 million, compared to approximately $3.1 million in the same period of the prior fiscal year. Revenues were flat in the second quarter of 2023, primarily due to credits/discounts/rebates issued to customers. We do not anticipate this trend to continue as renewed distribution ramps up and sales of non-tobacco flavored BIDI® Sticks increase, and even more so now that the MDO has been vacated, which allows us to continue marketing and selling the Products, subject to the FDA’s enforcement discretion.
Cost of Revenue, Net and Gross Profit (Loss):
Gross (loss) profit in the second quarter of fiscal year 2023 was approximately ($0.1) million, or approximately (4.2%) of revenues, net, compared to approximately $0.4 million gross profit or approximately 12.7%, of revenues, net, for the second quarter of fiscal year 2022. Total cost of revenue, net was approximately $3.1 million, or approximately 104.2% of revenue, net for the second quarter of fiscal year 2023, compared to approximately $2.7 million, or approximately 87.3% of revenue, net for the second quarter of fiscal year 2022. The decrease in gross profit is primarily driven by the credits/discounts/rebates issued to customers, totaling approximately $1.4 million, during the second quarter of fiscal year 2023.
Operating Expenses:
Total operating expenses were approximately $3.8 million for the second quarter of fiscal year 2023, compared to approximately $5.4 million for the second quarter of fiscal year 2022. For the second quarter of fiscal year 2023, operating expenses consisted primarily of advertising and promotion fees of approximately $0.7 million, stock option expense of approximately $1.4 million, professional fees of approximately $0.8 million, and all other general and administrative expenses of approximately $1.0 million. General and administrative expenses in the second quarter of fiscal year 2023 consisted primarily of salaries and wages, stock option expense, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes. For the second quarter of fiscal year 2022, operating expenses were approximately $5.4 million, consisting primarily of advertising and promotion fees of approximately $0.8 million, stock option expense of 2.5 million, professional fees totaling approximately $0.2 million, and all other general and administrative expenses of approximately $1.9 million. General and administrative expenses consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees. We expect future operating expenses to increase while we increase the footprint of our business and generate increased sales growth.
Income Taxes:
During the three months ended April 30, 2023, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately ($4.0) million, similarly we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately ($5.0) million for the three months ended April 30, 2022.
Net Loss:
As a result of the items noted above, the net loss for the second quarter of fiscal year 2023 was approximately $4.0 million, or $0.07 basic and diluted net loss per share, compared to a net loss of approximately $5.0 million, or $0.16 basic and diluted net loss per share, for the second quarter of fiscal year 2022. The decrease in the net loss for the second quarter of fiscal year 2023, as compared to the second quarter of fiscal year 2022, is primarily attributable to the increase revenues and decrease in customer credits/discounts/rebates, as noted above.
Six months ended April 30, 2023, compared to six months ended April 30, 2022
Revenues:
Revenues for the six months of fiscal year 2023 were approximately $5.5 million, compared to $6.0 million in the same period of the prior fiscal year.
Revenues decreased in the six months of fiscal year 2023 compared to fiscal year 2022, generally do to credits/discounts/rebates issued to customers. We do not anticipate this trend to continue as renewed distribution ramps up and sales of non-tobacco flavored BIDI® Sticks increase, and even more so now that the MDO has been vacated, which allows us to continue marketing and selling the Products, subject to the FDA’s enforcement discretion.
Cost of Revenue and Gross Profit (Loss):
Gross profit in the six months of fiscal year 2023 was approximately $0.4 million, compared to gross loss of approximately ($0.3) million for the six months of fiscal year 2022. Total cost of revenue was approximately $5.1 million for the six months of fiscal year 2023, compared to $6.2 million for the six months of fiscal year 2022. Therefore, the increase in gross profit of approximately $0.7 million for the six-month periods of fiscal years 2023 and 2022 is primarily driven by the decrease in overall sales of approximately $0.4 million and the decrease in the cost of revenue, totaling approximately $1.1 million , resulting in an increase in gross profit of approximately $0.7 million during the six months ended April 30, 2023.
Operating Expenses:
Total operating expenses were approximately $7.4 million for the first six months of fiscal year 2023, compared to approximately $7.5 million for the first six months of fiscal year 2022. For the first six months of fiscal year 2023, operating expenses consisted of advertising and promotion fees of approximately $1.2 million, stock option expense of approximately $2.8 million, professional fees of approximately $1.4 million, and all other general and administrative expenses of approximately $2.0 million. General and administrative expenses in the second quarter of fiscal year 2023 consisted primarily of salaries and wages, stock option expense, insurance, lease expense, project expenses, banking fees, business fees and state and franchise taxes. For the first six months of fiscal year 2022, operating expenses were approximately $7.5 million, consisting primarily of advertising and promotion fees of approximately $1.4 million, stock option expense of $2.8 million, professional fees totaling approximately $1.4 million, and all other general and administrative expenses of approximately $1.9 million. General and administrative expenses consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees. We expect future operating expenses to increase while we increase the footprint of our business and generate increased sales growth.
7
Income Taxes:
During the six months ended April 30, 2023, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately ($7.0) million, similarly we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately ($7.8) million for the six months ended April 30, 2022.
Net Income (Loss):
Net loss for the first six months of fiscal year 2023 was approximately $7.0 million, or $0.12 basic and diluted earnings per share, compared to net loss for the first six months of fiscal year 2022, which was approximately $7.8 million, or $0.25 basic and diluted earnings per share. The decrease in the net loss for the first six months of fiscal year 2023, as compared to the first six months of fiscal year 2022, is primarily attributable to the decreased revenues and the decrease in cost of sales.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates during the six months ended April 30, 2023 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2022 Annual Report for the year ended October 31, 2022.
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.
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.
8
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our President and Chief Operating Officer and Interim Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of April 30, 2023, the end of the period covered by this Quarterly Report. Based on that evaluation, the President and Chief Operating Officer and Interim Chief Financial Officer concluded that because of material weaknesses in our internal control over financial reporting, our disclosure controls and procedures were not effective as of April 30, 2023. Some of those internal controls include multiple levels of review of the accounting and reporting procedures and processes, lack of proper segregation of duties, lack of sufficient and consistent real time remote communications, as well as certain accounting and reporting issues.
Remediation of Material Weaknesses
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that all material weaknesses are remediated as soon as possible. Management will continue to work to improve its disclosure controls and procedures during fiscal 2023 with the goal of improvement in the effectiveness of its systems in our internal controls during the next 12 months. We intend to hire additional staff and to take such other actions as may be necessary to address its material weaknesses. The Company did add additional financial and accounting personnel during its fiscal year ended October 31, 2022, and as such, we believe we have made progress in the implementation of certain internal controls, such as multiple levels of review and analysis of the accounting and reporting procedures and processes, and of journal entries and general ledger account reconciliations.
Changes in Internal Control over Financial Reporting
Due to the identification of certain material weaknesses, we continue to work on strengthening our internal control structure. We made no other changes in internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended April 30, 2023, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
9
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.
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, “Item 1A. Risk Factors” in the 2022 Annual Report, for the year ended October 31, 2022, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report and in our other filings with the SEC in connection with evaluating us, our business, and the forward-looking statements contained in this Quarterly Report. Other than as disclosed under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Report, during the six months ended April 30, 2023, there have been no material changes from the risk factors previously disclosed under Part I, “Item 1A. Risk Factors” in the 2022 Annual Report, for the year ended October 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
10
Item 6. Exhibits
The following exhibits are filed herewith as a part of this Quarterly Report.
| 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)* |
*filed herewith
+ Schedules omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to supplementally furnish to the staff of the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request.
11
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: June 14, 2023 | A | /s/ Eric Mosser |
| Eric Mosser | ||
| President and Chief Operating Officer | ||
| Date: June 14, 2023 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
12
Exhibit 3.1
KAIVAL BRANDS INNOVATIONS GROUP, INC.
CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
SERIES B CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation Law of the State of Delaware)
Kaival Brands Innovations Group, Inc. (the “Corporation”), a corporation organized and existing under the General Corporation Law of the State of Delaware (the “DGCL”), in accordance with the provisions of Section 151 thereof, DOES HEREBY CERTIFY THAT:
WHEREAS, in accordance with the provisions of Section 151 of the DGCL and pursuant to the authority under Article 7 of the Amended and Restated Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”), the Board of Directors of the Corporation is authorized to issue from time to time shares of the Corporation’s preferred stock, $.001 par value per share (“Preferred Stock”) in one or more series; and
WHEREAS, on May 22, 2023, the Board of Directors approved and adopted the following resolution adopting and approving this Certificate of Designation of Rights and Preferences (this “Certificate of Designation”) authorizing the creation and issuance of a series of said Preferred Stock designated as the “Series B Convertible Preferred Stock.”
NOW THEREFORE, BE IT RESOLVED, that, pursuant to the authority expressly vested in the Board of Directors and in accordance with the provisions of the Certificate of Incorporation and the DGCL, the designation and amount of the Series B Convertible Preferred Stock and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series and the qualifications, limitations or restrictions thereof are as follows:
Section 1. Number of Shares and Designation. This series of Preferred Stock shall be designated as Series B Convertible Preferred Stock, $.001 par value per share (the “Series B Preferred Stock”), and the number of shares that shall constitute such series shall be Nine Hundred Thousand (900,000).
Section 2. Definitions. For purposes of the Series B Preferred Stock and as used in this Certificate of Designation, and in addition to the other capitalized terms defined herein, the following terms shall have the meanings indicated below:
“Board of Directors” shall mean the board of directors of the Corporation.
“Bylaws” shall mean the bylaws of the Corporation, as they may be amended and/or restated from time to time.
“Change of Control” shall mean, after the Original Issue Date: (i) a sale, lease, license or transfer of all or substantially all of the assets of the Corporation and its consolidated subsidiaries taken as a whole; (ii) the acquisition of more than fifty percent (50%) of the voting power of the outstanding securities of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, reorganization, exchange, merger or consolidation) unless the Company’s stockholders of record as constituted immediately prior to such acquisition will, immediately after such acquisition (by virtue of their continuing to hold such stock and/or their receipt in exchange therefor of securities issued as consideration for the Corporation’s outstanding stock) hold at least fifty percent (50%) of the voting power of the surviving or acquiring entity; or (iii) any reorganization, merger, combination, exchange, or consolidation in which the Corporation is not the surviving entity, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation.
“Common Shares” or “Common Stock” shall mean the shares of common stock, $.001 par value per share, of the Corporation.
“Electronic Means” means electronic mail transmission, facsimile transmission or other similar electronic means of communication providing evidence of transmission.
“Holder” or “Holders” shall mean the holder or holders of any of the then outstanding shares of Series B Preferred Stock.
“Liquidation Preference” shall mean $15.00 per share of Series B Preferred Stock.
“Majority Holders” shall mean, at the applicable time, the Holders holding a majority of the then outstanding shares of Series B Preferred Stock.
“Original Issue Date” means the date of the first issuance of any shares of the Series B Preferred Stock regardless of the number of transfers of any particular shares of Series B Preferred Stock and regardless of the number of certificates which may be issued to evidence such Series B Preferred Stock.
“Person” shall mean any individual, firm, partnership, limited liability company, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity.
Section 3. Dividends.
(a) Dividend Rate on Series B Preferred Stock. The holders of the Series B Preferred Stock shall be entitled to receive, on each share of Series B Preferred Stock, an amount (such amount, the “Series B Dividend”) equal to two percent (2%) multiplied by the Liquidation Preference, and no more. Amounts payable in respect of the Series B Dividend shall begin to accrue on a daily basis, be cumulative from and including the Original Issue Date, whether or not the Corporation has funds legally available for such dividends or such dividends are declared, shall compound on each six (6) month anniversary of the Original Issue Date (a “Compounding Date”) (i.e., no dividends shall accrue on other dividends unless and until the Compounding Date has passed) ,and shall be payable in arrears on the eighteen (18) month anniversary of the Original Issue Date (the “Dividend Date”). The Series B Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months.
(b) Payment of Dividends. The Series B Dividend shall be paid on any non-redeemed shares of Series B Preferred Stock in one lump sum in cash to Holders of record, on a pro rata basis, on the Dividend Date. If the Series B Preferred Stock are redeemed after the Dividend Date, all accrued and unpaid Series B Dividends will be payable on such redemption date. If any shares of Series B Preferred Stock are converted to Common Stock, all accrued and unpaid Series B Dividends will be paid in cash or converted into Common Stock, in the discretion of the Board of Directors, at the time of such redemption.
(c) Priority of Series B Dividends. The Series B Preferred Stock will rank, with respect to dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, and redemption rights, senior to the Common Stock and each other class or series of Capital Stock now existing or hereafter authorized, classified or reclassified, the terms of which do not expressly provide that such class or series ranks on a parity basis with or senior to the Series B Preferred Stock as to dividend rights, rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, and redemption rights.
(d) Dividend Restrictions. So long as any share of Series B Preferred Stock remains outstanding, (1) no dividend shall be declared and paid or set aside for payment and no distribution shall be declared and made or set aside for payment on any Junior Shares (other than a dividend payable solely in shares of Junior Shares) and (2) no Junior Shares shall be purchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than (a) as a result of a reclassification of Junior Shares for or into other Junior Shares, (b) repurchases, redemptions or acquisitions in connection with any employment contract, benefit plan or similar arrangements with or for the benefit of any one or more employees, officers, directors or consultants or in connection with a dividend reinvestment or stockholder stock purchase plan providing for the purchase of Junior Shares by stockholders of the Corporation from the Corporation, (c) through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Shares and (d) conversions into or exchanges for other Junior Shares and cash solely in lieu of fractional shares of Junior Shares), unless, in each case, the full dividends for the most recent Dividend Date on all outstanding shares of Series B Preferred Stock and for the most recent dividend payment date on all Parity Securities (as defined below) have been paid or declared and a sum sufficient for the payment thereof has been set aside.
(e) The holders of Series B Preferred Stock shall have no right to participate, on an as converted basis or otherwise, in any dividends declared or paid with respect any other securities of the Corporation.
Section 4. Liquidation Preference.
(a) Subject to the rights of the Holders of Senior Shares and Parity Shares, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the Holders of Junior Shares, as to the distribution of assets on any liquidation, dissolution or winding up of the Corporation, each Holder of the Series B Preferred Stock shall be entitled to receive an amount of cash per share of Series B Preferred Stock equal to the Liquidation Preference. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the Holders of the Series B Preferred Stock shall be insufficient to pay in full the Liquidation Preference and liquidating payments on any other shares of any class or series of Parity Shares as to the distribution of assets on any liquidation, dissolution or winding up of the Corporation, then such assets, or the proceeds thereof, shall be distributed among the Holders of Series B Preferred Stock and any such other Parity Shares ratably in accordance with the respective amounts that would be payable on such Series B Preferred Stock and any such other Parity Shares if all amounts payable thereon were paid in full. For the purposes of this Section 4, a Change of Control shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation.
(b) Written notice of any such liquidation, dissolution or winding up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid or by Electronic Means, not less than thirty (30) nor more than sixty (60) days prior to the payment date stated therein, to each record Holder of the Series B Preferred Stock at the respective address of such Holder as the same shall appear on the stock transfer records of the Corporation.
(c) Subject to the rights of the Holders of Senior Shares and Parity Shares upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the Holders of the Series B Preferred Stock, as provided in this Section 4, any other series or class or classes of Junior Shares shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Holders of the Series B Preferred Stock shall not be entitled to share therein.
Section 5. Series B Preferred Director.
(a) Series B Preferred Director. Any individual appointed or elected to the Board of Directors by the holders of the Series B Preferred Stock is referred to herein as a “Series B Preferred Director.” The initial Series B Preferred Director shall be James P. Cassidy (the “Initial Series B Director”), such individual to serve until at least the 2024 annual meeting of the Corporation’s stockholders or such individual’s earlier resignation, death or removal. In all cases, the Series B Preferred Director shall meet the definition of being “independent” under the applicable rules of the NASDAQ Stock Market.
(b) Nomination Right; Removal; Replacement. For so long as any shares of Series B Preferred Stock remain outstanding, the Majority Holders shall be entitled to designate one (1) individual to be nominated to serve as the Series B Preferred Director. At each annual meeting of the stockholders of the Corporation or at any special meeting called for the purpose of electing directors, the Board of Directors shall nominate such designee for election. Unless the Board of Directors shall have received from the Majority Holders a written designation by March 1 of each calendar year of an individual other than the then sitting Series B Preferred Director, the Board of Directors shall nominate the then sitting Series B Preferred Director for re-election to the Board of Directors. The Series B Preferred Director shall be subject to any classified board of directors provisions contained in the Certificate of Incorporation from time to time. The initial Series B Preferred Director designated in Section 5(a) shall take office effective as of the Original Issue Date and shall continue to hold office thereafter until the next annual meeting of the stockholders of the Corporation at which his or her term expires and until his or her successor is elected and qualified in accordance with this Section 5(b) and the Bylaws. The Majority Holders, voting as a single class at a meeting called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting), shall have the sole right to remove the Series B Preferred Director. Any vacancy created by the removal, resignation or death of a Series B Preferred Director shall solely be filled by the Majority Holders, voting as a single class, at a meeting called for such purpose (or by written consent signed by the Majority Holders in lieu of such a meeting).
