Kaival Brands Innovations Group, Inc 10-Q for FY2022 Q2
Kaival Brands Innovations Group, Inc. (KAVL)
About this 10-Q
Kaival Brands Innovations Group, Inc filed this 10-Q on June 21, 2022, covering the quarter ended April 30, 2022 (FY2022 Q2).
Headline figures
Quarter ended April 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.06M
- down 83.1% from $18.15M a year earlier
- Net loss
- $5.01M
- compared with a net loss of $4.26M 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. ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
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 ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
shares of common stock, $0.001 par value, outstanding as of June 13, 2022
KAIVAL BRANDS INNOVATIONS GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
| Item | Page | |
| Cautionary Note Concerning Forward-Looking Statements | ii | |
| PART I | Financial Information | |
| Item 1. | Financial Statements | |
| 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 | 3 | |
| Results of Operations | 3 | |
| Off-Balance Sheet Arrangements | ||
| Emerging Growth Company | 5 | |
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 6 |
| Item 4 | Controls and Procedures | 6 |
| PART II | Other Information | 7 |
| Item 1. | Legal Proceedings | 7 |
| Item 1A. | Risk Factors | 7 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 7 |
| Item 3 | Defaults Upon Senior Securities | 7 |
| Item 4 | Mine Safety Disclosures | 7 |
| Item 5 | Other Information | 7 |
| Item 6 | Exhibits | 8 |
| Signatures | 9 | |
| i |
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q for the three and six months ended April 30, 2022 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, our ability to obtain the products we distribute from Bidi Vapor, LLC (“Bidi”), the timing and outcome of Bidi’s appeal of the U.S. Food and Drug Administration’s (the “FDA”) Premarket Tobacco Product Application (“PMTA”) marketing authorization denials for Bidi’s non-tobacco flavored products, the scope of future FDA enforcement of regulations in the electronic nicotine delivery system (“ENDS”), the FDA’s approach to the regulation and enforcement of synthetic nicotine and our competitors’ use of the substance in their products to avoid the PMTA requirements, the impact of black-market goods on our business, the success of the agreement with Philip Morris Products S.A. (“PMPSA”), a wholly owned affiliate of Philip Morris International Inc. (“PMI”) related to the international distribution of the BIDI® Stick, the demand for the products we distribute, anticipated product performance, market and industry expectations, significant changes in our relationships with our distributors or sub-distributors, changes in government regulation or laws that affect our business, and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs of our current and planned business initiatives, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; changes in government regulations or laws that affect our business; significant changes in our relationships with our distributor or sub-distributors; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
| ii |
Kaival Brands Innovations Group, Inc.
Consolidated Balance Sheets
(Unaudited)
| April 30, 2022 | October 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Restricted Cash | ||||||||
| Accounts receivable | ||||||||
| Inventory deposit – related party | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Income tax receivable | ||||||||
| Total current assets | ||||||||
| Right of use asset- operating lease | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable- related party | ||||||||
| Accrued expenses | ||||||||
| Operating lease obligation – short term | ||||||||
| Customer refund due | ||||||||
| Total current liabilities | ||||||||
| LONG TERM LIABILITIES | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock shares authorized; Series A Convertible Preferred stock ($ par value, shares authorized, issued and outstanding as of April 30, 2022 and October 31, 2021) | ||||||||
| Common stock ($ par value, shares authorized, and issued and outstanding as of April 30, 2022 and October 31, 2021, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-1 |
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended April 30, | For the Six Months Ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Revenues - related parties | ||||||||||||||||
| Excise tax on products | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total revenues | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Cost of revenue - related party | ||||||||||||||||
| Cost of revenue - other | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Gross profit | ( | ) | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Advertising and Promotion | ||||||||||||||||
| General & Administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Other Income | ||||||||||||||||
| Interest income | ||||||||||||||||
| Total Other Income | ||||||||||||||||
| Income (loss) before income taxes provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income (loss) per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-2 |
Kaival Brands Innovations Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the 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 Expenses | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, January, 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock Issued for Services – RSUs | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Exercise of common stock warrants | — | |||||||||||||||||||||||||||
| Stock Option Expenses | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, April, 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
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, 2021
(Unaudited)
| Convertible Preferred Shares (Series A) | Par Value Convertible Preferred Shares (Series A) | Common Shares | Par Value Common Shares | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||
| Balances, October 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common shares for employee compensation | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of common shares for compensation | — | |||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||
| Balances, January 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Issuance of common shares for employee compensation | — | |||||||||||||||||||||||||||
| Common shares settled and cancelled | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of common shares for compensation | — | |||||||||||||||||||||||||||
| Stock Option Expenses | — | — | ||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balances, April, 30, 2021 | $ | $ | $ | $ | ( | ) | $ |
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 April 30, 2022 | For the Six Months Ended April 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Stock option expense | ||||||||
| ROU operating lease expense | ||||||||
| Changes in current assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable – related parties | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Inventory deposit – related party | ||||||||
| Inventory | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related party | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Income tax accrual | ( | ) | ||||||
| Customer refund due | ( | ) | ||||||
| Right of use liabilities – operating lease | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Stock warrant exercises | ||||||||
| Settled RSUs with cash | ( | ) | ( | ) | ||||
| Cash flows provided by (used in) financing activities | ( | ) | ||||||
| Net change in cash and restricted cash | ( | ) | ( | ) | ||||
| Beginning cash and restricted cash balance | ||||||||
| Ending cash and restricted cash balance | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-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,” or “our”), formerly known as Quick Start Holdings, Inc., was incorporated on September 4, 2018 in the State of Delaware.
Description of Business
The Company is focused on growing and incubating innovative and profitable products into mature, dominant brands. In March 2020, the Company commenced business operations as a result of becoming the exclusive distributor of certain ENDS and related components (the “Products”) manufactured by Bidi, a related party company that is also owned by Nirajkumar Patel, the Chief Executive Officer of the Company.
On March 9, 2020, the Company entered into an exclusive distribution agreement (the “Distribution Agreement”) with Bidi, which Distribution Agreement 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 primarily of the “BIDI® Stick.” The Company ceased all retail/direct-to-consumer sales in February 2021. Subsequent to April 30, 2022, the Company entered into a third amended and restated exclusive distribution agreement (the “Third A&R Distribution Agreement”). For additional information, see Note 8, Subsequent Events.
In connection with the A&R Distribution Agreement, the Company entered into non-exclusive sub-distribution agreements, some of which were subsequently amended and restated by the parties in order to clarify certain provisions (all such agreements, as amended and restated, are collectively referred to as the “A&R Sub-Distribution Agreements”), whereby the Company appointed the counterparties as non-exclusive sub-distributors. Pursuant to the A&R Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the continental United States (the “Territory”).
On August 31, 2020, the Company formed Kaival Labs, Inc., a Delaware corporation (herein referred to as “Kaival Labs”), as a wholly owned subsidiary of the Company. On 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.
On July 16, 2021, the Company filed a Certificate of Amendment to the Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effect a 1-for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $ per share (the “Common Stock”). The Reverse Stock Split was effective as of 12:01 a.m. Eastern time on July 20, 2021. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the Board of Directors (the “Board”) approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Quarterly Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Common Stock was not affected by the Reverse Stock Split.