(c) Compensation. The Series B Preferred Director shall be entitled to receive similar compensation, benefits, reimbursement (including of reasonable travel expenses), indemnification and insurance coverage for his or her service as a director of the Corporation as the other non-employee directors of the Corporation. For so long as the Corporation maintains directors and officers liability insurance, the Corporation shall include the Series B Preferred Director as an “insured” for all purposes under such insurance policy for so long as such Series B Preferred Director is a director of the Corporation and for the same period as for other former directors of the Corporation when such Series B Preferred Director ceases to be a director of the Corporation.
Section 6. Redemption.
(a) Optional Redemption Right. The Corporation may in its sole discretion elect to redeem the Series B Preferred Stock, in whole at any time or from time to time in part, for cash (the “Optional Redemption Right”) at a price per share of Series B Preferred Stock equal to the Liquidation Preference (the “Redemption Price”); provided, however, that if the volume weighted average sale price of the Common Stock on the NASDAQ Stock Market or any exchange or quotation service where the Common Stock is then listed or traded for ten (10) trading-days in any thirty (30) trading-day period is equal to or greater than the prices set forth below (each, a “Redemption Price Reduction Target”), the Redemption Price shall be subject to downward adjustment to the prices per share set forth below:
| Redemption Price Reduction Target | Redemption Price |
| $3.50 per share of Common Stock | $10.00 per share of Series B Preferred Stock |
| $5.50 per share of Common Stock | $8.00 per share of Series B Preferred Stock |
| $7.50 per share of Common Stock | $6.00 per share of Series B Preferred Stock |
The Redemption Price and the Redemption Price Reduction Targets shall be adjusted proportionally for any forward or reverse splits of the Common Stock which may be undertaken from time to time.
(b) Redemption Procedures. If the Corporation shall determine to redeem, in whole or in part, shares of Series B Preferred Stock pursuant to Section 6(a), the Corporation shall deliver a notice of redemption (the “Notice of Redemption”), by overnight delivery, by first class mail, postage prepaid or by Electronic Means to Holders thereof. A Notice of Redemption shall be provided not less than ten (10) days prior to the date determined and fixed by the Board of Directors to effectuate the redemption of the Series B Preferred Stock in question (the “Redemption Date”). Each Notice of Redemption shall state: (i) the Redemption Date; (ii) the number of shares of Series B Preferred Stock to be redeemed; (iii) if applicable, the CUSIP number for the Series B Preferred Stock; (iv) the Redemption Price per share; and (v) if applicable, the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Directors requires and the Notice of Redemption states) are to be surrendered for payment of the Redemption Price. The Corporation may provide in any Notice of Redemption relating to a redemption contemplated to be effected pursuant hereto that such redemption is subject to one or more conditions precedent and that the Corporation shall not be required to effect such redemption unless each such condition has been satisfied at the time or times and in the manner specified in such Notice of Redemption. No defect in the Notice of Redemption or delivery thereof shall affect the validity of redemption proceedings, except as required by applicable law. The Corporation may, in its discretion, utilize the services of a paying or similar agent to effectuate any redemption of Series B Preferred Stock, and the Corporation shall bear the cost of any such agent.
(c) Status of Redeemed Shares. All shares of Series B Preferred Stock issued and redeemed by the Corporation in accordance with this Section 6 or otherwise acquired by the Corporation shall be restored to the status of authorized but unissued shares of undesignated Preferred Stock of the Corporation.
Section 7. Ranking. Any class or series of shares of stock of the Corporation shall be deemed to rank:
(a) prior to the Series B Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the Holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the Holders of Series B Preferred Stock (“Senior Shares”);
(b) on a parity with the Series B Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series B Preferred Stock, if the Holders of such class or series and the Series B Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other (“Parity Shares”); and
(c) junior to the Series B Preferred Stock, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be the Common Shares or any other class or series of shares of stock of the Corporation now or hereafter issued and outstanding over which the Series B Preferred Stock have preference or priority in the payment of dividends and in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation (“Junior Shares”).
Section 8. Voting Rights.
(a) The Series B Preferred Stock shall have no voting rights, except as set forth in Section 5 with respect to the nomination, removal and replacement of the Series B Preferred Director and in this Section 8.
(b) So long as any shares of Series B Preferred Stock are outstanding, the affirmative vote of the Majority Holders, acting as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting any amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or this Certificate of Designation that materially and adversely affects the rights, preferences or voting power of the Series B Preferred Stock; provided, however, that the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of, the Series B Preferred Stock, any Senior Shares, any Parity Shares or any Junior Shares shall not be deemed to materially or adversely affect the rights, preferences or voting power of the Series B Preferred Stock.
(c) For purposes of paragraph (b) of this Section 8, each share of Series B Preferred Stock shall have one vote per share. Except as set forth herein, the Series B Preferred Stock shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the Holders thereof shall not be required for the taking of any corporate action.
(d) No amendment to these terms of the Series B Preferred Stock shall require the vote of the Holders of Common Stock (except as required by law) or any series of Preferred Stock (unless expressly required by the terms of such Preferred Stock).
Section 9. Record Holders. The Corporation shall deem and treat the record Holder of any shares of Series B Preferred Stock as the true and lawful owner thereof for all purposes, and the Corporation shall not be affected by any notice to the contrary.
Section 10. No Sinking Fund. The Series B Preferred Stock shall not be entitled to the benefits of any retirement or sinking fund.
Section 11. Conversion. The shares of Series B Preferred Stock are not convertible into or exchangeable for any other property or securities of the Corporation, except as provided in this Section 11.
(a) Automatic Conversion on Change of Control. All shares of Series B Preferred Stock shall automatically and without any further action required be converted into Common Stock (the “Automatic Conversion”) at the Conversion Rate (as defined below) immediately prior to the consummation of a Change of Control (the “Automatic Conversion Time”) such that the former Holders will be able to participate in the Change of Control as holders of Common Stock. The Holder entitled to receive the Common Stock issuable upon an Automatic Conversion shall be treated as the record holder of such Common Stock as of the Automatic Conversion Time, and such shares of Common Stock will only be deemed issued and outstanding as of the Automatic Conversion Time. Prior to the Automatic Conversion Time, the Common Stock issuable upon the Automatic Conversion shall not be outstanding for any purpose and Holders shall have no rights with respect to such shares of Common Stock, including voting rights, rights to respond to tender offers or rights to receive any dividends or other distributions on such Common Stock.
(b) Voluntary Conversion.
(1) Voluntary Conversion Election. Subject to and in compliance with the provisions of this Section 11(b), the Majority Holders may, on behalf of all of the then current Holders, elect to cause a voluntary conversion of the Series B Preferred Stock, without payment of additional consideration, into fully-paid and nonassessable shares of Common Stock (the “Voluntary Conversion Election”).
(2) Conversion Rate. The number of shares of Common Stock to which each share of Series B Preferred Stock shall be converted upon such election shall be 8.3333 shares of Common Stock for each share of Series B Preferred Stock, subject to adjustment as provided for herein (the “Conversion Rate”).
(3) Mechanics of Conversion. The Majority Holders may effectuate a Voluntary Conversion Election by giving written notice to the Corporation (a “Voluntary Conversion Notice”). The Voluntary Conversion Notice shall state the name and number of shares of Series B Preferred Stock held by each of the Majority Holders. Within thirty (30) days of its receipt of a Voluntary Conversion Notice, the Corporation shall promptly issue and deliver to all Holders a certificate or certificates (or electronic evidence of ownership) for the number of shares of Common Stock to which such Holder is entitled and shall promptly pay (i) in cash or, to the extent sufficient funds are not then legally available therefor or, in the sole judgment of the Board of Directors, if the payment of funds, though legally available, may cause financial hardship for the Corporation, in Common Stock (based on closing public trading price of Common Stock on the day prior to receipt of the Voluntary Conversion Notice or, if the Common Stock is not then subject to public trading or quotation, the fair market value of the Common Stock determined by the Board of Directors), any accrued but unpaid dividends on the shares of Series B Preferred Stock converted and (ii) in cash (based on closing public trading price of Common Stock on the day prior to receipt of the Voluntary Conversion Notice or, if the Common Stock is not then subject to public trading or quotation, the fair market value of the Common Stock determined by the Board of Directors) the value of any fractional share of Common Stock otherwise issuable to any Holder in respect of such Holders shares of Series B Preferred Stock. A Voluntary Conversion Election shall be deemed to have been made at the close of business on the date of the Corporation’s receipt of a Voluntary Conversion Notice, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.
(4) Limitations on Voluntary Conversions. Notwithstanding any other provision of this Certificate of Designation, a Voluntary Conversion Election may only occur on or after the following dates and only up to the following number of shares of Series B Preferred Stock:
| (A) | On the eighteen (18) month anniversary of the Original Issue Date, up to 180,000 shares of Series B Preferred Stock; | |
| (B) | On the twenty-four (24) month anniversary of the Original Issue Date, up to an additional 180,000 shares of Series B Preferred Stock; | |
| (C) | On the thirty-six (36) month anniversary of the Original Issue Date, up to an additional 180,000 shares of Series B Preferred Stock; | |
| (D) | On the forty-eight (48) month anniversary of the Original Issue Date, up to an additional 180,000 shares of Series B Preferred Stock; and | |
| (E) | On the sixty (60) month anniversary of the Original Issue Date, up to an additional 180,000 shares of Series B Preferred Stock. |
(c) Certain Conversion Rate Adjustments.
(1) Adjustment for Stock Splits and Combinations. If at any time or from time to time on or after the date the Original Issue Date the Corporation effects a subdivision of the outstanding Common Stock, the Conversion Rate in effect immediately before that subdivision shall be proportionately decreased. Conversely, if at any time or from time to time after the Original Issue Date the Corporation combines the outstanding shares of Common Stock into a smaller number of shares, the Conversion Rate in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 11(c)(1) shall become effective at the close of business on the date the subdivision or combination becomes effective.
(2) Adjustment for Common Stock Dividends and Distributions. If at any time or from time to time on or after the Original Issue Date the Corporation pays to holders of Common Stock a dividend or other distribution in additional shares of Common Stock, the Conversion Rate then in effect shall be decreased as of the time of such issuance multiplying the Conversion Rate then in effect by a fraction, the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance, and the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend or distribution.
(3) Adjustment for Recapitalization or Reclassification. If at any time or from time to time on or after the Original Issue Date the Common Stock issuable upon a conversion of the Series B Preferred Stock is changed into the same or a different number of shares of any class or classes of stock by recapitalization, reclassification, a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 11 other than in connection with a Change of Control, then in any such event each holder of Series B Preferred Stock shall then have the right to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such recapitalization, reclassification or other change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 11 with respect to the rights of the holders of Series B Preferred after the capital reorganization to the end that the provisions of this Section 11 (including adjustment of the Conversion Rate then in effect and the number of shares issuable upon conversion of the Series B Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable.
Section 12. No Preemptive Rights. No Holder of the Series B Preferred Stock shall have any preemptive rights to purchase or subscribe for additional shares of capital stock of the Corporation or any other security of the Corporation which it may issue or sell.
Section 13. Uncertificated Book-Entry Securities. The Series B Preferred Stock shall be issued as book-entry securities directly registered in each Holder’s name on the Corporation’s books and records. The Series B Preferred Stock shall not be represented by certificates but instead shall be uncertificated securities of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be duly executed and acknowledged by the undersigned officer of the Corporation as of this 30th day of May, 2023.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| By: |
/s/ Eric Mosser | |
| Name: Eric Mosser | ||
| Title: President and Chief Operating Officer | ||
Exhibit 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED, IF SO REQUESTED BY THE COMPANY, BY AN OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, WHICH OPINION SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
| Issue Date of this Warrant (the “Issue Date”): May 30, 2023 |
KAIVAL BRANDS INNOVATIONS GROUP, INC.
Common Stock Purchase Warrant
THIS CERTIFIES THAT, for value received, Gofire, Inc., a Delaware corporation (the “Holder”), is entitled to subscribe for and purchase, at the applicable Exercise Price (as defined below), from Kaival Brands Innovations Group, Inc., a Delaware corporation (the “Company”), a number of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), as provided for in Section 1 hereof.
This Warrant may be exercised by the Holder at any time during the period beginning on the Issue Date through the fourth (4th) anniversary of the Issue Date (the “Warrant Term”). Following the conclusion of the Warrant Term, this Warrant and any right of the Holder to receive any Warrant Shares (as defined below) shall automatically terminate.
This Warrant is being issued to the Holder pursuant to the terms of that certain Asset Purchase Agreement, dated as of the Issue Date, by and among the Holder, the Company and Kaival Labs, Inc. (the “Asset Purchase Agreement”). This Warrant is not redeemable.
This Warrant is subject to the following terms and conditions:
1. Warrant Shares. The Holder has, subject to the terms set forth herein, the right during the Warrant Term to purchase up to an aggregate of ONE MILLION EIGHT HUNDRED THOUSAND (1,800,000) shares of Common Stock (the “Warrant Shares”) at a per share exercise prices provided for in Section 2 below (the “Exercise Price”). The Exercise Price is subject to adjustment as provided in Section 4 hereof.
2. Exercise Price. The Exercise Price shall be as follows:
(a) for the initial FIVE HUNDRED THOUSAND (500,000) Warrant Shares, $3.00 per share;
(b) for the second FIVE HUNDRED THOUSAND (500,000) Warrant Shares, $4.00 per share ;
(c) for the third FIVE HUNDRED THOUSAND (500,000) Warrant Shares, $5.00 per share; and
(d) for the final FIVE HUNDRED THOUSAND (500,000) Warrant Shares, $6.00 per share.
3. Exercise of Warrant.
(a) Cash Exercise. This Warrant may be exercised by the Holder at any time in whole or in part, by delivering the notice of exercise attached as Exhibit A hereto (the “Notice of Exercise”), duly executed by the Holder to the Company at its principal office, or at such other office as the Company may designate, accompanied by payment, by wire transfer of immediately available funds to the order of the Company to an account designated by the Company, of the amount obtained by multiplying the number of Warrant Shares designated in the Notice of Exercise by the Exercise Price detailed in the Notice of Exercise (the “Purchase Price”). For purposes hereof, “Exercise Date” shall mean the date on which all deliveries required to be made to the Company upon exercise of this Warrant pursuant to this Section 3(a) shall have been made. The Holder shall have the right to exercise this Warrant at any Exercise Price detailed in Section 2 hereof, or any combination of Exercise Prices, as it shall elect in its discretion, up to the total number of Warrant Shares exercisable at such prices as provided for in Section 2 hereof.
(b) Cashless Exercise. In the event, but only in the event, that at the time of exercise of this Warrant there is not an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) covering the public resale of the Warrant Shares, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
| (A) = | the Market Price (as defined below) on the Trading Day (as defined below) immediately preceding the date of proper delivery of the applicable Notice of Exercise; |
| (B) = | the Exercise Price of this Warrant, as may be adjusted hereunder; and |
| (X) = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
“Market Price” means, for any date, the price per share of the Common Stock determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on The New York Stock Exchange, the NYSE American, any tier of The Nasdaq Stock Market or the OTCQB, OTCQX or OTC Pink Markets (each as operated by OTC Markets Group, Inc., or any successor market) (each, a “Trading Market”), the daily volume weighted average price of the Common Stock for the ten (10) Trading Days prior to the date of delivery of the Notice of Exercise on the Trading Market on which the Common Stock are then listed or quoted as reported by Bloomberg L.P. (based on a trading day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)) or (b) in all other cases, the fair market value of a Common Stock as determined good faith by the Board of Directors of the Company.
“Trading Day” means any day on which all Trading Markets are open for trading.
If Warrant Shares are issued in a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 3(b). Notwithstanding anything to the contrary,
if on the Termination Date (unless the Holder otherwise notifies the Company in writing) there is no effective registration statement covering the resale of the Warrant Shares by the Holder, then, to the extent not already exercised by the Holder, this Warrant shall be automatically exercised in full via cashless exercise pursuant to this Section 3(b).
(c) Issuance of Certificates. As soon as practicable after the exercise of this Warrant, in whole or in part, in accordance with Section 3 hereof, the Company, at its expense, shall cause to be issued in the name of and delivered to the Holder: (i) by restricted book entry notation or (if applicable) by delivery through the facilities of the Depository Trust Company or similar electronic system the number of fully paid and non-assessable Warrant Shares to which the Holder shall be entitled upon such exercise and, if applicable, (ii) a new warrant identical to this Warrant to purchase all of the Warrant Shares that may be purchased pursuant to the portion, if any, of this Warrant not exercised by the Holder. Unless this Warrant is exercised in full, the Holder shall not be required to surrender this Warrant as a condition of exercise. The Holder shall for all purposes hereof be deemed to have become the Holder of record of such Warrant Shares on the date on which the Notice of Exercise and payment of the Purchase Price (or, if applicable, via valid cashless exercise) in accordance with Section 3 hereof were delivered and made, respectively, irrespective of the date of delivery of such certificate or other evidence of ownership, except that if the date of such delivery, notice and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of record of such Warrant Shares at the close of business on the next succeeding date on which the stock transfer books are open.
(d) Taxes. Upon the issuance of the Warrant Shares upon the exercise of this Warrant, and the delivery of certificates or other instruments representing such Warrant Shares, the Holder shall be responsible for any tax or other charge of whatever nature in respect of such issuance.
(e) Charges, Transfer Taxes, and Expenses. Issuance of evidence of ownership for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate including any charges of any clearing firm, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder. The Company shall pay all transfer agent fees required for processing of any exercise of this Warrant. The Company shall (i) pay the reasonable legal fees of Company counsel in connection with any legal opinion required in connection with the exercise of this Warrant, and (ii) cause such counsel to promptly provide any such opinion to the Company’s transfer agent.
(f) Authorized Shares. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges (other than taxes in respect of any transfer occurring contemporaneously with such issue).
4. Adjustment of Exercise Price.
(a) Adjustment for Reclassification, Consolidation or Merger. If, at any time while this Warrant is outstanding: (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another entity (excluding mergers effected solely to change the Company’s name), (ii) the Company (and all of its subsidiaries, taken as a whole), directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger or scheme of arrangement) with another individual or entity or group of individuals or entities whereby such other individual, entity or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other individual or entity or other individuals or entities making or party to, or associated or affiliated with the other individuals or entities making or party to, such stock or share purchase agreement or other business combination) (each, a “Fundamental Transaction”), then, as a part of such Fundamental Transaction, unless otherwise directed by the Holder in writing, all necessary or appropriate lawful provisions shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect or, if applicable, via cashless exercise pursuant to this Section 3(b), at the Holder’s sole discretion, the greatest number of shares of capital stock or other securities or property that a holder of the Warrant Shares deliverable upon exercise of this Warrant would have been entitled to receive in such Fundamental Transaction if this Warrant had been exercised immediately prior to such Fundamental Transaction, all subject to further adjustment as provided in this Section 4. If the per share consideration payable to the Holder for Warrant Shares in connection with any such Fundamental Transaction is in a form other than cash or marketable securities, then the value of such consideration shall be mutually agreed upon by the Company and the Holder. The foregoing provisions of this paragraph shall similarly apply to successive Fundamental Transactions and to the capital stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. In all events, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the applicable Fundamental Transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such Fundamental Transaction upon exercise of this Warrant.
(b) Adjustments for Split, Subdivision or Combination of Warrant Shares. If the Company shall at any time subdivide (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock subject to acquisition hereunder, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock subject to acquisition upon exercise of the Warrant will be proportionately increased. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock subject to acquisition hereunder, then, after the record date for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock subject to acquisition upon exercise of the Warrant will be proportionately decreased.
(c) Adjustments for Dividends in Stock or Other Securities or Property. If while this Warrant, or any portion hereof, remains outstanding, the holders of any class of securities as to which purchase rights under this Warrant exist at the time shall have received or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of such class of security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the class of security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available to it as aforesaid during said period, giving effect to all adjustments called for during such period by the provisions of this Section 4.
5. Notices. All notices, requests, consents and other communications required or permitted under this Warrant shall be in writing shall be deemed given and effective when provided in accordance with Section 7.2 of the Asset Purchase Agreement.
6. Legends. Each certificate or evidence of ownership evidencing the Warrant Shares issued upon exercise of this Warrant shall be stamped or imprinted with a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED OR OTHERWISE SOLD UNLESS (I) IT HAS BEEN REGISTERED UNDER THE SECURITIES ACT AND ALL SUCH APPLICABLE STATE SECURITIES LAWS OR (II) THE TRANSACTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS UNDER THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE LAW AND, IF THE CORPORATION REQUESTS, AN OPINION SATISFACTORY TO THE CORPORATION TO SUCH EFFECT HAS BEEN RENDERED BY COUNSEL.”
7. Removal of Legend. Upon request of a holder of a certificate with the legends required by Section 6 hereof, the Company shall or shall direct its transfer agent to issue to such holder a new certificate or evidence of ownership therefor free of any transfer legend, if, with such request, the Company or its transfer agent, if so requested by the Company or such transfer agent, shall have received an opinion of counsel satisfactory to the Company in form and substance to the effect that any transfer by such holder of the Warrant Shares evidenced by such certificate will not violate the Act or any applicable state securities laws. Notwithstanding anything to the contrary in this Section 7 or this Agreement, if the Company does not successfully register all of the shares of Common Stock as required under the Asset Purchase Agreement, the Company will, at its sole cost and expense, cooperate fully with the Holder and/or its designees and distributees to cause the issuance of the legal opinions required by the transfer agent for the removal of the restricted transfer legends on the shares and will cause the transfer agent to so remove such transfer restriction legend on the Warrant Shares so that the Holder and/or its designees and distributees can transfer the Warrant Shares.
8. Fractional Warrant Shares. No fractional Warrant Shares will be issued in connection with any exercise hereunder. Instead, the Company shall round up, as nearly as practicable to the nearest whole Share, the number of Warrant Shares to be issued.
9. No Rights as Stockholder. The Holder, as such, shall not be entitled to vote or receive dividends or be deemed the holder of the Warrant Shares or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or otherwise until this Warrant shall have been exercised and the Warrant Shares purchasable upon the exercise hereof shall have been issued, as provided herein.
10. Transfers. This Warrant is not assignable or transferable, except for any assignment or transfer of this Warrant by the Holder pursuant to the Holder’s estate plan or a valid court decree or to Holder’s beneficiaries or shareholders. Any such transfer shall comply with all applicable laws, rules and regulations, including, without limitation, with the U.S. federal securities laws.
11. Miscellaneous.
(a) This Warrant and disputes arising hereunder shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to agreements made and to be performed wholly within such State, without regard to its conflict of law rules.
(b) The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect any of the terms hereof.
(c) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors or permitted assigns of the Company and of the Holder and of the Warrant Shares issued or issuable upon the exercise hereof.
(e) This Warrant and the other documents delivered pursuant hereto, including the Asset Purchase Agreement, constitute the full and entire understanding and agreement between the parties with regard to the subject hereof.
(f) The Company shall not, by amendment of the Certificate of Incorporation or Bylaws, or through any other means, directly or indirectly, avoid or seek to avoid the observance or performance of any of the terms of this Warrant and shall at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder contained herein against impairment.
(g) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company, at its expense, will execute and deliver to the Holder, in lieu thereof, a new Warrant of like date and tenor.
(h) This Warrant and any provision hereof may be amended, waived or terminated only by an instrument in writing signed by the Company and the Holder.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the Issue Date.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| By: | /s/ Eric Mosser | |
| Name: Eric Mosser | ||
| Title: President and Chief Operating Officer |
Exhibit A
NOTICE OF EXERCISE
TO: Kaival Brands Innovations Group, Inc., Attention: President
(1) The undersigned hereby elects to purchase ________ Warrant Shares pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 3(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 3(b).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
| _______________________________ |
The Warrant Shares shall be delivered to the following DWAC Account Number (if applicable):
| _________________________________ | ||
| _________________________________ |
The undersigned hereby represents and warrants the following:
(a) The undersigned (i) has such knowledge and experience in financial and business affairs that the undersigned is capable of evaluating the merits and risks involved in purchasing the Warrant Shares, (ii) is able to bear the economic risks involved in purchasing the Warrant Shares, and (iii) is an “accredited investor,” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended;
(b) In making the decision to purchase the Warrant Shares, the undersigned has relied solely on independent investigations made by the undersigned and has had the opportunity to ask questions of, and receive answers from, the Company concerning the Warrant Shares, the financial condition, prospective business and operations of the Company and has otherwise had an opportunity to obtain any additional information, to the extent that the Company possess such information or could acquire it without unreasonable effort or expense;
(c) The undersigned’s overall commitment to investments that are not readily marketable is not disproportionate to the undersigned’s net worth and income, and the purchase of the Warrant Shares will not cause such overall commitment to become disproportionate; the undersigned can afford to bear the loss of the Purchase Price of the Warrant Shares;
(d) The undersigned has no present need for liquidity in the undersigned’s investment in the Warrant Shares; and
(e) The undersigned acknowledges that the transaction contemplated in connection with the purchase of the Warrant Shares has not been reviewed or approved by the Securities and Exchange Commission or by any administrative agency charged with the administration of the securities laws of any state, and that no such agency has passed on or made any recommendation or endorsement of any of the securities contemplated hereby.
| ________________________________________ | |
| (Signature and Date) |
Exhibit 10.1
ASSET PURCHASE AGREEMENT
dated May 30, 2023,
by and among
KAIVAL BRANDS INNOVATIONS GROUP, INC.,
KAIVAL LABS, INC.
and
GOFIRE, INC.
| TABLE OF CONTENTS | ||
| Page | ||
| ARTICLE I. CLOSING; SALE OF PURCHASED ASSETS | 1 | |
| 1.1 | The Closing; Closing Deliverables | 1 |
| 1.2 | Sale of Purchased Assets | 2 |
| 1.3 | Assumption of Liabilities | 4 |
| 1.4 | Closing Share Consideration; Delivery of Closing Share Consideration | 5 |
| 1.5 | Allocation of Closing Share Consideration | 6 |
| 1.6 | Power of Attorney | 6 |
| 1.7 | Actions Simultaneous | 6 |
| ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE SELLER WITH RESPECT TO THE SELLER | 7 | |
| 2.1 | Organization; Good Standing | 7 |
| 2.2 | Authority; Execution and Delivery; Enforceability | 7 |
| 2.3 | Non-Contravention | 7 |
| 2.4 | Title to Assets | 7 |
| 2.5 | Intellectual Property | 8 |
| 2.6 | Tax Matters | 9 |
| 2.7 | Litigation and Claims | 10 |
| 2.8 | Compliance with Laws | 10 |
| 2.9 | No Finder | 10 |
| 2.10 | No Other Representations or Warranties | 10 |
| 2.11 | Invest Company Act | 11 |
| 2.12 | No Other Representations or Warranties | 11 |
| ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE BUYER | 12 | |
| 3.1 | Organization; Good Standing | 12 |
| 3.2 | Authority; Execution and Delivery; Enforceability | 12 |
| 3.3 | Non-Contravention | 12 |
| 3.4 | Consents and Approvals | 12 |
| 3.5 | SEC Reports and Buyer Financials. | 13 |
| 3.6 | Litigation and Claims | 14 |
| 3.7 | No Finder | 14 |
| 3.8 | Closing Share Consideration | 14 |
| 3.9 | Valid Issuance of the Common Shares, Preferred Shares and Warrant | 14 |
| 3.10 | No Other Representations or Warranties | 14 |
| ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES | 15 | |
| 4.1 | Cooperation in Litigation | 15 |
| 4.2 | Non-Derogation and Confidentiality | 15 |
| 4.3 | Tax Matters | 17 |
| 4.4 | Further Assurances | 17 |
| 4.5 | Registration Statement | 18 |
| 4.6 | Publicity | 19 |
| 4.7 | [Reserved] | 19 |
| 4.8 | Dissolution and Liquidation of the Seller. | 19 |
| 4.9 | Lock-Up Period | 19 |
| 4.10 | Contingent Cash Payment. | 21 |
| 4.11 | Nasdaq Listing | 22 |
| 4.12 | Conditions to a Trust Transfer | 22 |
| ARTICLE V. INDEMNIFICATION | 23 | |
| 5.1 | Survival | 23 |
| 5.2 | Indemnification by the Seller | 23 |
| 5.3 | Indemnification by the Buyer | 23 |
| 5.4 | Limitations on Indemnification | 23 |
| 5.5 | Tax Treatment of Indemnity Payments | 24 |
| 5.6 | Notice of Claims | 24 |
| 5.7 | Third Party Claims | 25 |
| 5.8 | Other Limitations | 25 |
| 5.9 | Determination of Damages | 26 |
| 5.10 | Payments of Damages. | 26 |
| ARTICLE VI. MISCELLANEOUS | 27 | |
| 6.1 | Expenses of the Transaction | 27 |
| 6.2 | Notices | 27 |
| 6.3 | Amendment and Waiver | 28 |
| 6.4 | Entire Agreement | 28 |
| 6.5 | Severability | 28 |
| 6.6 | Specific Performance | 28 |
| 6.7 | Assignment | 29 |
| 6.8 | Governing Law; Jurisdiction | 29 |
| 6.9 | Headings; References | 29 |
| 6.10 | Waiver of Jury Trial | 29 |
| 6.11 | Interpretation | 30 |
| 6.12 | Schedules | 30 |
| 6.13 | Representation by Counsel | 30 |
| 6.14 | Construction | 30 |
| 6.15 | Third Parties | 30 |
| 6.16 | Counterparts | 30 |
APPENDICES
| APPENDIX A. DEFINITIONS | A-1 |
| APPENDIX B. SELLER DISCLOSURE SCHEDULES | B-1 |
| APPENDIX C. BUYER DISCLOSURE SCHEDULES | C-1 |
| APPENDIX D. ALLOCATION SCHEDULE | D-1 |
EXHIBITS
| EXHIBIT A | Bill of Sale |
| EXHIBIT B | Intellectual Property Assignment Agreement |
| EXHIBIT C | Escrow Agreement |
| EXHIBIT D | Non-Competition Agreement |
| EXHIBIT E | Certification of Designation |
| EXHIBIT F | Form of Warrant |
| EXHIBIT G | Non-Foreign Affidavit |
| EXHIBIT H | Charter Amendment of the Seller |
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of May 30, 2023, by and among Kaival Brands Innovations Group, Inc., a Delaware corporation (the “Buyer”), Kaival Labs, Inc., a Delaware corporation (“Kaival Labs”), and GoFire, Inc., a Delaware corporation (the “Seller”).
W I T N E S S E T H:
WHEREAS, the Seller is engaged in the business of developing proprietary drug delivery devices focusing on inhalation devices with applications in the consumer and pharmaceutical industries (the “Business”);
WHEREAS, the Buyer desires to purchase and acquire from the Seller, and the Seller desires to sell and transfer to the Buyer the intellectual property assets of the Seller used in the Business listed on Section 1.1 of the Seller Disclosure Schedule, all on the terms and subject to the conditions hereinafter set forth;
WHEREAS, following the Closing (as defined below) the Seller will form a grantor trust (the “Trust”) for the sole purpose of holding, collecting, and managing the Closing Share Consideration (as defined below) payable to the Seller with respect to the Purchased Assets and distributing the assets of the Trust to the Trust’s beneficiaries and after Closing the Seller intends, subject to the satisfaction or waiver of the conditions set forth in Section 4.12, to transfer the Closing Share Consideration to the Trust (the “Trust Transfer”);
WHEREAS, simultaneously with the execution and delivery of this Agreement, as a material inducement to the Buyer to enter into this Agreement, Peter Calfee and John Woodbine (the “Key Employees”) have entered into a Non-Competition and Non-Solicitation Agreement, in substantially the form attached hereto as Exhibit D (the “Non-Competition Agreements”), pursuant to which each such Key Employee has agreed, not to compete with the Business of the Buyer; and
WHEREAS, terms used in this Agreement and not otherwise defined in the body of this Agreement are defined in Appendix A hereto.
NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
ARTICLE I.
CLOSING; SALE OF PURCHASED ASSETS
1.1 The Closing; Closing Deliverables.
(a) The closing (the “Closing”) of the transactions contemplated by this Agreement shall be deemed effective at 12:01 a.m. Eastern time (the “Closing Time”) on the date first referenced above (the “Closing Date”).
(b) Simultaneously with the execution and delivery of counterpart signature pages hereto to each other, the parties have entered into and/or delivered the documentation set forth below:
(i) the Buyer shall have submitted an application for the listing on the Nasdaq Capital Market of the shares of Common Stock to be issued at Closing under this Agreement, has been notified that such application has been successfully submitted, and has not been contacted by the Nasdaq Capital Market with respect to any compliance issues with respect to such application;
(ii) the Seller has delivered to the Buyer copies of all required consents set forth on Section 2.3 of the Seller Disclosure Schedule;
(iii) the Seller has delivered to the Buyer a certificate of an authorized officer of the Seller, dated as of the Closing Date, setting forth: (i) evidence of adoption and approval by the board of directors of the Seller of this Agreement, the Related Documents and the transactions contemplated hereby and thereby; and (ii) the resolutions of the stockholders of the Seller adopting and approving this Agreement and the other transactions contemplated by this Agreement and the Related Documents;
(iv) the Seller has delivered or made available to the Buyer, in accordance with Section 1.1(b), the Books and Records;
(v) the Buyer and the Seller have executed and delivered to each other counterpart signatures to the Bill of Sale, in substantially the form attached hereto as Exhibit A;
(vi) the Buyer and the Seller have executed and delivered to each other counterpart signatures to the Intellectual Property Assignment Agreement, in substantially the form attached as Exhibit B;
(vii) the Buyer and the Seller have executed and delivered to each other counterpart signatures to the Escrow Agreement, in substantially the form attached as Exhibit C as executed by the Escrow Agent;
(viii) the Buyer and the Key Employees have executed and delivered to each other counterpart signatures to the Non-Competition Agreement; and
(ix) the Seller has delivered the Non-Foreign Affidavit, in substantially the form attached as Exhibit G; and
(x) the Seller shall have pre-cleared its Certificate of Amendment to its Certificate of Incorporation, in substantially the form attached as Exhibit H (the “Charter Amendment”), with the Secretary of State of the State of Delaware and received approval from the Secretary of State of the State of Delaware that the Charter Amendment is acceptable for filing.
| 1 |
1.2 Sale of Purchased Assets.
(a) On the terms and subject to the conditions set forth herein, effective as of the Closing, the Seller shall sell, convey, transfer, assign and deliver to the Buyer, and the Buyer shall purchase, all of the Seller’s right, title and interest in and to the following assets of the Seller (collectively, the “Purchased Assets”), free and clear of any Liens (other than Permitted Liens):
(i) all Company Intellectual Property as set forth in Section 1.2(a) of the Seller Disclosure Schedule;
(ii) copies all books, records, files and materials, other than accounting and financial records, owned by the Seller that relate to any of the Purchased Assets, regardless of form or medium of storage, including, without limitation, licensee files, all visuals and documentations (regardless of form or medium) of current, future and past, patterns, designs, collections, products and samples and all archives related to the foregoing, and copies of litigation files, but not to the extent that the foregoing relate to any of the Excluded Assets or to any communications between Seller and its attorneys relating to (x) the negotiation, execution, and delivery of this Agreement and the transactions contemplated by this Agreement or (y) compliance with co-venturer arrangements (collectively, the “Books and Records”);
(iii) all brochures, marketing and sales literature, advertising catalogues, photographs, display materials, media materials, packaging materials and other similar items which have been produced by or for Seller in connection with the Business or the Purchased Assets; and
(iv) all claims and causes of action against third parties relating to the Purchased Assets whether arising by way of counterclaim or otherwise;
provided, that, with respect to the foregoing clauses (ii) and (iii), the Seller shall use commercially reasonable efforts to deliver or make available such Purchased Assets to the Buyer as soon as practicable after the Closing.