Current Product Offerings
Pursuant to the A&R Distribution Agreement, the Company sells and resells electronic nicotine delivery systems, which it may refer to herein as “ENDS Products”, or “e-cigarettes”, to non-retail level customers. The sole Product the Company resells is the “BIDI® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The Company does not manufacture any of the Products it resells. The BIDI® Stick is manufactured by Bidi. Pursuant to the terms of the A&R Distribution Agreement, Bidi provides the Company with all branding, logos, and marketing materials to be utilized by the Company in connection with its marketing and promotion of the Products.
On July 14, 2021, the Company announced plans to launch its first Kaival-branded product, a Hemp CBD product. In addition to its branded formulation, the Company anticipates that it will also provide white label, wholesale solutions for other product manufacturers through its subsidiary, Kaival Labs. The Company has not yet launched any branded product, nor has it begun to provide white label wholesale solutions for other product manufacturers. |
| F-6 |
COVID-19 Impact
In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.
The Company’s operations have not been directly impacted by COVID-19. However, we have encountered some logistical delays related to product launches and distribution in international markets. The Company was also indirectly impacted by supply chain issues and regulatory oversight. No impairments have been recorded and no triggering events or changes in circumstances had occurred. While the spread of COVID-19 has slowed and social restrictions have been largely lifted, the full impact of the COVID-19 pandemic continues to evolve and remains uncertain, particularly as new variants of the virus emerge. As such, the full magnitude of the COVID-19 pandemic, and the resulting impact, if any, on the Company’s financial condition, liquidity, and future results of operations is uncertain.
Impact of the FDA PMTA Decision
As of March 2022, the FDA announced that it has taken action 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 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 flavored ENDS product.
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the Administrative Procedure Act (“APA”), as well as ultra vires, for the FDA not to conduct any scientific review of 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.
Finally, on October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021, pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit, which was granted on February 1, 2022.
On February 1, 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding were held on May 17, 2022.
In the event that the U.S. Court of Appeals for the Eleventh Circuit issues a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce the MDO against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Stick products in the United States, thereby resulting in the Company being unable to distribute such products, and the Company’s business and financial condition would be materially adversely affected. The Company cannot provide any assurances as to the timing or outcome of the merits-based case.
Note 2 – Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company’s wholly-owned subsidiaries, Kaival Labs, Inc. and Kaival Brands International, LLC. Intercompany transactions are eliminated.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Annual Report on Form 10-K on February 16, 2022 (the “2021 Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the 2021 Annual Report have been omitted.
| F-7 |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Restricted Cash
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents at April 30, 2022 and October 31, 2021. Cash and restricted cash at April 30, 2022 and October 31, 2021
were $
Restricted
cash consists of cash held in short-term escrow as required. As of April 30, 2022, and October 31, 2021, the Company had $
The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated balance sheet and the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.
| Restrictions on Cash and Cash Equivalents | ||||||||
April 30, 2022 | October 31, 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash shown in statement of cash flows | $ | $ | ||||||
Advertising and Promotion
All advertising, promotion and marketing expenses, including commissions, are expensed when incurred.
Accounts Receivable and Allowance for Doubtful Accounts
Receivables
are stated at cost, net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectability of accounts receivables. A considerable amount of judgment is required in assessing the amount of the
allowance and the Company considers the historical level of credit losses and collection history and applies percentages to aged receivable
categories. The Company makes judgments about the creditworthiness of debtors based on ongoing credit evaluations and monitors current
economic trends that might impact the level of credit losses in the future. If the financial condition of the debtors were to deteriorate,
resulting in their inability to make payments, a larger allowance may be required. As of April 30, 2022, based upon management’s
assessment of the accounts receivable aging and the customers’ payment history, the Company has determined that no allowance for
doubtful accounts was required. As of October 31, 2021, the Company also determined that
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The Company determines cost based on the FIFO method. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. All inventories (i) were purchased from Bidi, a related party, as of October 31, 2021 and April 30, 2022, (ii) only consisted of finished goods, (iii) were significant, and (iv) were located in three storage warehouses: (1) the primary leased warehouse, which is owned by a related party, Just Pick, LLC (“Just Pick”), (2) a customer/sub distributor warehouse, which is owned by Favs Business LLC (“Favs Business”), and (3) a third-party logistics services warehouse, which is owned by Ranger Enterprises, LLC (“Ranger”). Based upon fiscal year 2021 inventory management procedures and their results, that have continued through the quarter ended April 30, 2022, the Company has determined that no allowance for the inventory valuation was required at April 30, 2022, nor October 31, 2021.
Inventory deposit related party
In the fourth quarter of fiscal
2021, the Company placed an order for BIDI® Sticks in anticipation of the distribution launch in the United Kingdom. In
connection with this order, the Company paid $2,925,000 from its capital financing raise to Bidi, a related party, in advance to have
the BIDI® Sticks manufactured in compliance with the regulatory product requirements in the United Kingdom, which differs
from the regulatory product requirements in the United States. The parties originally contemplated that delivery of the BIDI®
Sticks to the Company would occur by the end of April 2022. On April 29, 2022, the Company and Bidi agreed to cancel the order due
to an internal change of approach to international distribution, and Bidi agreed to credit the $
| F-8 |
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.
On October 31, 2021, the Company and one of its customers, Favs Business, entered into a Consignment Agreement. As of October 31, 2021,
the value of the Products stored at Favs Business under the Consignment Agreement was approximately $
Deferred Revenue
The
Company accepts partial payments for orders from wholesale customers, which it holds as deposits or deferred revenue, until the Company
has received full payment and orders are shipped to the customer. Revenue for these orders is recognized at time of shipment to the customer.
As of April 30, 2022, the Company had received $
Customer Refunds
The
Company infrequently has a need to adjust the size of an order after it has been shipped, received, and paid for, due to the customer
oversizing the order for more product that it can realistically sell at that time. If and when this occurs, the Company will ask the
customer to return the over allotted Products. Once received and inspected, the Company will issue a refund for the Product return. As
of April 30, 2022 and October 31, 2021, the Company had customer refunds due in the amounts equal to approximately $
Products Revenue
The Company generates revenue from the sale of the Products (as defined above) to non-retail customers. The Company recognizes revenue at a point in time based on management’s evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the Products has been transferred to the customer. In most situations, transfer of control is considered complete when the Products have been shipped to the customer. The Company determines that a customer obtains control of the Product upon shipment when title of such product and risk of loss transfer to the customer. The Company’s shipping and handling costs are fulfillment costs and such amounts are classified as part of cost of sales. The Company’s sales arrangements for retail sales usually require full prepayment before delivery of the Products. The advance payment is not considered a significant financing component because the period between when the Company transfers a promised good to a customer and when the customer pays for that good is short. The Company offers credit sales arrangements to non-retail (or wholesale) customers and monitors the collectability of each credit sale routinely.
Revenue is measured by the transaction price, which is defined as the amount of consideration expected to be received in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes refunds and returns as well as incentive offers and promotional discounts on current orders. Estimates for sales returns are based on, among other things, an assessment of historical trends, information from customers, and anticipated returns related to current sales activity. These estimates are established in the period of sale and reduce revenue in the period of the sale. Variable consideration related to incentive offers and promotional programs are recorded as a reduction to revenue based on amounts the Company expects to collect. Estimates are regularly updated and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established at the time an order is placed and incentives have very short-term durations.
Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time related to credit terms is required before payments are due. The Company does not grant payment financing terms greater than one year. Payments received in advance of revenue recognition are recorded as deferred revenue.
Concentration of Revenues and Accounts Receivable
For
the six months ended April 30, 2022, approximately 40%, or $
Favs Business had an outstanding balance of approximately
$
For
the six months ended April 30, 2021, approximately 33%, or $
Favs
Business, with an outstanding balance of approximately $
| F-9 |
The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which a recipient is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.
The fair value of each option granted during the fiscal six-month period ended April 30, 2022 and at October 31, 2021 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:
| Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions | ||||||||
| As of April 30, 2022 | As of October 31, 2021 | |||||||
| Expected dividend yield | % | % | ||||||
| Expected option term (years) | ||||||||
| Expected volatility | %- | % | %- | |||||
| Risk-free interest rate | %- | % | %- | % | ||||
The
expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility
was based on the volatility in the trading of the Common Stock. The assumed discount rate was the default risk-free ten-year interest
rate for U.S. Treasury bills. The Company’s stock option expense for the fiscal three and six months ended April 30, 2022 was $
The Company’s stock-based compensation for the fiscal three and six months ended April 30, 2022 was $and $, respectively.
Income Tax
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
The
Company has Federal net operating loss (“NOL”) carryforwards of approximately $
The Company has completed its federal and state tax
returns for the 2020 tax year and intends on filing them shortly. Given the federal and state NOLs, the Company anticipates that its 2020
tax returns will report that it is eligible to apply those NOLs against the federal and state taxes it paid in 2019. The Company anticipates
federal and state tax refunds of approximately $
During the six months ended April 30, 2022, the Company generated no taxable income and, thus, no federal or state income taxes are accrued for fiscal year 2022.
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:
| F-10 |
| ● | 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, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, restricted cash, accounts receivable, inventory, accounts payable and accrued expenses.
Recent Accounting Pronouncements
The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Note 3 – Going Concern
In February 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Bidi a judicial stay of the MDO previously issued by the FDA. The ruling means that the MDO is not legally in force pending the outcome of litigation on the merits of Bidi’s challenge to the MDO. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits case were held on May 17, 2022.
If the U.S. Court of Appeals for the Eleventh Circuit rules in Bidi’s favor in the merits case, the Company anticipates that the FDA will be compelled to place the non-tobacco flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, the Company anticipates being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for non-tobacco flavored ENDS and the FDA issues its decision on each.
If the U.S. Court of Appeals for the Eleventh Circuit does not rule in Bidi’s favor on the merits case, if the FDA re-issues the MDO after completing its scientific review process for each of Bidi’s PMTAs for its non-tobacco flavored ENDS, or if the FDA otherwise chooses to enforce the MDO against Bidi, the Company will be forced to cease sales of the non-tobacco flavored BIDI® Sticks in the United States market, leaving only the Tobacco (Classic) BIDI® Sticks for sale in the United States. If this is the outcome of the merits case, this combined with a negative cash flow from operations, raises substantial doubt on our ability to continue as a going concern.
Management plans to continue similar operations with increased marketing, which the Company believes will result in increased revenue and net income. Further, after the end of the three and six months ended April 30, 2022, the Company’s wholly owned subsidiary, KBI, entered into an international licensing agreement with PMPSA, which the Company expects will generate additional revenues. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally.
These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Note 4 – Leases
The Company capitalizes all leased assets pursuant to ASU 2016-02, Leases (Topic 842) (“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 adopted the standard in the fourth quarter of fiscal year 2020. The adoption of Topic 842 did not have any impact on the Company’s previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. The Company does not have financing leases and only one operating lease for office space, with a related party. Certain of the Company’s leases include renewal options and have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the option.
Office Space
On
August 1, 2020, the Company began leasing office space for its main corporate office in Grant, Florida. The five-year lease
agreement is with a related party, Just Pick. The Company’s Chief Executive Officer is an officer of Just Pick. Prior to this,
the Company utilized the home office space and warehouse of its management at no cost through July 31, 2020. The operating lease is
for a term of five
As
of April 30, 2022 and October 31, 2021, the ROU lease asset, net of accumulated amortization, was approximately $
| Schedule of Future Minimum Rental Payments for Operating Leases | ||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | Total | ||||||||||||||||
| Lease payments | $ | $ | $ | $ | $ | |||||||||||||||
| Less discount imputed interest | ( | ) | ||||||||||||||||||
| Present value of future payments | ||||||||||||||||||||
| Less current obligations | ( | ) | ||||||||||||||||||
| Long term lease obligations | $ | |||||||||||||||||||
| F-11 |
Storage Space
On
November 1, 2021, the Company entered into a month-to-month lease agreement with Ranger Enterprises, LLC, located in Seymour, Indiana,
to store product inventory at this satellite location. The Company made seven payments on this lease, totaling approximately $
For additional information regarding leases as of the date these unaudited consolidated financial statements were issued, please see Note 8, Subsequent Events.
Note 5 – Stockholder Equity
Additional Paid-In Capital
During
the six months ended April 30, 2022, approximately $
Preferred Shares Issued
The
authorized preferred stock of the Company consists of shares with a par value of $ per share, of which shares
were designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of the Series A Preferred
Stock was initially convertible into 100 shares of Common Stock; however,
Common Shares Issued
The
Company implemented the Reverse Stock Split, effective prior to the opening of the market on July 20, 2021. The Reverse Stock Split was
implemented by the Company in support of its application to list on the Nasdaq Capital Market (“Nasdaq”). As a result of
the Reverse Stock Split at a ratio of
During
the three months ended April 30, 2022, stockholders of the Company exercised warrants to purchase approximately
The authorized Common Stock of the Company consists of shares with a par value of $ per share. There were 31,166,090 shares of Common Stock issued and outstanding as of April 30, 2022. There were 30,195,312 shares of the Common Stock issued and outstanding as of October 31, 2021.
Warrants Shares Issued
As part of the Company’s underwritten public
offering during fiscal 2021, the Company issued warrants to purchase a total of
The following is a summary of the stock warrant activity during the fiscal six months ended April 30, 2022 and the year ended October 31, 2021.
| Share-based Payment Arrangement, Option, Activity | ||||||||||||||||
| Six Months Ended April 30, 2022 | Year Ended October 31, 2021 | |||||||||||||||
| Number of Warrants | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Warrants Outstanding at Beginning of the Period | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ( | ) | ||||||||||||
| Canceled, forfeited, expired | ||||||||||||||||
| Warrants Outstanding and Exercisable at End of Period | $ | $ | ||||||||||||||
| F-12 |
Restricted Stock Unit Awards
On
November 5, 2021,
On
February 5, 2022,
Additionally,
during the three months ended April 30, 2022, the Company issued
.
Stock Options
During
fiscal year 2021,
The
Company granted new options during the three months ended April 30, 2022. On February 27, 2022, non-qualified stock options exercisable
for up to shares of Common Stock were awarded to two consultants of the Company. These stock options
have a ten-year term from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares
vesting on the first anniversary of the grant date. The stock options exercisable for an aggregate of up to shares of Common
Stock had a fair market value of $ per share, which represents the closing price of the Company’s Common Stock on the grant
date. The amortization expense and unamortized expense for these stock options for the three months ended April 30, 2022 was $
The aggregate intrinsic value of these outstanding options as of October 31, 2021 and April 30, 2022 was $.
Common Stock Compensation Transition Plan
During the second quarter of fiscal year 2021 the Board and executive management began cost reduction discussions, including the reduction of non-cash items such as equity compensation awards. Those discussions stalled primarily due to the focus on other corporate events of significant value.