(b) Except for the Purchased Assets, as expressly described in Section 1.2(a), the Buyer is not acquiring and the Seller is not selling any other assets (collectively, the “Excluded Assets”), including, without limitation, the following:
(i) the intellectual property assets of the Seller used in the Business listed on Section 1.2(b)(i) of the Seller Disclosure Schedule, which include, for the avoidance of doubt, all intellectual property assets of Chronicle;
(ii) any cash held by the Seller as of the Closing Date;
(iii) any bank accounts of the Seller;
(iv) any and all accounts receivable of the Seller arising prior to the Closing Date;
(v) any real property owned or leased by the Seller;
| 2 |
(vi) any Contracts;
(vii) all furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers, telephones and other tangible personal property;
(viii) the corporate seals, organizational documents, minute books, books of account, accounting, tax and financial records or other records having to do with the organization of the Seller or its members (including without limitation, their tax status);
(ix) all claims and causes of action against third parties pertaining to facts or circumstances that arose prior to the Closing Date;
(x) all rights and benefits of the Seller under this Agreement and the Related Documents;
(xi) any assets (including any rights) resulting from expenses prepaid by or for the benefit of Seller;
(xii) any security deposits made or held by or for the benefit of Seller; and
(xiii) any ownership interests in any entities, including without limitation, Chronicle, and any other assets that are not Purchased Assets.
Without limiting the generality of the foregoing, the Buyer is not acquiring or assuming, and the Seller is not selling or assigning, any employment or consulting agreements or any Employee Plans.
(c) The Purchased Assets shall not include any of the Seller’s assets which would otherwise constitute a part of the Purchased Assets if the assignment or attempted assignment of such assets would be invalid or would constitute a breach of any agreement or commitment to which the Seller is a party or by which the Seller may be bound. Notwithstanding anything in the preceding sentence to the contrary, any such asset that would otherwise constitute part of the Purchased Assets shall be held and/or received by the Seller for the benefit of the Buyer so that to the extent reasonably possible the Buyer will be in substantially the same economic position as if such Purchased Asset had been transferred to the Buyer at the Closing. The sale, conveyance, transfer, assignment and delivery of the Purchased Assets by the Seller to the Buyer hereunder shall be effected by such assignments, transfers of title, bills of sale and other instruments as shall be reasonably requested by the Buyer.
(d) The Seller and Buyer acknowledge and agree that it is the intent of the Buyer to, at the Closing, cause the transfer of all of the Purchased Assets to its subsidiary, Kaival Labs. Kaival Labs hereby agrees that upon such transfer it shall become a secondary obligor of the Buyer under this Agreement and under the Related Documents, assuming herewith and therewith all of the obligations of the Buyer in the event that the Buyer does not perform such obligations, and the Seller and the Seller Member Group shall have full recourse against Kaival Labs as a secondary obligor hereunder and thereunder.
| 3 |
1.3 Assumption of Liabilities.
(a) Notwithstanding anything else contained in this Agreement or in any Related Document, the Buyer shall not assume any Liabilities of the Seller, and will not become liable for and shall not be obligated to pay or satisfy any obligation or liability of the Seller, including, without limitation, those (collectively, the “Excluded Liabilities”):
(i) arising or accruing under any Contract;
(ii) arising out of or in connection with Seller’s non-compliance with Laws;
(iii) arising out of or in connection with investigations or audits of business partners of the Seller or otherwise in connection with Seller’s operation of the Business;
(iv) arising from, relating to, or existing in connection with the Excluded Assets;
(v) associated with any Employee Plans maintained by Seller, including, without limitation, any claims by any employees or former employees of the Seller under any Employee Plans maintained by the Seller;
(vi) with respect to severance Liabilities for all employees and former employees of the Seller;
(vii) with respect to Taxes, whether or not accrued, assessed or currently due and payable, including any Taxes (i) of the Seller or any of its Affiliates, whether or not such Taxes relate to the Business or the Purchased Assets, (ii) related or attributable to the operation of the Business or the ownership of the Purchased Assets for any period (or portion thereof) ending on or before the Closing Date, or (iii) except as otherwise set forth in Section 4.3(b), arising out of or resulting from the transactions contemplated by this Agreement or the Related Documents;
(viii) arising or accruing under any Tax sharing, allocation, indemnity or similar agreement of the Seller;
(ix) with respect to events arising out of or in connection with workers’ compensation claims against the Seller;
(x) arising out of or in connection with any Action against Seller to the extent it relates to facts or events occurring prior to the Closing Time;
(xi) for indebtedness of the Seller, including, without limitation, any such Liabilities arising under any credit agreement between the Seller and another Person, including any letter of credit facility, and any indebtedness owed to any member of the Seller; and
(xii) fees and expenses of the Seller arising out of or in connection with the transactions contemplated by this Agreement and the Related Documents; and
(xiii) imposed on the Buyer as a result of transferee, successor or similar liability (including bulk sales or similar Laws).
| 4 |
1.4 Closing Share Consideration; Delivery of Closing Share Consideration. The aggregate consideration payable by the Buyer to the Seller for the sale of the Purchased Assets to the Buyer shall be the Closing Share Consideration. The Closing Share Consideration shall be payable to the Seller at Closing, as follows:
(a) at the Closing, the Buyer shall deliver the Closing Share Consideration (less the Escrow Amount) via original issue by the Buyer to the Seller, by a copy of irrevocable instructions to the Buyer’s transfer agent to issue the Closing Share Consideration to the Seller. For purposes of this Agreement, “Closing Share Consideration” means 2,000,000 shares (the “Common Shares”) of the Buyer’s common stock, par value $0.001 (the “Common Stock”), 900,000 shares of the Buyer’s Series B convertible preferred stock, par value $0.001 (the “Preferred Shares”), which shall have the rights, preferences and privileges as set forth in a Certificate of Designation, in the form attached hereto as Exhibit E (the “Certificate of Designation”), to be filed with the Delaware Secretary of State on or prior to the Closing, and a warrant to purchase 2,000,000 shares of Common Stock, substantially in the form attached as Exhibit F (the “Warrant”).
(b) To secure the Seller’s indemnification obligations set forth in Article V of this Agreement, the Escrow Amount shall be deposited into a dedicated securities account (the “Escrow Account”) to be held in escrow with the Escrow Agent, in accordance with the terms and conditions of the Escrow Agreement. The Escrow Agreement shall provide that 50% of such Escrow Amount, minus any Escrow Shares not reasonably necessary to satisfy all claims for which notice has been provided in accordance with Article VI (comprising 50% of the Common Shares and 50% of the Preferred Shares) shall be released from the Escrow Account and delivered to the Seller or its designees on the date that is 6 months from the Closing Date, and any remaining Escrow Amount, minus any Escrow Shares reasonably necessary to satisfy all claims for which notice has been provided in accordance with Article V, shall be released from the Escrow Account and delivered to the Seller or its designees on the date that is 18 months from the Closing Date. Any remaining portion of the Escrow Amount, (i) after payment and satisfaction of any and all pending claims or (ii) to the extent such remaining portion is no longer reasonably necessary to satisfy all claims for which notice has been provided in accordance with Article V (either of the circumstances described in (i) or (ii), the “Escrow Release Circumstance”), shall be released to the Seller or its designees promptly and no later than five (5) Business Days after the occurrence of any Escrow Release Circumstance. For purposes of this Agreement, (i) the term “Escrow Shares” shall mean (A) the number of shares of Common Stock equal to the Escrow Share Consideration Value divided by the Per Share Value and (B) the number of shares of Preferred Shares, on an as-if-converted basis, equal to the Escrow Share Consideration Value divided by the Per Share Value, with any fractional shares being rounded to down to the nearest whole share and the remainder disregarded, (ii) “Escrow Share Consideration Value” means the dollar value of any such claim and (iii) “Per Share Value” means a dollar value equal to the volume weighted average sale price of Common Stock for the ten (10) consecutive Trading Days ending on the second to last Trading Day prior to the date of such determination pursuant to the terms of the Escrow Agreement. Notwithstanding the foregoing, in the event that the Buyer does not timely register the shares of Common Stock as provided in Section 4.5(a), the Buyer shall promptly and no later than five (5) Business Days thereafter instruct the Escrow Agent to release all remaining Escrow Shares to the Seller or its designees.
| 5 |
1.5 Allocation of Closing Share Consideration. The Closing Share Consideration (and all other capitalized costs) shall be allocated among the Purchased Assets in accordance with Section 1060 of the Code and the Treasury regulations promulgated thereunder (and any similar provision of state, local or foreign Law, as appropriate) and as reasonably agreed to by the Buyer and the Seller using the methodologies set forth in Appendix D hereto (the “Allocation Schedule”). The Buyer, the Seller, and their Affiliates shall report, act and file Tax Returns (including, but not limited to, Internal Revenue Service Form 8594) in all respects and for all purposes consistent with such Allocation Schedule. The Buyer and the Seller shall timely and properly prepare, execute, file and deliver all such documents, forms and other information as may be necessary to prepare such Allocation Schedule. None of the Buyer or the Seller shall take any position (whether in audits, Tax Returns or otherwise) that is inconsistent with such Allocation Schedule unless required to do so by applicable Law.
1.6 Power of Attorney. As of the Closing Time, the Seller shall constitute and appoint the Buyer the true and lawful attorney of the Seller with full power of substitution, in the name of the Seller, or in the name of the Buyer, at the expense of the Buyer and for the benefit of the Buyer, (a) to collect, assert or enforce any claim, right or title of any kind in or to the Purchased Assets for periods following the Closing Time, to institute and prosecute all actions, suits and proceedings which the Buyer may deem proper in order to collect, assert or enforce any such claim, right or title, to defend and compromise all such actions, suits and proceedings in respect of any of the Purchased Assets for periods following the Closing Time, and to do all such reasonable acts and things in relation thereto as the Buyer shall deem advisable and (b) to take all reasonable action which the Buyer may deem proper in order to provide for the Buyer the benefits of or under any of the Purchased Assets for periods following the Closing Time and for which any required consent of a third party to the assignment thereof to the Buyer shall not have been obtained; provided, however, that the Seller shall have no Liability for any such actions taken by the Buyer. The Seller acknowledges that such powers are coupled with an interest and shall not be revocable by it in any manner or for any reason, including, without limitation, the liquidation or dissolution of the Seller, and that the Buyer shall be entitled to retain for its own account any amounts collected pursuant to such powers, including any amounts payable as interest in respect thereof. Such powers shall be granted by such powers of attorney and other instruments as shall be reasonably requested by the Buyer. For clarity, none of the rights granted to Buyer pursuant to this Section 1.6 shall endow or entitle the Buyer with or to any rights of access to or control over, or grant any ownership interest in, the Seller’s bank accounts or any other Excluded Assets.
1.7 Actions Simultaneous. All actions to be taken and all documents to be executed and delivered by the parties at the Closing shall be deemed to have been taken and executed and delivered simultaneously and no actions shall be deemed to have been taken nor shall any documents be deemed to have been executed and delivered until all actions have been taken and all documents have been executed and delivered.
| 6 |
ARTICLE
II.
REPRESENTATIONS AND WARRANTIES OF THE
SELLER WITH RESPECT TO THE SELLER
Except as set forth in the Seller Disclosure Schedule, the Seller hereby represents and warrants to the Buyer as follows as of the Closing Date:
2.1 Organization; Good Standing. The Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. The Seller has full power and authority to own or lease all of the assets owned or leased by it. The Seller is duly licensed or qualified to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of the business and activities conducted by it, and/or the character of the assets owned or leased by it, makes such qualification necessary.
2.2 Authority; Execution and Delivery; Enforceability. The Seller has full legal right, power and authority to execute and deliver this Agreement and each of the Related Documents, to perform its obligations hereunder and under such Related Documents and to consummate the transactions contemplated hereby and by such Related Documents. All acts and other proceedings required to be taken by the Seller to authorize the execution, delivery and performance of this Agreement and such Related Documents have been duly and properly taken. Each of this Agreement and the Related Documents has been duly executed and delivered by the Seller, and constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, moratorium and other similar Laws of general applicability relating to or affecting creditors’ rights and to general equitable principles.
2.3 Non-Contravention. The execution, delivery and performance by the Seller of this Agreement and the Related Documents, the compliance by the Seller with the terms and provisions hereof and thereof and the consummation by the Seller of the transactions contemplated hereby and thereby do not and will not (with or without notice or lapse of time, or both) (a) conflict with or result in any violation by the Seller, under any provision of or result in acceleration, termination, cancellation or modification of, or constitute a default under (as applicable): (i) any provision of the organizational or governing documents of the Seller or any of its Affiliates; or (ii) any Contract, any Order or Law applicable to the Seller or any of the Seller’s properties or assets; or (b) result in the imposition of any Lien (other than Permitted Liens) on the Purchased Assets. No consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Authority, and no consent or approval of any other Person, is required to be obtained by or on behalf of the Seller in connection with the execution, delivery and performance by the Seller of this Agreement or the Related Documents, or the consummation of the transactions contemplated hereby and by such Related Documents. No consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Authority, and no consent or approval of any Person, is required to be obtained by or on behalf of the Seller in connection with the execution, delivery and performance by the Selle of this Agreement or the Related Documents or the consummation of the transactions contemplated hereby and by the Related Documents.
2.4 Title to Assets. The Seller has sole, exclusive, good and valid title to and/or interest in, free and clear of all Liens (other than Permitted Liens), all of the Purchased Assets.
| 7 |
2.5 Intellectual Property.
(a) Each item of Intellectual Property is owned solely by the Seller and is free and clear of any Liens (other than Permitted Liens). Each item of Intellectual Property owned by the Seller is valid, subsisting, in full force and effect and, to the Seller’s Knowledge, aside from the normal course of patent prosecution for all pending U.S. and foreign patent applications, none is involved in any interference, reexamination, cancellation, or opposition proceeding, or any other currently pending or threatened proceeding or claim challenging the ownership, use, validity or enforceability of any such item of Company Intellectual Property.
(b) The Seller has not transferred ownership of, or granted any exclusive license of or right to use, or authorized the retention of any exclusive rights to use or joint ownership of, any Registered Intellectual Property Rights that are included in Company Intellectual Property to any person or entity.
(c) All material registration, maintenance and renewal fees due and payable in connection with each item of the Registered Intellectual Property Rights have been paid or are set to be paid in the next sixty (60) calendar days and all documents and certificates necessary to maintain such Registered Intellectual Property Rights have been timely filed with the relevant Government Authority, including the U.S. Patent and Trademark Office, the U.S. Copyright Office, or their respective counterparts in any relevant foreign jurisdiction, as the case may be. To the Seller’s Knowledge, as set forth in Section 2.5(c) of the Disclosure Schedules, the Seller has documented the expected maintenance and renewal fees and the filing deadlines for known office actions. The Seller has timely recorded an assignment of each Registered Intellectual Property Right assigned to Seller or any of its subsidiaries, if any, with the relevant Governmental Authority, including the U.S. Patent and Trademark Office, the U.S. Copyright Office or their respective counterparts in any relevant foreign jurisdiction, as the case may be. All Registered Intellectual Property Rights were prosecuted and recorded in good faith and in compliance in all material respects with all applicable rules, policies and procedures of any applicable Governmental Authority.
(d) The Seller has taken steps sufficient to maintain and protect the secrecy, confidentiality, value and Seller’s rights in all Confidential Information and trade secrets of the Seller. The Seller has not received written notice of any misappropriation or unauthorized disclosure of any trade secret or Confidential Information related to the Purchased Assets, or any violation or breach of obligations of confidentiality with respect to such, nor does the Seller have any Knowledge of any basis for such misappropriation, unauthorized disclosure, violation or breach.
(e) To the Seller’s Knowledge (for purposes of this representation, assuming due investigation and inquiry), the Company Intellectual Property does not infringe or misappropriate any Registered Intellectual Property Rights of any Person or entity, violate any right of any Person or entity (including any right to privacy or publicity) or constitute unfair competition or trade practices under the laws of any jurisdiction where the Seller conducts its Business. The Seller has not received written notice from any Person or entity claiming that any Company Intellectual Property infringes or misappropriates any Intellectual Property rights of any Person or entity. Neither the Seller nor any of its subsidiaries incorporates or uses the content or images of any third party in any software or website owned or licensed by the Seller or any of its subsidiaries.
(f) To the Seller’s Knowledge, no Person is violating, infringing or misappropriating any Company Intellectual Property. The Seller has not made any such claims against any Person with respect to any Company Intellectual Property, and the Seller has not invited any Person to take a license, authorization, covenant not to sue or the like with respect to any Company Intellectual Property.
| 8 |
(g) There are no Actions to which the Seller or any of its subsidiaries is a party before any Governmental Authority (including before the U.S. Patent and Trademark Office) anywhere in the world where Seller conducts its Business related to any of the Company Intellectual Property, including any Registered Intellectual Property Rights and, to the Seller’s Knowledge, no such Actions are threatened.