In the first and second fiscal quarters of 2022, the Board resumed serious discussions, assessments, and evaluations regarding the equity compensation awarded to its officers and employees. The Board ultimately approved a stock option program for equity awards granted to its officers and employees. The Compensation Committee spent considerable time, effort, and resources designing this program, which was finalized in February 2022 and approved in March 2022. While evaluating and designing this program, the Compensation Committee did not utilize any aspects of value to the employees or other features. Therefore, the termination of the RSU program and the newly adopted stock option program were developed completely independent of each other and terminated and implemented, respectively, distinctly and simultaneously. Management concluded under ASC 718 these transactions are a cancelation and replacement whereby total compensation cost measured at the date of a cancellation and replacement is the portion of the grant-date fair value of the original award for which the service is expected to be rendered at that date plus the incremental cost resulting from the cancellation and replacement. Incremental cost is measured as the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date in which there was none since the fair value of the replacement award was less than the fair value of the canceled award.
The outcomes of this decision and the transition on March 4, 2022 resulting in: (i) the termination of the RSU program for all executive officers and employees, consisting of 1,230,833 unvested RSUs and (ii) the implementation a new stock option program for executive officers and employees. The stock options granted pursuant to the program will have ten-year terms from the grant date, with one-half of the shares vesting on the grant date and the remaining one-half of the shares vesting on the first anniversary of the grant date. Stock options exercisable for up to an aggregate of 1,385,600 shares of Common Stock were granted to the executive officers and employees with a fair market value of $2.85 per share, which was calculated using the Black Scholes method.
The amortization expense and unamortized expense for
these stock options for the three months ended April 30, 2022 was $
| F-13 |
The fair values of the options on the grant dates, as noted above, were approximately $3,948,948 using a Black-Scholes option pricing model with the following assumptions: stock price $2.85 per share (based on the quoted trading price on the date of grant), volatility range of 294.55%, expected term of 10 years, and a risk-free interest rate range of 1.62%. The Company is amortizing the expense over the vesting terms of each option. The total stock option expense for the three and six months ended April 30, 2022 was approximately $2,303,533. The fiscal year 2022 unamortized stock option expense at April 30, 2022 was approximately $1,645,395.
Note 6 – Related-Party Transactions
Revenue and Accounts Receivable
During
the six months ended April 30, 2022, the Company recognized revenue of approximately $
During
the six months ended April 30, 2021, the Company recognized revenue of approximately $
Concentration Purchases and Accounts Payable
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 $
During
the six months ended April 30, 2021, the Company purchased Products of approximately $
Leased Office Space and Storage Space
On August 1, 2020, the Company began leasing office
space for its main corporate office in Grant, Florida. The five-year lease agreement is with a related party, Just Pick. The Company’s
Chief Executive Officer is an officer of Just Pick. The liability for rent not paid from the beginning of the lease through April 30,
2022 is $
For additional information regarding leases as of the date these unaudited consolidated financial statements were issued, please see Note 8, Subsequent Events.
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, 2022 and April 30, 2021 other than the below:
Cash and Equity Bonus Awards
On
May 28, 2020, the Board approved cash bonus awards to each of the Company’s Chief Executive Officer and its Chief Operating Officer.
With respect to the Chief Executive Officer, the Board approved a
During
the quarter ended April 30, 2022, the $
On March 4, 2022, the Board terminated all future cash and equity bonus awards for the Company’s Chief Executive Officer and its Chief Operating Officer.
Service Agreement
On March 31, 2020, the Company entered into a service agreement (the “Service Agreement”) with QuikfillRx LLC, a Florida limited liability company (“QuikfillRx”), whereby QuikfillRx provides the Company with certain services and support relating to sales management, website development and design, graphics, content, public communication, social media, management and analytics, and market and other research (collectively, the “Services”). The Services are provided by QuikfillRx as requested from time to time by the Company.
| F-14 |
On
June 2, 2020, the Company entered into the First Amendment to the Service Agreement (the “First Amendment) with QuikfillRx.
Effective as of March 16, 2021, the Company entered into the Second Amendment to Service Agreement (the “Second
Amendment”) with QuikfillRx. Effective as of September 17, 2021, the Company entered into the Third Amendment to the Service
Agreement (the “Third Agreement” and, collectively with the First Amendment, Second Amendment, and the Service
Agreement, the “Amended Service Agreement”) with QuikfillRx. Pursuant to the terms of the Amended Service Agreement, the
parties agreed to the following “General Compensation” payments: (i) for the Services provided in March 2020,
| ● | An amount equal to 0.9% of the Applicable Gross Quarterly Sales (as defined in the Amended Service Agreement), which amount shall, at the Company’s option be paid in (a) cash or (b) shares of the Company’s common stock, or (c) a combination of cash and Common Stock. | |
| ● | An amount equal to 0.27% of the Applicable Gross Quarterly Sales, which amount must be paid in cash. |
On
March 17, 2021, the Company entered into a consulting agreement with Russell
Quick, pursuant to which the Company granted stock options exercisable for up to 41,667 shares of the Company’s Common Stock in
exchange for consulting services. The shares underlying the stock option fully vested on December 1, 2021. The exercise price per share is $28.68. The Company recognized approximately $190,000 in expense to account for the stock options.
Russell Quick is the Chief Executive Officer of QuikfillRx. The Company accrued approximately $
Note 8 – Subsequent Events
Third Amended and Restated Distribution Agreement
On June 10, 2022, the Company entered into the Third A&R Distribution Agreement with Bidi, which amended and restated the A&R Distribution Agreement (collectively, the “Distribution Agreement”).
The Third A&R Distribution Agreement modifies various terms and provisions to reflect the terms of the PMI Licensing Agreement (as defined below) and also modify the terms between the Company and Bidi. Pursuant to the Third A&R Distribution Agreement, Bidi granted the Company, and its designees, an exclusive right to distribute electronic and non-electronic nicotine delivery systems and related components (other than certain excluded products) for sale and resale to both retail level customers and non-retail level customers worldwide, subject to a carve-out for, and exclusion, of the PMI Markets (as defined below). The Third A&R Distribution Agreement has a term of ten years and automatically renews for a successive ten-year term, unless earlier terminated pursuant its terms.
Exercise of Stock Warrants
As part of the Company’s underwritten public
offering during fiscal 2021, the Company issued warrants to purchase a total of
Lease Agreement
On
June 10, 2022, the Company entered into a Lease Agreement (the “2022 Lease”) with Just Pick for approximately
The
anticipated commencement date of the 2022 Lease is June 10, 2022 (the “Commencement Date”). The term of the Lease is one
(
The
Company must pay Just Pick base rent equal to $
Any changes, alterations, additions, or improvements to the Premises made by the Company becomes the property of Just Pick unless prior to the 2022 Lease expiration, the Company removes such improvements and restores the Premises to the same condition as existed on the Commencement Date.
The 2022 Lease contains customary representations, warranties, covenants, indemnification provisions, default provisions, and termination provisions.
| F-15 |
License Agreement
On June 10, 2022, Bidi entered into a License Agreement (the “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 Deed of Licensing Agreement (the “PMI License Agreement”), by and between KBI and PMPSA. 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.
Pursuant to the License Agreement, if at any time, KBI receives any license of PMPSA intellectual property from PMPSA or any of its affiliates in the manner contemplated by the PMI License Agreement, KBI will grant Bidi an irrevocable sub-license of all right, title, and interest of KBI in and to that PMPSA intellectual property. In addition, Bidi and KBI agree that any amount payable and all net royalties payable to KBI under the PMI License Agreement will be apportioned equally among Bidi and KBI in a manner such that each will ultimately receive fifty percent (50%) thereof.
The License Agreement contains customary representations, warranties, covenants, and indemnification provisions.
Deed of Licensing Agreement
On June 13, 2022 KBI entered into the PMI License Agreement with 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-cigarettes 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 2.00% to 3.50% 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 equal to twenty percent (20%) of 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 of One Million Dollars ($
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 ($10,000,000); or (ii) an amount equal to the total of the royalties due to KBI (but not yet paid) plus the royalties (including the guaranteed royalty payment) paid to KBI pursuant to the PMI License Agreement during the immediately preceding twelve (12) consecutive months, provided that such amount shall not exceed Thirty Million Dollars ($30,000,000).
In connection with the PMI License Agreement, the Company, Bidi, and PMPSA also entered into a deed of letter (“Deed of Letter”) to require specific performance of the duties and obligations set forth in the PMI License Agreement if KBI is unable or fails to sublicense the intellectual property to PMPSA pursuant to the PMI License Agreement and/or is unable or fails to perform certain of its obligations or grant the rights pursuant to the PMI License Agreement. In addition, the Company, Bidi, and PMPSA entered into a guarantee (“Guarantee”), whereby each of the Company and Bidi guarantees to PMPSA up to 50% of all of KBI’s monetary obligations set forth in the PMI License Agreement if KBI fails to perform or discharge certain of its obligations in the PMI License Agreement.
| F-16 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the unaudited Financial Statements and notes thereto for the three and six months ended April 30, 2022 included under Item 1 – Financial Statements in this Quarterly Report and our audited Financial Statements and notes thereto for the year ended October 31, 2021 contained in the 2021 Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
Impact of COVID-19
In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout the world, including the United States. Our business operations, which commenced during this pandemic, continue to be operational; however, we were indirectly negatively impacted by COVID-19.
We were indirectly impacted by supply chain issues and regulatory oversight. First, COVID-19 impacted Bidi’s ability to quality test and develop its new product, the BIDI® Pouch, in line with its targeted release date, which negatively impacted our ability to begin distribution of the BIDI® Pouch. Secondly, we believe that many retailers and distributers relaxed their compliance standards as an indirect result of COVID-19 for two reasons: (i) government enforcement of regulations was very limited due to imposed social restrictions, resulting in less in-person monitor enforcement by government officials and (ii) retail stores experienced light foot traffic from customers due to COVID-19 restrictions and fears, which resulted in relaxed compliance in an effort to generate revenue. We believe this relaxation of standards by certain retailers significantly impacted our revenues.
Impact of the FDA PMTA Decision
In September 2021, in connection with the PMTA process, the FDA effectively “banned” flavored ENDS by denying nearly all then-pending PMTAs for such products. Following the issuance of an MDO, manufacturers are required to stop selling non-tobacco flavored ENDS product. As of March 2022, the FDA announced that it has taken action on over 99% of applications and issued 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 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 flavored ENDS product.
On September 29, 2021, Bidi petitioned the U.S. Court of Appeals for the Eleventh Circuit to review the FDA’s denial of the PMTAs for its non-tobacco flavored BIDI® Stick ENDS, arguing that it was arbitrary and capricious under the APA, as well as ultra vires, for the FDA not to conduct any scientific review of the company’s comprehensive applications, as required by the 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.
On October 14, 2021, Bidi requested that the FDA re-review the MDO and reconsider its position that Bidi did not include certain scientific data in its applications sufficient to allow the PMTAs to proceed to scientific review. In light of this request, on October 22, 2021 pursuant to 21 C.F.R. § 10.35(a), the FDA issued an administrative stay of Bidi’s MDO pending its re-review. Subsequently, the FDA lifted its administrative stay on December 17, 2021. Following the lifting of the FDA’s administrative stay, Bidi filed a renewed motion to stay the MDO with the U.S. Court of Appeals for the Eleventh Circuit.
On February 1, 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Bidi’s motion to stay (i.e., put on hold) the MDO, pending the litigation on the merits. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits-based proceeding were held on May 17, 2022.
In the event that the U.S. Court of Appeals for the Eleventh Circuit issues a ruling adverse to Bidi, or if the FDA otherwise chooses to enforce the MDO against Bidi, Bidi will be forced to cease the continued sale of its non-tobacco flavored BIDI® Sticks in the United States, thereby resulting in us being unable to distribute such Products, and our business and financial condition would be materially adversely affected. We cannot provide any assurances as to the timing or outcome of the merits-based case.
Corporate History
We were incorporated on September 4, 2018 in the State of Delaware. Effective July 12, 2019, we changed our corporate name from Quick Start Holdings, Inc. to Kaival Brands Innovations Group, Inc. The name change was effected through a parent/subsidiary short-form merger of Kaival Brands Innovations Group, Inc., our wholly-owned Delaware subsidiary formed solely for the purpose of the name change, with and into us. We were the surviving entity.
Change of Control
On February 6, 2019, we entered into a Share Purchase Agreement (the “Share Purchase Agreement”), by and among us, GMRZ Holdings LLC, a Nevada limited liability company (“GMRZ”), our then-controlling stockholder, and Kaival Holdings, LLC, a Delaware limited liability company (“KH”), pursuant to which, on February 20, 2019, GMRZ sold 504,000,000 shares of our restricted common stock, representing approximately 88.06 percent of our then issued and outstanding shares of common stock, to KH, and KH paid GMRZ consideration in the amount set forth in the Share Purchase Agreement. The consummation of the transactions contemplated by the Share Purchase Agreement resulted in a change in control, with KH becoming our largest controlling stockholder. Nirajkumar Patel and Eric Mosser are the sole voting members of KH.
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Description of Business
We are focused on growing and incubating innovative and profitable products into mature, dominant brands. Pursuant to the Distribution Agreement, Bidi granted us an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers and non-retail level customers. We ceased all retail/direct-to-consumer sales in February 2021. Pursuant to the terms of the Distribution Agreement, Bidi provides us with all the branding, logos, and marketing materials to be utilized by us in connection with our marking and promotion of the Products. We do not manufacture any of the Products we resell. Currently, the Products consist of the “BIDI® Stick,” a disposable, tamper-resistant ENDS Product. In June 2022, we entered into the Third A&R Distribution Agreement, which, among other items, modifies various terms and provisions to reflect the terms of the PMI Licensing Agreement. Pursuant to the Third A&R Distribution Agreement, the exclusive right to distribute the Products is subject to a carve-out for, and exclusion, of the PMI Markets.
In connection with the Distribution Agreement, we entered into Sub-Distribution Agreements, whereby we appointed the counterparties as non-exclusive sub-distributors. Pursuant to the Sub-Distribution Agreements, the sub-distributors agreed to purchase for resale the Products in such quantities as they should need to properly service non-retail customers within the Territory
We process all sales made only to non-retail customers in the United States, with all sales to non-retail customers made through Bidi’s age-restricted website, www.wholesale.bidivapor.com. We ceased all retail/direct-to-consumer sales in February 2021 in order to better ensure youth access prevention and to comply with the Prevent All Cigarette Trafficking (“PACT”) Act. We provide all customer service and support at our own expense. Bidi sets the minimum prices for all sales made by us. We maintain adequate inventory levels of the Products in order to meet the demands of our non-retail customers, and deliver the Products sold to these customers.