(h) No Company Intellectual Property is subject to any Action or any outstanding Order that restricts the use, transfer or licensing thereof by the Seller or any of its subsidiaries or that would reasonably be expected to adversely affect the validity, use or enforceability of such Company Intellectual Property.
(i) Neither this Agreement nor the consummation of the transactions contemplated hereby, will (i) result in any loss of, or give rise to a right to modify or terminate the right to use, any material Company Intellectual Property, (ii) result in (x) the Seller granting to any Person any license, covenant not to sue, immunity or other right with respect to any Company Intellectual Property; or (z) the Seller, any of its subsidiaries or any of their respective Affiliates being obligated to pay any royalties or other amounts to any Person.
(j) The Seller has taken steps to preserve and maintain all the interests and proprietary rights of the Seller in, to and under the Company Intellectual Property.
2.6 Tax Matters.
To the extent relating to the Purchased Assets:
(a) the Seller has timely filed all Tax Returns that it was required to file prior to the Closing Date. All such Tax Returns (including information provided therewith or with respect to thereto) were true, correct and complete in all material respects. All Taxes owed by the Seller (whether or not shown on said Tax Returns) for all taxable periods, or portions thereof, ending on or before the Closing Time have been fully and timely paid and the Seller has made adequate provision on its financial statements for any Taxes that are not yet due and payable. All Taxes that the Seller is or was obligated to withhold from amounts paid to any Person have been fully paid and all Tax Returns relating to such payments have been filed;
(b) no Tax audit or other proceeding is pending or currently being conducted with respect to the Seller, no issues that had been raised by a Tax Authority with respect to the Seller are pending, the Seller has not received written notification from any Tax Authority that it intends to commence a Tax proceeding with respect to any Tax Return or to assert any deficiency or claim for additional Taxes against the Seller, and all deficiencies for Taxes asserted or assessed against the Seller have been fully and timely paid, settled or properly reflected in the Seller’s financial statements;
(c) there are no outstanding agreements extending or waiving the statutory period of limitations applicable to any claim for, or the period for the collection or assessment or reassessment of, Taxes due from the Seller for any taxable period and no request for any such waiver or extension is currently pending;
| 9 |
(d) the Seller has delivered to the Buyer or made available to the Buyer, true, correct, and complete copies of all federal, state, local and foreign income Tax Returns which have been filed by the Seller for taxable periods ended on or after January 1, 2019, and all ruling requests, private letter rulings, closing agreements, settlement agreements and statements of deficiencies sent or received by the Seller;
(e) there are no Liens for any Taxes (other than statutory Liens for current Taxes not yet due and payable);
(f) the Seller has never been a member of an “affiliated group” within the meaning of Section 1504(a) of the Code filing a consolidated federal income Tax Return and has never been a member of any other consolidated, combined, affiliated, or unitary group for any Tax purposes. The Seller does not have any liability for the Taxes of any other Person under Section 1.1502-6 of the Treasury Regulations (or any similar provision of state, local or foreign Law), as a transferee or successor, by Contract, other than third-party commercial agreements not primarily related to Taxes; and
(g) the Seller has not received any written notice or questionnaire from any jurisdiction with which it does not currently file Tax Returns suggesting that the Seller is obligated to file Tax Returns or pay Taxes in such jurisdiction.
2.7 Litigation and Claims. There is no Action pending or, to the Knowledge of the Seller, threatened, against or affecting the Purchased Assets or the Business, and there is no Action pending or, to the Knowledge of the Seller, threatened, affecting the propriety or validity of, or that challenges or seeks to prevent, enjoin, or otherwise delay the the transactions contemplated hereby or by the Related Documents. The Seller is not subject to or in default under or with respect to any Order.
2.8 Compliance with Laws. To the Seller’s Knowledge, the Seller is in compliance in all material respects with all Laws which are applicable to the Purchased Assets or, to the Knowledge of the Seller, the Business.
2.9 No Finder. Except as set forth in Section 2.9 of the Disclosure Schedules, neither the Seller nor any party acting on its behalf has employed or entered into any Contract with, or otherwise became obligated to pay any fee or commission to, any investment banker, broker, finder, consultant or intermediary that would be entitled to any investment banking, brokerage, finder’s or similar fee in connection with the transactions contemplated by this Agreement or the Related Documents.
2.10 Investment Purpose.
(a) The Closing Share Consideration is being acquired solely for the Seller’s and/or the Trust’s own account for investment purposes and not with a view to or in connection with any sale or other distribution thereof, within the meaning of the Securities Act.
(b) All of the Closing Share Consideration acquired by it is to be issued and sold to the Seller without registration and in reliance upon certain exemptions under the Securities Act, and in reliance upon certain exemptions from registration requirements under applicable state securities laws.
| 10 |
(b) The Seller will not make any transfer or assignment of any of the Closing Share Consideration except in compliance with the Securities Act, this Agreement, the Escrow Agreement and any other applicable securities laws.
(d) The Seller prior to any transfer or disposition not registered under the Securities Act of any of the Closing Share Consideration, or any shares received from Buyer on account of such Closing Share Consideration pursuant to a stock dividend, stock split, or similar event, will give written notice to Buyer, expressing the Seller’s intention to effect such transfer or disposition and describing the proposed transfer or disposition. Such notice shall be accompanied by an opinion of counsel for the Seller, reasonably acceptable to Buyer, that the proposed transfer is exempt under Securities Act and applicable state securities laws.
(e) The Seller is aware that no federal or state agency has made any recommendation or endorsement of the Closing Share Consideration or any finding or determination as to the fairness of the investment in such Closing Share Consideration.
(h) No offer in respect of the Closing Share Consideration was made to the Seller or the Trust by the Buyer or any person acting on Buyer’s behalf by means of general or public solicitation or general or public advertising, such as by newspaper or magazine advertisements, by broadcast media, or at any seminar or meeting whose attendees were solicited by such means.
(i) The Buyer has made available all information concerning Buyer and its businesses, assets, liabilities, and rights which the Seller has requested to obtain. The Seller has received all information it requires in order to make its respective investment decision herein.
(j) The Seller (i) qualifies as an “accredited investor” as such term is defined in Rule 501 of the regulations issued under the Securities Act, and (ii) has such knowledge and experience in financial and business matters, and particularly the business conducted by Buyer, that it is capable of evaluating the risk of the investment in the Closing Share Consideration contemplated by this Agreement.
2.11 Investment Company Act. Neither the Seller nor the Trust is duly registered with the SEC under the Investment Company Act, as amended, as a non-diversified, closed-end management investment company.
2.12 No Other Representations or Warranties. The Seller acknowledges and agrees that except for the representations and warranties of the Buyer contained in Article III of this Agreement, no express or implied representation or warranty is made by the Buyer with respect to this Agreement or the transactions contemplated by this Agreement or otherwise.
| 11 |
ARTICLE
III.
REPRESENTATIONS AND WARRANTIES OF THE BUYER
Except as set forth in the Buyer Disclosure Schedule, the Buyer represents and warrants to the Seller as follows as of the Closing Date:
3.1 Organization; Good Standing. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer is duly licensed or qualified to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of the business and activities conducted by it, and/or the character of the assets owned or leased by it, makes such qualification necessary.
3.2 Authority; Execution and Delivery; Enforceability. The Buyer has full corporate power and authority to execute and deliver this Agreement and the Related Documents, to perform its obligations hereunder and under the Related Documents and to consummate the transactions contemplated hereby and by the Related Documents. All corporate acts and other proceedings required to be taken by the Buyer to authorize the execution, delivery and performance of this Agreement and the Related Documents have been duly and properly taken. Each of this Agreement and the Related Documents has been duly executed and delivered by the Buyer, and constitutes the legal, valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, moratorium and other similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles.
3.3 Non-Contravention. The execution and delivery by the Buyer of this Agreement and the Related Documents does not, and the consummation by the Buyer of the transactions contemplated hereby and by the Related Documents and compliance by the Buyer with the terms hereof and of the Related Documents, will not:
(a) constitute a violation or breach of the certificate of incorporation or the by-laws of the Buyer;
(b) constitute a default under or a violation or breach of, or result in the acceleration of any obligation of the Buyer under, any provision of any contract or other instrument to which the Buyer is a party or by which any of the assets of the Buyer may be affected which has heretofore been filed as an exhibit to the SEC Reports; or
(c) violate any Order or any Law affecting the Buyer or its assets.
3.4 Consents and Approvals. No consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Authority, and no consent or approval of any Person, is required to be obtained by or on behalf of the Buyer in connection with the execution, delivery and performance by the Buyer of this Agreement or the Related Documents or the consummation of the transactions contemplated hereby and by the Related Documents.
| 12 |
3.5 SEC Reports and Buyer Financials.
(a) The Buyer has filed all forms, reports, schedules, statements, registration statements, prospectuses and other documents required to be filed or furnished by the Buyer with the SEC under the Securities Act and/or the Exchange Act, as applicable, together with any amendments, restatements or supplements thereto. Except to the extent available on the SEC’s website through EDGAR, the Buyer has delivered to the Company copies in the form filed with the SEC of all of the following: (i) the Buyer’s annual reports on Form 10-K for each fiscal year of the Buyer beginning with the first year the Buyer was required to file such a form, (ii) the Buyer’s quarterly reports on Form 10-Q for each fiscal quarter that the Buyer filed such reports to disclose its quarterly financial results in each of the fiscal years of the Buyer referred to in clause (i) above, (iii) all other forms, reports, registration statements, prospectuses and other documents (other than preliminary materials that have been superseded by definitive materials) filed by the Buyer with the SEC since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements, prospectuses and other documents referred to in clauses (i), (ii) and (iii) above, whether or not available through EDGAR, are, collectively, the “SEC Reports”) and (iv) all certifications and statements required by (A) Rules 13a-14 or 15d-14 under the Exchange Act, and (B) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002, as amended) with respect to any report referred to in clause (i) above (collectively, the “Public Certifications”). The SEC Reports (x) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (y) did not, as of their respective effective dates (in the case of SEC Reports that are registration statements filed pursuant to the requirements of the Securities Act) and at the time they were filed with the SEC (in the case of all other SEC Reports) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, and the Public Certifications are each true as of their respective dates of filing. As used in this Section 3.5, the term “file” shall be broadly construed to include any manner permitted by SEC rules and regulations in which a document or information is furnished, supplied or otherwise made available to the SEC.
(b) The financial statements and notes of the Buyer contained or incorporated by reference in the SEC Reports (the “Buyer Financials”), fairly present in all material respects the financial position and the results of operations, changes in stockholders’ equity, and cash flows of the Buyer at the respective dates of and for the periods referred to in such financial statements, all in accordance with (i) GAAP methodologies applied on a consistent basis throughout the periods involved and (ii) Regulation S-X or Regulation S-K, as applicable (except as may be indicated in the notes thereto and for the omission of notes and audit adjustments in the case of unaudited quarterly financial statements to the extent permitted by Regulation S-X or Regulation S-K, as applicable).
(c) Except to the extent reflected or reserved against in the Buyer Financials, the Buyer has not incurred any Liabilities or obligations of the type required to be reflected on a balance sheet in accordance with GAAP that are not adequately reflected or reserved on or provided for in the Buyer Financials, other than Liabilities of the type required to be reflected on a balance sheet in accordance with GAAP that have been incurred since the Buyer’s formation in the ordinary course of business.
| 13 |
3.6 Litigation and Claims. There is no Action pending or, to the knowledge of the Buyer, threatened, against or affecting the Buyer or any senior officer or director of the Company arising out of their employment or board relationship with the Buyer or that questions the validity of this Agreement and the Related Documents or the right of the Buyer to enter into them, or to consummate the transactions contemplated by this Agreement and the Related Documents. The Buyer is not subject to or in default under or with respect to any Order.
3.7 No Finder. Except as set forth in Section 3.7 of the Disclosure Schedules, neither the Buyer nor any party acting on its behalf has employed or entered into any Contract with, or otherwise became obligated to pay any fee or commission to, any investment banker, broker, finder, consultant or intermediary that would be entitled to any investment banking, brokerage, finder’s or similar fee in connection with the transactions contemplated by this Agreement or the Related Documents.
3.8 Closing Share Consideration. Upon issuance, the Closing Share Consideration will be duly authorized, validly issued, fully paid and non-assessable and will not be subject to any option, call, preemptive, subscription or similar rights or Liens, other than restrictions on transfer imposed by applicable securities laws. The Buyer has sufficient authorized but unissued shares or treasury shares of Common Stock and Preferred Shares to meet its obligation to deliver the Closing Share Consideration under this Agreement, including the shares of Common Stock underlying the Preferred Shares and the Warrant
3.9 Valid Issuance of the Common Shares, Preferred Shares and Warrant. The Common Shares, Preferred Shares and Warrant, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Related Documents, applicable state and federal securities laws and liens or encumbrances created by or imposed by this Agreement and the Related Documents. Assuming the accuracy of the representations of the Seller in Article II of this Agreement, the Common Shares, Preferred Shares and Warrant will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrant has been duly reserved for issuance, and upon issuance in accordance with the terms of the Buyer’s organizational documents, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement and the Related Documents, applicable federal and state securities laws and liens or encumbrances created by or imposed by this Agreement and the Related Documents. Based in part upon the representations of the Buyer in Article III of this Agreement, the Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrant will be issued in compliance with all applicable federal and state securities laws.
3.10 No Other Representations or Warranties. The Buyer acknowledges and agrees that except for the representations and warranties of the Seller contained in Article II of this Agreement, no express or implied representation or warranty is made by the Seller to the Buyer with respect to this Agreement or the transactions contemplated by this Agreement or otherwise.
| 14 |
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Cooperation in Litigation. From and after the Closing Date (until the date that is 18 months from the Closing Date (the “Post-Closing Period”), each party hereto shall provide to the other such cooperation as may reasonably be requested in connection with the defense of any litigation relating to the Purchased Assets, whether existing on the Closing Date or arising thereafter, at their own expense.
4.2 Non-Derogation; Confidentiality and Noncompetition Agreement.
(a) From and after the Closing Date, the Seller shall not make any comment or act in any manner, which is derogatory or disparaging towards the Buyer, the operation of the Buyer, or any services rendered or products manufactured, sold or distributed by the Buyer or its Affiliates, including, after the Closing, the Purchased Assets. From and after the Closing Date, the Buyer shall not make any comment or act in any manner, which is derogatory or disparaging towards the Seller, the operation of the Seller, or any services rendered or products manufactured, sold or distributed by the Seller, its Affiliates, including, after the Closing, the Excluded Assets.
(b) As a material inducement for the agreement of the Buyer to enter into this Agreement, and as additional consideration therefor, the Seller hereby agrees that:
(i) Except as otherwise provided herein or in any Related Document, from and after the Closing for a period of ten (10) years, the Seller shall not, and shall cause its Affiliates not to, without the prior written consent of the Buyer, directly or indirectly, engage or participate in, whether as principal, manager, director, officer, shareholder, member, employee, agent, consultant, or otherwise, or become involved in any business in competition with the Business of the Buyer or its Affiliates anywhere in the world (the “Restrictive Activities”); provided, that: (A) passive ownership of ten percent (10%) or less of the voting stock, equity securities or other equity interests or other securities convertible into any company, corporation, partnership or other entity that is public; (B) ownership, management, operation, control, participation in, performance of services for or otherwise carrying on the businesses, substantially in the manner as of immediately prior to the execution and delivery of this Agreement, of Chronicle or any other company that is not in competition with the Business of the Buyer or its Affiliates; (C) existing and future investments in, and representation on the board of directors or managers of Chronicle; and (E) interests in the Buyer pursuant to this Agreement, in each case, shall not be a breach of the Seller’s and its Affiliates’ obligations under this Agreement.
(ii) Except as otherwise provided herein or in any Related Document, from and after the Closing for a period of ten (10) years, the Seller shall not, and shall cause its Affiliates not to, without the prior written consent of the Buyer, directly or indirectly (A) solicit the trade of, call on, trade with, or provide any services to or conduct any other business or transaction with, any present or past (within the year prior to the date hereof) supplier, customer, account, or client of the Seller with respect to the Business as of the Closing Date, or (B) attempt to induce any such person to terminate or diminish their business with the Buyer or any of its Affiliates.
| 15 |
(c) Each of the Buyer and the Seller acknowledges and agrees that the covenants and agreements contained in this Section 4.2 have been negotiated in good faith by each of them. Each of the Buyer and the Seller further acknowledges that (i) the goodwill associated with the Purchased Assets prior to the transactions contemplated herein is an integral component of the value of the Purchased Assets to the Buyer and is reflected in the consideration to be received by the Seller pursuant to this Agreement, and (ii) the covenants and agreements contained in this Section 4.2 are necessary to preserve the value of the Purchased Assets for the Buyer following the transactions contemplated herein. The Seller acknowledges that the limitations of time, geography and scope of activity agreed to in this Section 4.2 are reasonable because, among other things: (A) the Buyer and the Seller are engaged in a highly competitive industry, (B) the Seller has unique access to, and will continue to have access to, Confidential Information, including trade secrets and know-how regarding the Purchased Assets, (C) the Seller is receiving significant consideration in connection with the transactions contemplated herein and (D) this Section 4.2 provides no more protection than is necessary to protect the Buyer’s interest in the goodwill of the Purchased Assets, Confidential Information and trade secrets. If any one or more of the provisions contained in this Section 4.2 shall be held to be excessively broad as to scope, territory or period of time, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable Law.