Current Product Offerings
Pursuant to the Distribution Agreement, we sell and resell ENDS Products, also referred to as (“e-cigarettes”), to non-retail level customers. Our primary Product we resell is the “BIDI® Stick,” a disposable, tamper-resistant ENDS product that comes in a variety of flavor options for adult cigarette smokers. The court-ordered stay means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. We are wholly dependent on Bidi to supply the BIDI® Sticks to us for distribution. Accordingly, any supply or other issues that impact Bidi, indirectly impacts us and our ability to operate our business.
In addition to the BIDI® Stick, we originally anticipated launching the distribution of the “BIDI® Pouch” outside of the United States. The initial planned February 2021 roll-out of the BIDI® Pouch was delayed due to COVID-19 based manufacturing and supply chain constraints. Due to these complications, and in effort to prevent future bottlenecks, Bidi decided to move manufacturing in-house. In 2021, Bidi modified the planned formulation of the BIDI® Pouch. The original BIDI® Pouch formulation intended to utilize a tobacco-free (synthetic) nicotine formulation, along with natural fibers and a chew-base filler in six different flavors. However, the BIDI® Pouch product was placed on temporary hold domestically in anticipation of the FDA’s enforcement of synthetic nicotine products as either unauthorized drugs under Section 201(g) of the Food, Drug and Cosmetic Act (“FDCA”) or as tobacco products under new FDA authority. On March 15, 2022, the FDA Center for Tobacco Products (“CTP”) was given the authority to regulate products containing non-tobacco derived synthetic nicotine after President Biden signed the Omnibus Budget Bill (H.R. 2741). Pursuant to the new legislation, which included a rider amending the definition of a “tobacco product” in the FDCA to include products containing nicotine from any source, synthetic nicotine products became subject to the TCA requirements for tobacco products, including the requirement for premarket authorization. Given these developments, Bidi has decided not to launch the synthetic-nicotine BIDI® Pouch at this time, but will instead seek a PMTA marketing authorization from the FDA for the BIDI® Pouch made with tobacco-derived nicotine.
On July 14, 2021, we announced plans to launch our first Kaival-branded product, a Hemp CBD product. In addition to our branded formulation, we anticipate that we will also provide white label, wholesale solutions for other product manufacturers through our subsidiary, Kaival Labs. However, as of the date of this Quarterly Report, we have not launched any Kaival-branded products, nor have we begun to offer white label, wholesale solutions to other product manufacturers.
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
Going Concern
In February 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Bidi a judicial stay of the MDO previously issued by the FDA to Bidi in September 2021. The ruling means that the MDO is not legally in force. Accordingly, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, while Bidi continues with its merits case challenging the legality of the MDO. The FDA has indicated that it is prioritizing enforcement against companies that have either not submitted PMTAs, whose PMTAs have been refused acceptance or filing by the FDA, or whose PMTAs remain subject to MDOs. Oral arguments in the merits case were held on May 17, 2022.
If the U.S. Court of Appeals for the Eleventh Circuit rules in favor of Bidi in the merits case, we anticipate that the FDA will be compelled to place the non-tobacco flavored ENDS back into the PMTA scientific review process. If this is the outcome of the merits case, we anticipate being able to continue marketing and selling the Products, subject to the FDA’s enforcement discretion, until the scientific review process is complete on each of Bidi’s PMTA for the non-tobacco flavored ENDS and the FDA issues its decision on each.
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If the U.S. Court of Appeals for the Eleventh Circuit rules against Bidi on the merits case, if the FDA re-issues the MDO after completing its scientific review process for each of Bidi’s PMTAs for its non-tobacco flavored ENDS, or if the FDA otherwise chooses to enforce the MDO against Bidi, we will be forced to cease sales on the non-tobacco flavored BIDI® Sticks in the United States market, leaving only the Tobacco (Classic) BIDI® Sticks product for sale in the United States. If this is the outcome of the merits case, this combined with a negative cash flow from operations may raise substantial doubt on our ability to continue as a going concern.
Management plans to continue similar operations with increased marketing, which we believe will result in increased revenue and net income. Further, we believe that the PMI License Agreement will generate additional revenues through royalties paid by PMPSA. However, there is no assurance that management’s plan will be successful due to the current economic climate in the United States and globally.
The unaudited consolidated financial statements filed as part of this Quarterly Report do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue as a going concern.
Liquidity and Capital Resources
We believe we have sufficient cash on hand as of June 13, 2022. However, we are awaiting the outcome of Bidi’s merit-based case pending in the U.S. Court of Appeals for the Eleventh Circuit with respect to the MDO issued by the FDA in September 2021. If the Eleventh Circuit Court of Appeals rules against Bidi, our business and financial condition will be materially adversely affected, including our ability to generate revenues and our liquidity. Other than the ongoing MDO matters, we have no known current demands or commitments and are not aware of any events or uncertainties as of April 30, 2022 that will result in or that are reasonably likely to materially increase or decrease our current requirements for cash.
At April 30, 2022, we had working capital of approximately $13.1 million and total cash of approximately $4.7 million.
We intend to generally rely on cash from operations and equity and debt offerings, to the extent necessary and available, to satisfy our liquidity needs. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth and increased costs. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, or other alternatives. We believe we have the financial resources to weather any short-term impacts of the FDA’s PMTA process and Bidi’s receipt of a MDO from the FDA; however, an extended impact, or a negative ruling in Bidi’s merits-based litigation case or the FDA ultimately not approving Bidi’s PMTA if it is re-evaluated could have a material and adverse effect on our sales, earnings, and liquidity. At this time, we do not foresee the need for further strategic financing for the next twelve months, given the financing we completed in September 2021, as indicated below, and our continual sales efforts and results.
In September 2021, we completed a firm commitment underwritten offering, which offering was made pursuant to our Registration Statement on Form S-3 (File No. 333-258339) (the “Registration Statement”). The SEC declared the Registration Statement effective on August 10, 2021. We sold 4,700,000 shares of our Common Stock and warrants to purchase an additional 3,525,000 shares of our Common Stock. We sold each share of our Common Stock and warrants to purchase 0.75 shares of our Common Stock at a combined public offering price of $1.70. We also granted the underwriter the option to purchase an additional 705,000 shares of our Common Stock and warrants to purchase an additional 528,750 shares of our Common Stock. We received net proceeds from the offering of approximately $8.3 million. We have also received approximately $1.7 million from the exercise of the warrants. We used the proceeds for general corporate purposes.
Cash Flows:
Cash flow used in operations was approximately $(4.6) million for the first six months of fiscal year 2022, compared to $(5.2) million used in operations for the first six months of fiscal year 2021. The decrease in cash flow used in operations for the first six months of fiscal year 2022 compared to the first six months of fiscal 2021 was primarily due to decrease in stock-based compensation, accounts receivable, and accounts payable.
The net cash flow provided by financing activities was approximately $1.5 million for the first six months of fiscal year 2022, compared to cash flow used in financing activities of approximately $78,000 for the first six months of fiscal year 2021. Cash provided by financing activities during the first six months of fiscal year 2022 resulted from the exercise of warrants by various stockholders. The cash used in financing activities for the first six months of fiscal year of 2022 and fiscal year 2021 consisted of cash used for the settlement of RSUs issued to employees.
Results of Operations
Three months ended April 30, 2022, compared to three months ended April 30, 2021
Revenues:
Revenues for the second quarter of fiscal year 2022 were approximately $3.1 million, compared to approximately $18.1 million in the same period of the prior fiscal year. In February 2022, Bidi was granted a judicial stay on the MDO previously issued by the FDA prohibiting the marketing and sale of non-tobacco flavored BIDI® Sticks, which had significantly impacted our revenues in previous quarters. As a result of the grant of the judicial stay of the MDO, our revenues increased in the second quarter of fiscal 2022, as compared to first quarter of fiscal 2022. We expect this trend to continue as renewed distribution ramps up and sales of non-tobacco flavored BIDI® Sticks increase, subject to the court ruling in Bidi’s favor in the pending merits-based case, and subject to the FDA’s enforcement discretion.
With respect to synthetic nicotine vaping products, on March 15, 2022, the FDA was given the authority to regulate products containing non-tobacco derived synthetic nicotine after President Biden signed the Omnibus Budget Bill (H.R. 2741). Pursuant to the new legislation, which amended the definition of a “tobacco product” in the FDCA to include products containing nicotine from any source, manufacturers of all currently marketed synthetic nicotine products were required to submit a PMTA by May 14, 2022 to remain on the market. Products that do not receive PMTA authorization (i.e., a Marketing Grant Order or “MGO”) within 60 days (i.e., by July 13, 2022) and that remain on the market thereafter will be in violation of the statute and subject to FDA enforcement. We anticipate that if the FDA begins enforcement against illegally-marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping products, such as the BIDI® Stick.
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Cost of Revenue, net and Gross Profit (Loss):
Gross profit in the second quarter of fiscal year 2022 was approximately $387,700, or approximately 12.7%, of revenues, net, compared to approximately $6.3 million gross profit, or approximately 34.6%, of revenues, net, for the second quarter of fiscal year 2021. Total cost of revenue, net was approximately $2.7 million, or approximately 87.3%, of revenue, net for the second quarter of fiscal year 2022, compared to approximately $11.9 million, or approximately 65.4%, of revenue, net for the second quarter of fiscal year 2021. The decrease in gross profit is primarily driven by the decrease in overall sales and the recognition of accumulated year-to-date credits/discounts/rebates given to customers, totaling approximately $499,000, resulting in an offset to revenue, net, during the second quarter of fiscal year 2022.
Operating Expenses:
Total operating expenses were approximately $5.4 million for the second quarter of fiscal year 2022, compared to approximately $10.4 million for the second quarter of fiscal year 2021. For the second quarter of fiscal year 2022, operating expenses consisted primarily of advertising and promotion fees of approximately $761,000, stock-based compensation expense of approximately $2.5 million, professional fees of approximately $163,000, and all other general and administrative expenses of approximately $2.0 million. General and administrative expenses in the second quarter of fiscal year 2022 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 2021, operating expenses were approximately $10.4 million, consisting primarily of advertising and promotion fees of approximately $801,000, professional fees totaling approximately $7.3 million, and all other general and administrative expenses of approximately $2.3 million. General and administrative expenses in the second quarter of fiscal year 2021 consisted primarily of salaries and wages, insurance, banking fees, business fees, and other service fees. We expect future operating expenses to increase while we increase the footprint of our business and generate increased sales growth.
Income Taxes:
During the second quarter of fiscal year 2022, we did not accrue a tax provision for income taxes, due to the pre-tax loss of approximately ($5.1) million, compared to a tax provision of approximately $187,000 for the second quarter of fiscal year 2021, due to the amount of pre-tax income for that three-month period. However, we did report a tax benefit of approximately $5,800 during fiscal year 2022. The reduction from the second quarter of fiscal year 2021 was due to the pre-tax operating loss recognized during the second quarter of fiscal year 2022.
Net Loss:
As a result of the items noted above, the net loss for the second quarter of fiscal year 2022 was approximately ($5.0) million, or ($0.16) basic and diluted loss per share, compared to a net loss of approximately ($4.3) million, or ($0.18) basic and diluted earnings per share, for the second quarter of fiscal year 2021. The increase in the net loss for the second quarter of fiscal year 2022, as compared to the second quarter of fiscal year 2021, is primarily attributable to the decreased revenues and increase in customer credits/discounts/rebates, as noted above.
Six months ended April 30, 2022, compared to six months ended April 30, 2021
Revenues:
Revenues for the first six months of fiscal year 2022 were approximately $6.0 million, compared to $55.5 million in the same period of the prior fiscal year. Revenues decreased in the first six months of fiscal year 2022 compared to fiscal year 2021, generally due to (i) Bidi’s receipt of the MDO, which limited our ability during the first six months of fiscal year 2022 to sell flavored BIDI® Sticks in the United States and (ii) increased competition. A recent court ruling in favor of Bidi granted a judicial stay on the MDO previously issued by the FDA banning the marketing and sale of flavored BIDI® Sticks, amongst banning these flavored sticks with other industry competitors. As a result of the judicial stay of Bidi’s MDO, we have begun to experience an upward trajectory of revenues as renewed distribution ramps up and sales of flavored BIDI® Sticks products increase, which sales remain subject to FDA’s enforcement discretion (and assuming that Bidi is successful in its currently pending merits-based case). We also anticipate that if the FDA begins enforcement against illegally-marketed or synthetic-nicotine vaping products, there may be an increased demand for compliant and legal vaping products, such as the BIDI® Stick.
Cost of Revenue and Gross Profit (Loss):
Gross loss in the first six months of fiscal year 2022 was approximately ($303,000), compared to gross profit of approximately $11.1 million profit for the first six months of fiscal year 2021. Total cost of revenue was approximately $6.2 million for the first six months of fiscal year 2022, compared to $44.4 million for the first six months of fiscal year 2021. The decrease in gross profit is primarily driven by the decrease in overall sales and the recognition of accumulated year-to-date credits, discounts, and rebates given to customers, totaling approximately $1.4 million, resulting in an offset to revenue, net, during the six months ended April 30, 2022.
Operating Expenses:
Total operating expenses were approximately $7.5 million for the first six months of fiscal year 2022, compared to approximately $14.7 million for the first six months of fiscal year 2021. For the first six months of fiscal year 2022, operating expenses consisted of commissions paid pursuant to the Amended Service Agreement of approximately $1.4 million and general and administrative expense consisting of amortized stock option expense of approximately $2.8 million, professional fees of approximately $1.4 million, salaries and wages of approximately $939,000, and all other general and administrative expenses of approximately $1.0 million. General and administrative expenses in the first six months of fiscal year 2022 consisted primarily of legal fees, salaries, other professional fees, merchant fees, and other service fees. Total operating expenses for the first six months of fiscal year 2021 were approximately $14.7 million. These operating expenses consisted primarily of advertising and promotion fees of approximately $1.8 million; professional fees of approximately $9.7 million; salary, wages, commissions, and bonuses of approximately $1.8 million; stock-based compensation expense of approximately $580,000; professional fees of approximately $163,000; and general and administrative expenses of approximately $820,000, which consisted primarily of insurance, banking fees, merchant fees, business fess and other service fees.
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Income Taxes:
During the first six months of fiscal year 2022, we did not accrue a tax provision for income taxes , due to the pre-tax loss of approximately ($7.8) million. However, we did report a tax benefit of approximately $5,800 during fiscal year 2022. During the first six months of fiscal year 2021, we accrued a tax provision of approximately $293,100 related to tax liabilities for fiscal year 2020.