(d) Except as required by Law, the Seller shall, and shall cause each Seller Group Member to, hold for a period of five (5) years from the Closing Date in confidence all Confidential Information obtained in the course of its ownership of or participation in, the Business concerning the Purchased Assets which is either non-public, confidential or proprietary in nature. For a period of five (5) years from the Closing Date, the Seller shall, and shall cause each Seller Group Member to, keep such Confidential Information confidential and shall not, without the prior written consent of the Buyer, disclose such Confidential Information to any Person. Notwithstanding the foregoing, the Seller may disclose Confidential Information if and only to the extent such disclosure (i) is reasonably necessary (x) for the purpose of the Seller asserting its rights (or a defense) in a dispute among the parties hereto or under any Related Document or (y) in connection with the resolution of a dispute between the Seller and any counterparties to the Excluded Liabilities (provided, that, in the case of disclosure to counterparties to the Excluded Liabilities, the Seller must first provide Buyer with a reasonable, good faith written request prior to such disclosure and receive prior consent of the Buyer, which consent will be reasonably provided subject to such counterparty executing a nondisclosure agreement with respect to the information disclosed to it), (ii) to the extent required by Law, subject to reasonable prior notice to Buyer, cooperation with Buyer (at Buyer’s sole cost) in its attempt to seek a protective order or other relief, and, failing the entry of such a protective order or other relief, the limitation of any such disclosure to such Confidential Information as is, in the opinion of counsel, legally required to be so disclosed, (iii) is obtained by the Seller from a third party who the Seller reasonably believes has no obligation of confidentiality to Buyer with respect to such information, (iv) is generally available to the public at the time of disclosure by Seller, provided that, such entrance into public knowledge is through no breach of this Agreement by the Seller or person(s) acting on the Seller’s behalf, or (v) is required in connection with the preparation of a Tax Return or similar Tax-related filing. Notwithstanding the restrictions in this Section 4.2(c), the Seller may disclose Confidential Information if reasonably related to the charitable activities of the Seller’s members and consistent with the Seller’s past practice. The Seller will use its commercially reasonable efforts to limit any disclosure of the Confidential Information. For the avoidance of doubt, the obligations of the Seller set forth in this Section 4.2(c) will not apply to any Person other than the Seller. Without limiting the generality of the foregoing, the receipt by any Person of information contained in any data room prior to the date of this Agreement and the use and dissemination thereof by any such Person that is not Seller shall not violate this Agreement.
| 16 |
4.3 Tax Matters.
(a) The Buyer and the Seller agree to (and shall cause each of their respective Affiliates to) provide each other with such information and assistance as is reasonably necessary for the preparation of any Tax Returns or for the defense of any Tax claim or assessment, whether in connection with an audit or otherwise. In addition, the Buyer and the Seller shall promptly and no later than five (5) Business Days notify the other in writing upon receipt by such party or any of its Affiliates of notice of any pending or threatened federal, state, local or foreign Tax audits or assessments which may affect the Tax liabilities for which the other party would be required to indemnify such party pursuant to Article V hereof; provided, that Seller or Buyer’s failure to comply with this provision shall not affect such party’s right to indemnification.
(b) The Seller shall file all Tax Returns required to be filed by it from and after the date of this Agreement through the end of any taxable year that includes the Closing, and shall pay all Taxes with respect to any such taxable year.
(c) All applicable transfer Taxes, sales and/or use Taxes, real property transfer or excise Taxes, recording, deed, stamp and other similar Taxes, fees and duties under applicable Law incurred in connection with the transfer of the Purchase Assets shall be borne equally by the Buyer and the Seller. The Seller and the Buyer shall jointly prepare or cause to be prepared and file or cause to be filed in a timely manner, all Tax Returns required to be filed with respect to such Taxes.
(d) For all Tax purposes, the parties shall report the transactions contemplated by this Agreement in a manner consistent with the terms of this Agreement, and all parties shall file their Tax Returns accordingly, unless otherwise required by applicable Law.
(e) The Seller shall deliver to the Buyer a non-foreign affidavit dated as of the Closing Date, sworn under penalties of perjury and in form and substance required under Treasury Regulations issued pursuant to Section 1445 of the Code, stating that the Seller is not a “foreign person.”
4.4 Further Assurances.
(a) From and after the Closing Date, each party hereto shall, at any time and from time to time, make, execute and deliver, or cause to be made, executed and delivered, for no additional consideration but at the cost and expense of the requesting party (excluding any internal costs incurred, such as having any of the following reviewed by counsel) such assignments, deeds, drafts, checks, returns, filings and other instruments, agreements, consents and assurances and take or cause to be taken all such actions as the other party or its counsel may reasonably request for the effectual consummation and confirmation of this Agreement and the Related Documents and the transactions contemplated hereby and by the Related Documents.
| 17 |
(b) Without limitation to Section 1.2, the Seller shall promptly and no later than five (5) Business Days transfer or deliver to Buyer all of the Purchased Assets retained or received by Seller after the Closing Date.
4.5 Registration Statement.
(a) The Buyer shall use commercially reasonable efforts to file with the SEC a registration statement on Form S-3 (or, if Form S-3 is unavailable, another available form) (the “Registration Statement”) covering the distribution and/or public resale of Common Shares and the shares of Common Stock underlying the Warrant, at the Buyer’s sole cost and expense, and to notify the Seller in writing promptly and no later than five (5) Business Days after such filing. The Buyer will use its commercially reasonably efforts to obtain effectiveness of the Registration Statement within one hundred and eighty (180) calendar days of the Closing Date; provided, that it shall be a condition to the Buyer’s obligation to file the Registration Statement in respect of the Seller or the applicable selling stockholders thereunder, that Seller or such selling stockholders provide the Buyer with the information reasonably requested by the Buyer for inclusion in the Registration Statement.
(b) In the event that any Preferred Shares remain outstanding nineteen (19) months after the Closing, the Buyer shall use commercially reasonable efforts to file with the SEC a subsequent registration statement on Form S-3 (or, if Form S-3 is unavailable, another available form) (the “Preferred Stock Registration Statement”), covering the sale of the shares of Common Stock underlying the then-outstanding Preferred Shares. The Buyer will use its commercially reasonable efforts to obtain effectiveness of the Preferred Stock Registration Statement within 19 months of the Closing Date; provided, that it shall be a condition to the Buyer’s obligation to file the Preferred Stock Registration Statement in respect of the Seller or the applicable selling stockholders thereunder, that Seller or such selling stockholders provide the Buyer with the information reasonably requested by the Buyer for inclusion in the Preferred Stock Registration Statement. In the event that any Preferred Shares remain outstanding nineteen (19) months after the Closing Date and the Buyer does not successfully register the shares of Common Stock underlying the then-outstanding Preferred Shares within nineteen (19) months of the Closing as required pursuant to this Section 4.5(c), the Buyer will issue to Seller an additional 10% of all of the shares Common Stock underlying the then-outstanding Preferred Shares (on a one Preferred Share into 8.3333 Common Shares basis) to the Seller no later than one week after expiration of such 19-month period (“Make Whole Amount”).
(c) In addition, if the Buyer does not successfully register all of the shares of Common Stock as required pursuant to Section 4.5(a) and Section 4.5(b), the Buyer will, at its sole cost and expense, and to the extent legally permitted, cooperate fully with the Seller to provide any legal opinions reasonably required by the transfer agent for the removal of the restricted transfer legends from such shares of Common Stock, and, to the extent legally permitted, will direct the transfer agent to remove such transfer restriction legends from certificates representing the shares of Common Stock so that the Seller and/or its designees and distributees can transfer such shares of Common Stock. Seller acknowledges that Buyer is a former “shell company” as contemplated by SEC Rule 144, as amended, and, therefore, the legal opinions required to be provided pursuant to this Section 4.5(c) may contain (and the ability of Seller or its designees or distributes to sell Common Stock under such rule may be subject to) time or other restrictions or limitations in order to ensure compliance with such rule.
| 18 |
4.6 Publicity. No public release or announcement concerning the transactions contemplated hereby or by the Related Documents shall be issued by any party hereto without the prior consent of the other party hereto (which consent shall not be unreasonably withheld or delayed), except as such release or announcement may be required by Law or the rules or regulations of any U.S. or foreign securities exchange, in which case the party required to make the release or announcement shall allow the other party reasonable time to comment on such release or announcement in advance of such issuance and shall make a reasonable effort to take into account such comments.
4.7 [Reserved]
4.8 Dissolution and Liquidation of the Seller.
The Seller shall refrain from liquidating or dissolving, and shall maintain its existence, until the expiration of all survival periods under Section 5.1 hereof, including any extensions thereof due to the making of any claim during any survival peiod; provided, that, in no event shall Seller be required to maintain its existence at any time following the Post-Closing Period.
4.9 Lock-Up Period.
(a) The Seller hereby agrees and shall cause the Trust to not for one hundred and eighty (180) calendar days after the Closing Date (the “Lock-Up Period”): (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any Closing Share Consideration to be issued to the Seller and/or the Trust pursuant to this Agreement, together with any securities paid as dividends or distributions with respect to the Closing Share Consideration or into which such securities are exchanged or converted (if any), the “Restricted Securities”), (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Restricted Securities or (iii) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (i), (ii) or (iii) above is to be settled by delivery of Restricted Securities or other securities, in cash or otherwise (any of the foregoing described in clauses (i), (ii) or (iii), a “Prohibited Transfer”). The Seller further agrees to execute such agreements as may be reasonably requested by the Buyer that are consistent with the foregoing or that are necessary to give further effect thereto.
(b) If any Prohibited Transfer is made or attempted contrary to the provisions of this Agreement, such purported Prohibited Transfer shall be null and void ab initio, and the Buyer shall refuse to recognize any such purported transferee of the Restricted Securities as one of its equity holders for any purpose. In order to enforce this Section 4.9, the Buyer may impose stop-transfer instructions with respect to the Restricted Securities of the Seller until the end of the Lock-Up Period.
(c) During the Lock-Up Period, each certificate or book-entry evidencing any Restricted Securities shall be stamped or otherwise imprinted with a legend in substantially the following form, in addition to any other applicable legends:
| 19 |
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY OTHER JURISDICTION, IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, NOR WILL AN ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER OF THE SHARES BY THE ISSUER UNLESS (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND OTHER APPLICABLE SECURITIES LAWS WITH RESPECT TO THE SHARES ANDTHE TRANSFER SHALL THEN BE IN EFFECT, OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER, THE SHARES ARE TRANSFERRED IN A TRANSACTION WHICH IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN (A) AN ASSET PURCHASE AGREEMENT, DATED AS OF MAY 30, 2023, BY AND AMONG THE ISSUER OF SUCH SECURITIES, KAIVAL LABS, INC. AND GOFIRE, INC., AS AMENDED, AND (B) A TRUST AGREEMENT, BY AND AMONG TRUIST BANK, GOFIRE, AND GEORGE GLACKIN, AS AMENDED”
(d) For the avoidance of any doubt, the Seller shall retain all of its rights as a stockholder of Buyer during the Lock-Up Period, including the right to vote any Restricted Securities.
(e) Following the Lock-Up Period, upon the Common Shares and the Warrant being registered pursuant to Section 4.5(a), subject to applicable securities regulations, the Seller shall be free to, at the option of the Seller, transfer the Common Shares to the Seller’s then-current shareholders in accordance such shareholders’ respective ownership interests in the Seller or sell the Common Shares in the Trading Market on behalf of such shareholders and distribute the sale proceeds as a dividend thereto, and exercise the Warrant to acquire the Common Stock subject to the terms of the Warrant Agreement and after such exercise transfer or sell the Common Stock in the manner previously described herein.
(f) In addition, following the Lock-Up Period, upon the shares of Common Stock underlying the Preferred Shares being registered pursuant to Section 4.5(b), subject to applicable securities regulations and the terms of the Certificate of Designations, the Seller or the Trust, as the case may be, shall be free to convert the Preferred Shares into Common Stock and (i) sell them in the Trading Market or (ii) transfer the Common Shares to the Seller’s then-current shareholders or the beneficiaries of the Trust in accordance with the terms of the Trust Agreement, as the case may be, in accordance with such shareholders’ respective ownership interests in the Seller.
(g) The transfer of unregistered Common Shares or shares of Common Stock underlying the Preferred Shares and the Warrant at any time after the Lock-Up Period shall be subject to the provisions of Section 4.5(c) and the terms of the Certificate of Designation and the Warrant Agreement, respectively.
| 20 |
4.10 Contingent Cash Payment.
(a) As part of the consideration set forth herein, sufficiency of which are hereby acknowledged, from and after the Closing Date and until January 1, 2027 (“CCP Period”), any cannabis-specific royalties that are generated by Kaival Labs, Inc. from or due to the Purchased Assets will be subject to a contingent cash payment (“CCP”), pursuant to which the Buyer shall pay to the Seller certain amounts as described below. For the avoidance of doubt, the CCP is specific to cannabis, hemp or cannabinoid royalties, and any other royalties generated by the Purchased Assets will not apply. Prior to the earlier of: (i) Buyer achieving less than or equal to $15,000,000 in aggregate gross cannabis-specific royalties from any Kaival Labs licensing agreements, and (ii) January 1, 2027, Buyer shall pay to the Seller a CCP equal to 50% of the aggregate gross cannabis-specific royalties generated by the Purchased Assets. After the earlier of: (i) Buyer achieving greater than $15,000,000 in aggregate gross cannabis-specific royalties, and (ii) January 1, 2027, the Buyer shall pay to the Seller a CCP equal to 10% of the aggregate gross cannabis-specific royalties generated by the Purchased Assets until January 1, 2027. By way of example only, if aggregate cannabis-specific royalties from or due to the Purchased Assets of $10,000,000 are achieved by the Buyer prior to January 1, 2027, the Buyer shall pay to the Seller a 50% CCP of such cannabis-specific royalties. If aggregate gross cannabis-specific royalties of $30,000,000 are achieved by the Buyer prior to January 1, 2027, the Buyer shall pay to the Seller a 50% CCP of the first $15,000,000 and a 10% CCP of the next $15,000,000, until January 1, 2027.
(b) Within five (5) Business Days after each quarterly and annual tax filing date, the Buyer shall prepare and deliver a statement (an “CCP Statement”), setting forth the Buyer’s good faith calculation of the CCP for the applicable tax filing period, together with reasonable supporting detail and documentation. The Seller shall have inspection rights. If the Seller has accepted the CCP Statement in writing or has not given written notice to the Buyer setting forth any objection of the Seller to such CCP Statement (a “CCP Objections”) prior to the expiration of a ten (10) Business Day period from receipt of a CCP Statement (the “CCP Review Period”), then such CCP Statement shall be final and binding upon the parties, and shall be deemed the final CCP Statement.
(c) In the event that the Seller delivers a CCP Objections during the applicable CCP Review Period, the Buyer and the Seller shall negotiate in good faith to resolve any such objection within ten (10) Business Days following the receipt by the Buyer of the CCP Objections (the “CCP Consultation Period”). If the Seller and the Buyer are unable to reach an agreement as to any such objection(s) within the CCP Consultation Period, then either party may submit such matter to an accounting firm that is not the independent auditor of either the Buyer or the Seller and that is reasonably acceptable to the Buyer and the Seller (the “CCP Settlement Accountant”) for resolution of the remaining disputed matters. The CCP Settlement Accountant shall act as an expert and not as an arbitrator. The CCP Settlement Accountant’s determination shall be made solely in accordance with the terms and procedures set forth in this Agreement (e.g., not on the basis of an independent review). The resolution of the dispute by the CCP Settlement Accountant shall be final, binding and non-appealable on the parties hereto. The parties shall bear their own costs in the process.
(d) During the CCP Period, (i) the Buyer shall not, and shall cause its Affiliates not to, take any action with the primary purpose of reducing or delaying the CCP for the applicable quarterly or annual tax filing period or otherwise act in bad faith to frustrate the ability to achieve the amount of the CCP, and (ii) the Buyer shall, and shall cause its Affiliates to, use commercially reasonable efforts acting in good faith, to comply in all material respects with and enforce the terms of the Kaival Labs licensing agreements from which the cannabis-specific royalties are generated.
| 21 |
4.11 Nasdaq Listing. For a period of two (2) years following the Closing Date, and except in connection with a change of control transaction involving the Buyer, the Buyer shall use commercially reasonable efforts to continue to have its Common Stock listed on Nasdaq or another U.S. national securities exchange.
4.12 Conditions to a Trust Transfer. The consummation of the Trust Transfer described herein shall be subject to the satisfaction or written waiver by the Buyer of the following conditions:
(a) any Trust Transfer shall be undertaken pursuant to a valid exemption from registration under, and would not otherwise violate, applicable federal securities laws, rules and regulations;
(b) the Buyer shall have received a written legal opinion of counsel to the Seller addressed to the Buyer, in form reasonably satisfactory to the Buyer, as to certain matters including, but not limited to: (i) those described in Section 4.12(a) herein, (ii) formation of the Trust, (iii) authority, execution and delivery of the Trust Agreement with respect to the Seller, (iv) enforceability of the Trust Agreement as against the Seller, (v) non-contravention of the Trust Agreement of Law, Order or Contract of the Seller, and (vi) absence of any requirement that the Trust be required to register as an investment company under the Investment Company Act of 1940;
(c) the Trust shall execute a written agreement with the Buyer that the Trust shall be subject to the provisions of Section 4.9 hereof; and
(d) the Buyer shall, prior to the execution thereof, be provided a copy of the Trust Agreement and a five (5) Business Day opportunity to review and comment on the same. Included in the provisions of the Trust Agreement shall be that the Seller, and not the Trustee, shall retain voting and dispositive and other actionable power of the Closing Share Consideration during the Lock-Up Period.
| 22 |
ARTICLE
V.
INDEMNIFICATION
5.1 Survival. Subject to the limitations and other provisions of this Agreement, the representations, warranties and covenants of the Seller in this Agreement shall survive the Closing for twelve (12) months from the Closing Date, except for (a) the Fundamental Representations and Section 2.5 hereof, which shall terminate eighteen (18) months from the Closing Date, and (b) the representations and warranties contained in Section 2.6, which shall survive for the applicable statute of limitations, and (ii) all covenants and agreements that by their nature are to be satisfied, performed and/or fulfilled from and after the Closing shall survive until twenty (20) calendar days after the last day that each such covenant or agreement is to be so satisfied, performed and/or fulfilled. Notwithstanding the foregoing, if a good faith notice of any matter setting forth in reasonable detail a claim for a breach of any representation, warranty or covenant is given by the Buyer to the Seller, or by the Seller to the Buyer, in writing pursuant to this Agreement prior to the end of the applicable survival period, any such representation, warranty or covenant that would otherwise terminate shall be deemed to survive solely with respect to such matter until such matter is finally resolved.
5.2 Indemnification by the Seller. The Seller agrees to and shall indemnify, defend and hold harmless any Buyer Group Member from and against any and all Damages incurred by such Buyer Group Member arising out of or caused by:
(a) any actual (and not merely alleged) failure by the Seller to perform any covenants or other obligations of the Seller contained in this Agreement;
(b) any actual (and not merely alleged) breach of any representation or warranty of the Seller contained in this Agreement;
(c) any Excluded Asset or Excluded Liability; and
(d) without duplication, any Tax liability of the Seller, or Tax liability (including, without limitation, any audit of or any proposed adjustment to any Tax liability) of or with respect to the Purchased Assets to the extent it relates to a period prior to the Closing.
5.3 Indemnification by the Buyer. The Buyer agrees to and shall indemnify, defend and hold harmless any Seller Group Member from and against any and all Damages incurred by any Seller Group Member arising out of or caused by:
(a) any actual (and not merely alleged) failure by the Buyer to perform any covenants or other obligations of the Buyer contained in this Agreement; and
(b) any actual (and not merely alleged) breach of any representation or warranty of the Buyer contained in this Agreement.
5.4 Limitations on Indemnification.
(a) Notwithstanding any other provision in this Agreement to the contrary, the Seller shall have no liability under Section 5.2 (including without limitation pursuant to third party Actions) unless the aggregate of all Damages relating thereto for which the Seller would be liable, but for this Section 5.4(a), exceeds on a cumulative basis the sum of $73,190 (the “Deductible”), in which case, subject to the other limitations in this Section 5.4, the Seller shall be liable only for all such Damages in excess of the Deductible; provided, however, that the Deductible shall not apply to any breach of any Fundamental Representation or a breach of Section 5.2(d). Any claims for indemnification under Section 5.32 (including without limitation pursuant to third party Actions) shall be limited solely to $1,463,800. Notwithstanding the foregoing, the limitations set forth in this Section 5.4(a) shall not apply to any Damages which any Buyer Group Member actually suffers as a result of any claim based on actual fraud or intentional misrepresentation of the Seller.
| 23 |
(b) Notwithstanding any other provision in this Agreement to the contrary, the Buyer shall have no liability under Section 5.3(b) (including without limitation pursuant to third party Actions) unless the aggregate of all Damages relating thereto for which the Buyer would be liable, but for this Section 5.4(b), exceeds on a cumulative basis the Deductible; provided, however, that the Deductible shall not apply to any breach of any Fundamental Representation. Any claims for indemnification under Section 5.3 (including without limitation pursuant to third party Actions) shall be limited solely to $1,463,800. Notwithstanding the foregoing, the limitations set forth in this Section 5.4(b) shall not apply to any Damages which any Seller Group Member actually suffers as a result of any claim based on actual fraud or intentional misrepresentation of the Buyer.
(c) Solely for purposes of calculating the amount of any Damages, and not for any purpose of determining any breach, in connection with any inaccuracy of a representation or warranty made by the Seller in this Agreement for which a Buyer Group Member is entitled to indemnification pursuant to this Article V or by the Buyer in this Agreement for which a Seller Group Member is entitled to indemnification pursuant to this Article V, any references in any such representation or warranty to “material,” “materiality,” or similar qualifier will be disregarded.
(d) The parties acknowledge and agree that after the Closing, the indemnification provisions contained in this Article V shall be the sole and exclusive remedy for Damages arising out of or caused by the breach of any of the representations, warranties, covenants or agreements of the parties contained in this Agreement or otherwise in connection with the transactions pursuant to this Agreement, except (i) with respect to claims arising out of actual fraud or intentional misrepresentation, or (ii) any Buyer Group Member’s or Seller Group Member’s right, as applicable, to seek specific performance or other injunctive or equitable relief.
5.5 Tax Treatment of Indemnity Payments. It is the intention of the parties hereto to treat any indemnity payment made under this Agreement as an adjustment to the Closing Share Consideration for all federal, state, local and foreign Tax purposes, and the parties hereto agree to file their Tax Returns accordingly unless otherwise required by applicable Law.
5.6 Notice of Claims. Any party hereto seeking indemnification hereunder (the “Indemnitee”) shall prior to the expiration of the applicable survival period in Section 5.1 hereof give to the intended indemnifying party (the “Indemnitor”) a notice (a “Claim Notice”) describing in reasonable detail the facts giving rise to any claim for indemnification hereunder and shall include in such Claim Notice (if then known) the amount or the method of computation of the amount of such claim, and a reference to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based. Any Claim Notice shall be given by the Indemnitee to the Indemnitor promptly (but in any event, within thirty (30) calendar days) after such Indemnitee becomes aware of the claim; provided, however, that the Indemnitee shall not be foreclosed from seeking indemnification pursuant to this Article V by any failure to provide timely notice of the existence of an Action to the Indemnitor, except and only to the extent that the Indemnitor has been materially damaged or prejudiced as a result of such delay.
| 24 |
5.7 Third Party Claims. In the case of any third party Action as to which indemnification is sought by an Indemnitee, the Indemnitor shall have thirty (30) calendar days after receipt of a Claim Notice to notify the Indemnitee that it elects to conduct and control such Action. If the Indemnitor does not give the foregoing notice, the Indemnitee shall have the right to conduct and control such Action (without prejudice to the Indemnitee’s right to seek indemnification pursuant to this Article V); provided, that the Indemnitee shall permit the Indemnitor to participate in the conduct of such Action through counsel chosen by the Indemnitor, but the fees and expenses of such counsel shall be borne by the Indemnitor. If the Indemnitor gives the foregoing notice, the Indemnitor shall have the right, at the sole expense of the Indemnitor, to conduct and control such Action with counsel reasonably acceptable to the Indemnitee, and the Indemnitee shall cooperate with the Indemnitor in connection therewith; provided, that (x) the Indemnitor shall permit the Indemnitee to participate in such conduct or settlement through counsel chosen by the Indemnitee, but the fees and expenses of such counsel shall be borne by the Indemnitee, and (y) the Indemnitor may not compromise or settle any such Action without the consent of the Indemnitee (which consent will not be unreasonably withheld, conditioned and/or delayed) unless (i) there is no finding or admission of any violation of Law by the Indemnitee or any violation by the Indemnitee of the rights of any Person and no effect on any other claims that may be made against the Indemnitee, (ii) the sole relief provided is money Damages that are paid in full by the Indemnitor, (iii) the Indemnitee shall have no liability with respect to any compromise or settlement, and (iv) such settlement includes an unconditional release in favor of the Indemnitee by the third-party claimant from all liability with respect to such claim. Notwithstanding anything to the contrary contained in this Section 5.7, if with respect to a third party Action, (A) such third party Action seeks equitable relief that would adversely affect the ongoing business of an Indemnitee if such third party Action is decided against an Indemnitee, (B) the Indemnitor does not provide an Indemnitee with evidence reasonably acceptable to the Indemnitee that the Indemnitor will have adequate financial resources to defend against the third party Action and fulfill its indemnification obligations hereunder, (C) such third party Action relates to or otherwise arises in connection with any criminal or regulatory enforcement Action, (D) the Indemnitor does not actively and diligently conduct the defense of the third party Action, or (E) an Indemnitee has been advised by counsel that (x) there are one or more legal or equitable defenses available to it with a reasonable prospect of success which are not available to the Indemnitor or (y) there exists a reasonable likelihood of a conflict of interest between the Indemnitee and the Indemnitor, then, in any such case, the Indemnitee shall be entitled to assume control of the defense of such third party Action and may defend against the matter in any manner that it reasonably may deem appropriate. To the extent that the Indemnitee is entitled to and does assume the defense of such third party claim, the Indemnitee shall obtain the prior written consent of the Indemnitor (which consent shall not be unreasonably withheld, conditioned and/or delayed) before entering into any settlement of a claim or ceasing to defend such claim. If the Indemnitee assumes the defense of any such Action as contemplated herein, the Indemnitee shall select one counsel reasonably acceptable to the Indemnitor (such consent not to be unreasonably withheld, delayed or conditioned) to conduct the defense of such claim or legal proceeding.
5.8 Other Limitations.
(a) In addition to any obligations under applicable Law, the parties hereto shall use all commercially reasonable efforts to mitigate all Damages upon and after becoming aware of any event which would reasonably be expected to give rise to Damages that are or may be indemnifiable by each of them hereunder.
(b) The Buyer Group Members shall not be entitled to recover any Damages relating to any matter arising under one provision of this Agreement to the extent that any Buyer Group Member had already recovered such Damages with respect to such matter pursuant to any other provision of this Agreement.
| 25 |
5.9 Determination of Damages.
(a) In the event that an insurance recovery or a recovery under any other third-party agreement is received by an Indemnitee with respect to any Damages for which any Indemnitee has been indemnified by an Indemnitor hereunder, then a refund equal to the aggregate amount of the recovery (net of the reasonable out of pocket costs of recovery) shall be made promptly and no later than five (5) Business Day thereafter by the Indemnitee to the Indemnitor. Each party will have a duty to mitigate its Damages with respect to each indemnifiable item. Payments by an Indemnitor in respect of any loss shall be limited to the amount of such loss that remains after deducting therefrom any insurance proceeds and any indemnity, contribution or any other payment or reimbursement actually received by the Indemnitee in respect of any such matter or claim (collectively, the “Insurance Proceeds”). Any Damages incurred by any Indemnitee with respect to any matter shall be calculated net of any Insurance Proceeds. If any Insurance Proceeds are received by any Indemnitee after an Indemnitor has made a payment to such Indemnitee, any such Indemnitee shall promptly and no later than five (5) Business Day thereafter remit such Insurance Proceeds (in an amount not to exceed the amount of such indemnity payment) to the applicable Indemnitor.
5.10 Payments of Damages.
(a) Once Damages are agreed to by the Indemnitor or finally adjudicated to be payable pursuant to this Article V, the Indemnitor shall satisfy its obligations within five (5) Business Days of such final, non-appealable adjudication by wire transfer of immediately available funds. The parties hereto agree that should an Indemnitor not make full payment of any such obligations within such five (5) Business Day period, any amount payable shall accrue interest from and including the date of agreement of the Indemnitor or final, non-appealable adjudication to and including the date such payment has been made at a rate equal to seven percent (7%) per annum. Such interest shall be calculated on a simple interest basis using the actual number of calendar days elapsed in over the actual number of calendar days of the year.
(b) Any Damages payable to a Buyer Indemnitee pursuant to this Section 5.10 shall be satisfied: (i) from the Escrow Amount; and (ii) to the extent the Damages exceed the amounts available to the Buyer Group Member in the Escrow Amount, from the Seller. Any Damages payable to a Seller Indemnitee pursuant to this Section 5.10 shall be satisfied from the Buyer.
| 26 |
ARTICLE
VI.
MISCELLANEOUS
6.1 Expenses of the Transaction. The Buyer agrees to pay all of its fees and expenses in connection with this Agreement and the Related Documents and the transactions contemplated hereby and by the Related Documents, including, without limitation, legal and accounting fees and expenses. The Seller agrees to pay all of its fees and expenses in connection with this Agreement and the Related Documents and the transactions contemplated hereby and by the Related Documents, including, without limitation, legal and accounting fees and expenses. Notwithstanding the foregoing, each of Buyer and Seller agree to pay 50% of all fees and expenses in connection with the Escrow Agreement.
6.2 Notices. All notices or other communications required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by nationally-recognized overnight courier providing evidence of delivery or by registered or certified mail, postage prepaid, return receipt requested, at the following addresses or sent by email, with confirmation received, to the email address specified below:
If to the Buyer to:
Kaival Brands Innovations Group, Inc.
4460 Old Dixie Highway
Grant-Valkaria, Florida 32949
Attn: Eric Mosser, President
Email: eric@kaivalbrands.com
with a copy (which shall not constitute notice) to:
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, New York 10105
Attn: Lawrence A. Rosenbloom, Esq.
Telephone No.: (212) 370-1300
Email: lrosenbloom@egsllp.com
If to the Seller to:
GoFire, Inc.
8850 W. 38th Avenue, Unit A
Wheat Ridge, Colorado 80033
Attention: Peter Calfee, CEO
Telephone No.: (802) 779-2605
Email: peter@gofire.com
with a copy to:
Gunster, Yoakley & Stewart, P.A.
777 South Flagler Drive, Suite 500 East
West Palm Beach, FL 33401
Attention: Michael Mitrione, Esq.
Telephone No.: 561-650-0553
Email: MMitrione@gunster.com
| 27 |
or to such other address as such party may indicate by a notice delivered to the other parties hereto. All such notices or communications shall be deemed to be received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the date of delivery as indicated by the evidence of delivery furnished by the courier when sent, (c) in the case of mailing, on the third Business Day following the date on which the piece of mail containing such communication was posted, and (d) in the case of email, on the date of delivery (if receipt is confirmed).
6.3 Amendment and Waiver.
(a) Except as otherwise specifically set forth in this Agreement, any amendment, supplement or modification of or to any provision of this Agreement and any waiver of any provision of this Agreement shall be effective (i) only if it is made or given in writing and signed by the Buyer and the Seller or, in the case of a waiver, by the party granting the waiver (or such party’s attorney-in-fact) and (ii) only in the specific instance and for the specific purpose for which made or given.
(b) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are, subject to Section 5.4(d), cumulative and are not exclusive of any remedies that may be available to any party at Law, in equity or otherwise.
6.4 Entire Agreement. This Agreement together with the Schedules, Appendices and Exhibits hereto, the Confidentiality Agreement and the Related Documents, sets forth the entire agreement and understanding among the parties as to the subject matter hereof and supersedes all prior discussions, agreements and understandings of every kind and nature among them with respect to such subject matter.
6.5 Severability. If any provision of this Agreement or the application of any provision hereof to any Person or circumstances is held invalid, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected unless the provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement.
6.6 Specific Performance. The rights and remedies of the parties hereto shall be cumulative. The transactions contemplated by this Agreement are unique transactions and any failure on the part of any party to complete the transactions contemplated by this Agreement on the terms of this Agreement shall not be fully compensable in damages and the breach or threatened breach of the provisions of this Agreement would cause the other party hereto irreparable harm. Accordingly, in addition to and not in limitation of any other remedies available to the parties hereto for a breach or threatened breach of this Agreement, each of the parties hereto agrees that, without posting a bond or other undertaking, the parties hereto shall be entitled to seek specific performance of this Agreement and an injunction restraining any such party from such breach or threatened breach. Each party further agrees that, in the event of any Action for specific performance in respect of such breach or violation, it shall not assert that the defense that a remedy at law would be adequate.
| 28 |
6.7 Assignment. No party hereto may assign any of its rights under this Agreement without the prior written consent of the other parties hereto; provided, however, the foregoing limitation shall not bar or prevent the Seller from transferring to any Person any of the Common Shares or the shares of Common Stock underlying the Preferred Shares or the Warrant once same are registered pursuant to Section 4.5(a) and/or Section 4.5(b) or transferable pursuant to Section 4.5(c); provided, further that the Buyer may, without the consent of the Seller, assign any or all of its rights or obligations hereunder to Kaival Labs (although no such assignment shall relieve the Buyer of any of its obligations to the Seller). Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns.
6.8 Governing Law; Jurisdiction.
(a) This Agreement shall be governed by the Laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule that would cause application of the Laws of any jurisdiction other than the State of Delaware.
(b) Each party to this Agreement, by its execution hereof (i) irrevocably submits to the exclusive jurisdiction of any state or federal court located in the state of Delaware (or in any appellate court therefrom), for the purposes of any Action arising out of this Agreement or the transactions contemplated hereby, (ii) waives to the extent not prohibited by applicable Law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such Action brought in one of the above-named courts should be dismissed on grounds of forum non conveniens, should be transferred or removed to any court other than one of the above-named courts, or should be stayed by reason of the pendency of some other proceeding in any other court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by such court and (iii) hereby agrees not to commence any such Action other than before one of the above-named courts. Notwithstanding the previous sentence, any party hereto may commence any Action in a court other than the above-named courts solely for the purpose of enforcing an order or judgment issued by one of the above-named courts.
6.9 Headings; References. The headings appearing in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope and intent of this Agreement or any of the provisions hereof. Any reference in this Agreement (including in any Exhibit, Appendix or Schedule hereto) to a “Section,” “Article,” “Schedule” or “Exhibit” shall mean a Section, Article, Schedule or Exhibit of or to this Agreement unless expressly stated otherwise.
6.10 Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, THE PARTIES HEREBY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE PARTIES AGREE THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS, AND SUCH PROCEEDING WILL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
| 29 |
6.11 Interpretation. In this Agreement, (a) words used herein regardless of the gender specifically used shall be deemed and construed to include any other gender, masculine, feminine or neuter, as the context shall require, (b) all terms defined in the singular shall have the same meanings when used in the plural and vice versa and (c) the words “include”, “includes” or “including” are deemed to be followed by the words “without limitation”. Any statute defined or referred to herein or in any agreement or instrument that is referred to herein means such statute as from time to time amended, modified or supplemented, including (in the case of statutes) by succession of comparable successor statutes.
6.12 Schedules. Any item that is disclosed in any section of the Seller Disclosure Schedule or the Buyer Disclousre Schedule with sufficient specificity so that it is apparent on the face of such Schedule that such disclosure is also applicable to one or more other sections of such Schedule shall also be deemed disclosed for purposes of such other parts of such Schedule to which such disclosure is applicable. Terms used in any Schedule to this Agreement and not otherwise defined in such Schedule shall have the meaning ascribed to such term in this Agreement.
6.13 Representation by Counsel. Each party hereto acknowledges that it has been advised by legal and any other counsel retained by such party in its sole discretion. Each party acknowledges that such party has had a full opportunity to review this Agreement and all related exhibits, schedules and ancillary agreements and to negotiate any and all such documents in its sole discretion, without any undue influence by any other party hereto or any third party.
6.14 Construction. The parties have participated jointly in the negotiations and drafting of this Agreement and in the event of any ambiguity or question of intent or interpretation, no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement
6.15 Third Parties. Except as expressly provided herein or as otherwise agreed by the parties hereto, the provisions of this Agreement are solely for the benefit of the parties hereto and shall not inure to the benefit of any third party.
6.16 Counterparts. This Agreement and the Related Documents to be delivered in connection herewith may be executed in two or more counterparts, any one of which need not contain the signatures of all parties, but all of which counterparts taken together will constitute one and the same agreement. Facsimile and other electronic signatures shall constitute original signatures for all purposes of this Agreement and the Related Documents, and delivery of such signatures by electronic means shall constitute valid delivery thereof.
[Signature page follows]
| 30 |
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement on the date first written above by their respective officers thereunto duly authorized.
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | |||
| By: | /s/ Eric Mosser | ||
| Name: | Eric Mosser | ||
| Title: | President | ||
| GOFIRE, INC. | |||
| By: | /s/ Peter Calfee | ||
| Name: | Peter Calfee | ||
| Title: | Chief Executive Officer | ||
| KAIVAL LABS, INC. | |||
| By: | /s/ Eric Mosser | ||
| Name: | Eric Mosser | ||
| Title: | President | ||
APPENDIX A
DEFINITIONS
Definitions. The following terms when used in the Agreement shall have the respective meanings ascribed to them below:
“Action” shall mean any suit, arbitration, action, cause of action, claim, proceeding, audit, assessment, complaint, charge, prosecution, governmental or other administrative proceeding, whether civil or criminal and whether at law or at equity, before or by any Governmental Authority, or before any arbitrator or other tribunal.
“Affiliate” shall mean, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with such specified Person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through ownership of voting securities, by contract or otherwise, and “control” shall be presumed if any Person owns 50% or more of the voting capital stock or other ownership interests, directly or indirectly, of any other Person.
“Agreement” has the meaning ascribed to such term in the Preamble hereto.
“Allocation Schedule” has the meaning ascribed to such term in Section 1.5.
“Bill of Sale” shall mean the bill of sale between the Buyer and the Seller, annexed hereto as Exhibit A.
“Books and Records” has the meaning ascribed to such term in Section 1.2(ii).
“Business” has the meaning ascribed to such term in the Recitals hereto.
“Business Day” shall mean a day (other than a Saturday or Sunday), on which commercial banks are open for business in Wheat Ridge, Colorado or Grant-Valkaria, Florida.
“Buyer” has the meaning ascribed to such term in the Preamble hereto.
“Buyer Disclosure Schedule” shall mean that certain schedule attached hereto, qualifying the representations and warranties contained in Article III.
“Buyer Financials” has the meaning ascribed to such term in Section 3.5(a).
“Buyer Group Member” shall mean each of the Buyer and its Affiliates and each of their respective present and former directors, officers, employees, agents, successors and assigns.
“CCP” has the meaning ascribed to such term in Section 4.10(a).
“CCP Objections” has the meaning ascribed to such term in Section 4.10(b).
“CCP Consultation Period” has the meaning ascribed to such term in Section 4.10(b).
| A-1 |
“CCP Period” has the meaning ascribed to such term in Section 4.10(a).
“CCP Review Period” has the meaning ascribed to such term in Section 4.10(b).
“CCP Settlement Accountant” has the meaning ascribed to such term in Section 4.10(b).
“CCP Statement” has the meaning ascribed to such term in Section 4.10(b).
“Certificate of Designation” has the meaning ascribed to such term in Section 1.4(a).
“Charter Amendment” shall have the meaning ascribed to such term in Section 1.1(b)(x).
“Chronicle” shall mean Chronicle Intelligence LLC, an Affiliate of the Seller.
“Claim Notice” has the meaning ascribed to such term in Section 5.6.
“Closing” has the meaning ascribed to such term in Section 1.1(a).
“Closing Date” has the meaning ascribed to such term in Section 1.1(a).
“Closing Share Consideration” has the meaning ascribed to such term in Section 1.4.
“Closing Time” has the meaning ascribed to such term in Section 1.1(a).
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute thereto and all final or temporary regulations promulgated thereunder and published.
“Common Shares” has the meaning ascribed to such term in Section 1.4(a).
“Common Stock” has the meaning ascribed to such term in Section 1.4(a).
“Company Intellectual Property” shall mean the Intellectual Property set forth in Schedule 1.1 of the Disclosure Schedule owned by the Seller, licensed by the Seller from third parties or which the Seller is otherwise authorized by third parties to use and which is used in connection with the Purchased Assets, which shall include the rights to the GoFire mobile app.
“Confidential Information” shall mean, with respect to the Purchased Assets, the trade secrets, confidential or proprietary information, knowledge, know-how, including, without limitation, its licensees (past and present), research and development information and materials, inventions, methods, strategies, techniques, processes, plans, product designs, material designs, fabric designs, procedures, contracts, sales information, financial information and budgets.
“Confidentiality Agreement” shall mean that certain Mutual Confidentiality Agreement between the Buyer and the Seller dated February 23, 2023, as supplemented by that certain letter of intent dated May 4, 2023, between the Buyer and the Seller.
“Contracts” shall mean, with respect to the Purchased Assets, all leases, licenses, contracts, purchase orders, agreements, promissory notes, guarantees, arrangements, commitments and understandings of any kind, whether written or oral, to which the Seller is a party or by which the Seller or the Purchased Assets of the Seller may be bound, and all rights arising under any of them.
| A-2 |
“Damages” shall mean actual out-of-pocket losses, claims, obligations, Liabilities, settlement payments, awards, Actions, judgments, fines, penalties, audits, investigations, assessments, damages, deficiencies, Taxes, and reasonable expenses and costs, including reasonable attorneys’ and auditors’ fees (and any reasonable experts’ fees) and court costs; provided, that “Damages” shall not include any punitive, incidental, consequential (except to the extent such consequential damages are (x) the natural, probable and reasonably foreseeable result of the event giving rise to such damage and not based on any special circumstances of such Indemnitee), special, indirect or exemplary damages, including any lost profits, loss of future revenue or income, loss of business reputation or opportunity, diminution of value, or any damages based on any type of multiple, except to the extent actually payable, in connection with a Third-Party Claim, to a third party that is not an Affiliate of an Indemnitee.
“Deductible” shall have the meaning ascribed to such term in Section 5.4(a).
“Employee Plans” shall mean each employee benefit plan (including, but not limited to, any “employee benefit plan” as defined in Section 3(3) of ERISA) and each other benefit plan, program, contract or arrangement of any kind whatsoever (whether for the benefit of present, former, retired or future employees, directors, consultants or independent contractors of the Seller) sponsored, maintained or contributed to by the Seller, or with respect to which the Seller could have any liability, including, without limitation, plans, programs, contracts or arrangements with respect to pension, retirement, profit sharing, deferred compensation, thrift, savings, stock ownership, stock bonus, restricted stock, welfare plan, unemployment, health, dental, medical, life, hospitalization, disability, relocation, child care, educational assistance, stock purchase, stock option, incentive, bonus, sabbatical leave, vacation, severance, cafeteria, pre-tax premium, flexible spending or other contribution, benefit or payment of any kind, employee severance and change-of-control agreement, contracts or arrangements, and plans, programs, contracts or arrangements providing for contributions, benefits or payments in the event of a change of ownership or control in whole or in part of the Seller.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute thereto and all final or temporary regulations promulgated thereunder.
“Escrow Account” shall have the meaning set forth in Section 1.4(b).
“Escrow Agent” shall mean VStock Transfer, LLC, and its successor and assign.
“Escrow Agreement” shall mean that certain escrow agreement, dated on or about the date hereof, in the form attached hereto as Exhibit D, by and among the Escrow Agent, the Seller and the Buyer relating to the Escrow Amount.
“Escrow Amount” shall mean 200,000 Common Shares and 90,000 Preferred Shares.
“Escrow Release Circumstance” shall have the meaning ascribed to such term in Section 1.4(b).
| A-3 |
“Escrow Share Consideration Value” shall have the meaning ascribed to such term in Section 1.4(b).
“Escrow Shares” shall have the meaning ascribed to such term in Section 1.4(b).
“Excluded Assets” shall have the meaning ascribed to such term in Section 1.2(b).
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Excluded Liabilities” shall have the meaning ascribed to such term in Section 1.3(b).
“Fundamental Representations” shall mean, collectively, the representations and warranties in Section 2.1, Section 2.2, Section 2.4, Section 2.9, Section 3.1, Section 3.2, Section 3.7, and Section 3.9.
“GAAP” shall mean U.S. generally accepted accounting principles in effect from time to time, as consistently applied by the Seller.
“Governmental Authority” shall mean any (i) federal, state, local, provincial, municipal, foreign, or other government, (ii) governmental or quasi-governmental authority of any nature or (iii) other body exercising any statutory, administrative, judicial, arbitrative, legislative, police, regulatory, or taxing authority or power.
“Indemnitee” has the meaning ascribed to such term in Section 5.6.
“Indemnitor” has the meaning ascribed to such term in Section 5.6.
“Insurance Proceeds” has the meaning ascribed to such term in Section 5.9.
“Intellectual Property” shall mean (i) all trademarks, service marks, trade dress, logos, trade names, domain names, websites, social media handle, brand names and corporate names and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (ii) all inventions and designs (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (iii) all protectable subject matter under U.S. copyright law, including, but not limited to, software, artwork, photographs and advertising and promotional materials, and all copyrights and all applications, registrations and renewals in connection therewith, (iv) all trade secrets and confidential business information (including software, ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, fabrications, patterns, customer and supplier lists, pricing and cost information) and all rights of privacy, publicity, and rights of attribution and integrity, (v) all rights to pursue, recover and retain damages and costs and attorneys’ fees for past, present and future infringement, misappropriation or violation of any of the foregoing, in each case, to the extent protectable by applicable Law, (vi) all other proprietary rights in the foregoing, and (vii) all copies and tangible embodiments of the foregoing (in whatever form or medium, including historical and retrospective data, materials and objects).
| A-4 |
“Kaival Labs” has the meaning ascribed to such term in the Preamble hereto.
“Key Employees” has the meaning ascribed to such term in the Recitals hereto.
“Knowledge” shall mean, with respect to the Seller, the actual knowledge of a particular fact or other matter by any of Peter Calfee or John Woodbine and, with respect to the Buyer, the actual knowledge of a particular fact or other matter by any of Eric Mosser or Nirajkumar Patel.
“Law” shall mean any constitution, law, administrative act, treaty, compact, directive, ordinance, principal of common law, permit, authorization, variance, regulation, rule, code or statute of any Governmental Authority.
“Liabilities” shall mean any and all debts, liabilities and obligations, of any kind or nature, including those arising under common law, statue (or other Law), contract or otherwise, whether accrued or fixed, absolute or contingent, matured or unmatured, or determined or determinable.
“Liens” shall mean all mortgages, pledges, liens, security interests, conditional sale agreements or similar restrictions.
“Lock-Up Period” has the meaning ascribed to such term in Section 4.9.
“Make Whole Amount” has the meaning ascribed to such term in Section 4.9.
“Non-Competition Agreements” has the meaning ascribed to such term in the Recitals hereto.
“Order” shall mean any award, decision, injunction, decree, stipulation, determination, writ, judgment, order, ruling, or verdict ordered, issued, made or rendered by any court, administrative agency or other Governmental Authority.
“Per Share Value” shall have the meaning ascribed to such term in Section 1.4(b).
“Permitted Liens” shall mean Liens (i) for any current taxes or assessments not yet due and payable, and (ii) of carriers, warehousemen, mechanics, laborers or materialmen created by statute and incurred in the ordinary course of business.
“Person” shall mean individual, corporation, partnership, association, joint venture, trust, Governmental Authority, unincorporated organization, limited liability company or other legal entity.
“Post-Closing Period” shall have the meaning ascribed to such term in Section 4.1.
“Preferred Shares” has the meaning ascribed to such term in Section 1.4(a).
“Preferred Stock Registration Statement” has the meaning ascribed to such term in Section 4.4(b).
“Prohibited Transfer” has the meaning ascribed to such term in Section 4.9.
| A-5 |
“Public Certifications” has the meaning ascribed to such term in Section 3.5(a).
“Purchased Assets” has the meaning ascribed to such term in Section 1.2(a).
“Registration Statement” has the meaning ascribed to such term in Section 4.4(b).
“Registered Intellectual Property Rights” shall mean, with respect to the Seller, all U.S., international and foreign: (i) registered Patents, (ii) registered trademarks, applications to register Trademarks, including intent-to-use applications, or other registrations or applications related to Trademarks, (iii) copyright registrations and applications to register copyrights and (iv) any other rights in Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any Governmental Authority at any time.
“Related Documents” shall mean those agreements and documents entered into or delivered between the Buyer and the Seller related to, ancillary to, or in connection with this Agreement.
“Representatives” shall mean, with respect to any Person, any and all directors, officers, managers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.
“Restricted Securities” has the meaning ascribed to such term in Section 4.9.
“SEC” shall mean the U.S. Securities and Exchange Commission (or any successor Governmental Authority).
“SEC Reports” has the meaning ascribed to such term in Section 3.5(a).
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Seller Group Member” shall mean each of the Seller and its Affiliates and their respective present and former directors, officers, employees, agents, successors and assigns.
“Seller” has the meaning ascribed to such term in the Preamble hereto.
“Seller Disclosure Schedule” shall mean that certain schedule attached hereto, qualifying the representations and warranties contained in Article II.
“Taxes” shall mean any and all federal, state, local and foreign taxes, assessments, charges, duties, fees, levies, impositions, liabilities or other similar amounts in the nature of a tax, including, but not limited to, income (whether net or gross), excise, property, sales, transfer, gains, gross receipts, occupation, privilege, payroll, wage, unemployment, workers’ compensation, social security, abandoned property, escheat, use, value added, capital, gross receipts, franchise, license, severance, stamp, premium, windfall profits, environmental, capital stock, profits, withholding, disability, real property, personal property, registration, customs duties, alternative or add-on minimum, estimated or other tax of any kind whatsoever (whether disputed or not) imposed by any Tax Authority, including any related charges, deficiency assessments, fees, interest, penalties, additions to tax or other assessments, and any transferee, successor or similar liability in respect of any items described in the foregoing.
| A-6 |
“Tax Authority” shall mean any Governmental Authority having jurisdiction over the assessment, determination, collection or imposition of any Tax.
“Tax Returns” shall mean all returns, reports, declarations, estimates, information returns and statements (including any related or supporting information) filed or to be filed with any Tax Authority in connection with the determination, assessment, collection or administration of any Taxes.
“Trading Day” shall mean any day on which the Trading Market is open for trading of the Common Stock listed on the Trading Market.
“Trading Market” shall mean the principal trading market on which the Common Stock is listed or quoted from time to time.
“Trust” has the meaning ascribed to such term in the Recitals hereto.
“Trust Agreement” shall mean that certain trust agreement to be entered into after the Closing between the Seller as grantor and the trustees (each a “Trustee”) designated thereunder.
“Trust Transfer” has the meaning ascribed to such term in the Recitals hereto.
“U.S.” shall mean the United States of America.
“Warrant” has the meaning ascribed to such term in Section 1.4(a).
A-7
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Eric Mosser, 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: June 14, 2023 | By: | /s/ Eric Mosser |
| Eric Mosser | ||
| President, and Chief Operating 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: June 14, 2023 | 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 April 30, 2023 (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: June 14, 2023 | By: | /s/ Eric Mosser |
| Eric Mosser | ||
| President and Chief Operating 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 April 30, 2023 (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: June 14, 2023 | 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.