Net Income (Loss):
Net loss for the first six months of fiscal year 2022 was approximately ($7.8) million, or $(0.25) basic and diluted earnings per share, compared to net loss for the first six months of fiscal year 2021, which was approximately ($3.9) million, or $(0.17) basic and diluted earnings per share. The increase in the net loss for the first six months of fiscal year 2022, as compared to the first six months of fiscal year 2021, is primarily attributable to the decreased revenues and increase in customer credits/discounts/rebates.
Weighted-average shares of Common Stock outstanding were 23,511,959 and 23,368,691 for the first six months of fiscal year 2022 and 2021, respectively.
Critical Accounting Policies and Estimates
Other than the policy changes disclosed in Note 2, Basis of Presentation and Significant Accounting Policies, to the unaudited Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the three months ended April 30, 2022 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our 2021 Annual Report for the year ended October 31, 2021.
Emerging Growth Company
We are an “emerging growth company,” that is exempt from certain financial disclosure and governance requirements for up to five years as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act eases restrictions on the sale of securities and increases the number of stockholders a company must have before becoming subject to the SEC’s reporting and disclosure rules. We have not elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process, including policies and procedures, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our management assessed our internal control over financial reporting using the criteria in Internal Control – Integrated Framework (2013 Framework), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Based on our evaluation under the framework in COSO, our management concluded that our internal control over financial reporting remained ineffective as of April 30, 2022 based on such criteria. Material weaknesses existed in the design or operation of certain of our internal controls over financial reporting that adversely affect our internal controls. A material weakness is a significant deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements may not be prevented or detected. Management determined that there was a lack of resources to provide segregation of duties consistent with control objectives, the lack of sufficient and consistent real time remote communications, and the lack of a fully developed formal review process that includes multiple levels of review over financial disclosure and reporting processes.
The weaknesses and the related risks are not uncommon in a company of our size because of the limitations in the location, size and number of our staff. To address these material weaknesses, and subject to the receipt of additional financing or cash flows, we have undertaken certain remediation measures to date to address the material weaknesses described in this Quarterly Report, including implementing procedures pursuant to which we can ensure segregation of duties and hire additional resources to ensure appropriate review and oversight, as well as more timely formal communications processes, more diligent review and approval of all disbursements and more timely review of all banking transactions sales orders and inventory management.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met under all potential conditions, regardless of how remote, and may not prevent or detect all errors and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Exchange Act) that have occurred during the fiscal three months ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
Item 1A. Risk Factors
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 2021 Annual Report, for the year ended October 31, 2021, 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. During the quarter ended April 30, 2022, there have been no material changes from the risk factors previously disclosed under Part I, “Item 1A. Risk Factors” in the 2021 Annual Report, for the year ended October 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share-based Compensation
During the three months ended April 30, 2022, we issued the following securities as compensation to certain of our employees and consultants:
On February 4, 2022, the Company entered into a Consulting Agreement with Oakhill Europe Ltd (“Oakhill Europe”), pursuant to which the Company engaged Oakhill Europe to provide strategic advising and negotiation assistance for potential international distribution agreements (collectively, the “Oakhill Services”), in exchange for a cash monthly retainer, incentive compensation bonuses, and an incentive compensation bonus value of $75,000 paid in fully-vested non-qualified stock options, upon the achievement of certain events.
On February 5, 2022, the Company issued 61,250 shares of Common Stock to 7 employees in accordance with the vesting schedules set forth in RSU agreements previously entered into with such employees. The RSUs were a portion of the compensation paid to such employees for their services to us. Of the shares issued to employees, 24,058 shares were withheld by the Company to satisfy tax withholding obligations and/or satisfy cash settlement options to employees, equaling approximately $23,336. The issuances were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a) (2) thereof as a transaction not involving a public offering.
On February 27, 2022, the Company granted a stock option award to Mark Thoenes, Interim Chief Financial Officer, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Thoenes’ services. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On February 27, 2022, the Company granted a stock option award to Russell Quick, as an independent consultant providing strategic advising and negotiation assistance for potential international distribution agreements, to acquire up to 100,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.45 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Company granted a stock option award to Nirajkumar Patel, Chief Executive Officer, to acquire up to 600,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Executive Officer. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Company granted stock option awards to Eric Mosser, Chief Operating Officer, to acquire up to 500,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan, as partial compensation for Mr. Patel’s services as Chief Operating Officer. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On March 5, 2022, the Committee and the Board approved the grant of stock option awards to 5 employees, to acquire up to 285,600 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $2.85 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
On February 28, 2022 and on March 3, 2022 the Company issued 10,000 shares and 2,963 shares, respectively, of the Company’s Common Stock to Mr. Rudy Singh as payment for the EDGAR filing services performed for the filing of the Company’s Annual Report on Form 10-K for the year ended October 31, 2021. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
Following the end of the three months ended April 30, 2022, we issued the following securities as compensation:
On May 18, 2022, the Company granted a stock option award to Russell Quick, pursuant to a previously executed independent consultant agreement that renewed on December 1, 2022, to acquire up to 500,000 shares of Common Stock under the Company’s 2020 Stock and Incentive Compensation Plan. The option shares are exercisable at a price of $1.03 per share, which equaled the closing price of the Common Stock as of the date immediately prior to the grant date. The issuances were exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) thereof as a transaction not involving a public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
| 7 |
Item 6. Exhibits
The following exhibits are filed herewith as a part of this Quarterly Report.
| 8 |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
| (1) | Schedules and Exhibits omitted pursuant to Item 601(b) (10) (iv) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any Schedule or Exhibit so furnished |
*filed herewith
| 9 |
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 21, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President and Chief Executive Officer | ||
| Date: June 21, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
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Exhibit 10.23
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND REPLACED WITH “[***]”. SUCH IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS (1) NOT MATERIAL AND (2) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF DISCLOSED.
THIRD
AMENDED AND RESTATED
EXCLUSIVE DISTRIBUTION AGREEMENT
THIS THIRD AMENDED AND RESTATED EXCLUSIVE DISTRIBUTION AGREEMENT (this “Agreement”) is entered into as of June 10, 2022 (the “Effective Date”), by and between BIDI VAPOR, LLC, a Florida limited liability company (“Manufacturer”), and KAIVAL BRANDS INNOVATIONS GROUP, INC., a Delaware corporation (“Distributor”). Manufacturer and Distributor are each referred to herein as a “Party” and collectively, the “Parties.”
RECITALS
WHEREAS, Manufacturer is in the business of developing electronic and non-electronic nicotine delivery systems and related components (all such products whether now or hereafter made available for sale by Manufacturer, other than Excluded Products, being hereinafter referred to as the “Products”). A list of the currently available products is listed on Exhibit A.
WHEREAS, Distributor wishes to obtain, and Manufacturer is willing to grant Distributor, an exclusive worldwide right to distribute the Products for sale and resale to both retail level customers (“Retail Customers”) and non-retail level customers, including without limitation, to wholesale customers and sub-distributors (“Non-Retail Customers”).
WHEREAS, Manufacturer and Distributor previously entered into that certain Exclusive Distribution Agreement, effective as of March 9, 2020 (the “Original Agreement”).
WHEREAS, Manufacturer and Distributor amended and restated the Original Agreement in its entirety on May 21, 2020 (the “First Restated Agreement”), which superseded the Original Agreement, and then subsequently amended and restated the First Restated Agreement in its entirety pursuant to that certain Second Amended and Restated Exclusive Distribution Agreement, dated effective as of April 20, 2021 (the “Second Restated Agreement”), which superseded the First Restated Agreement.
WHEREAS, the Parties wish to amend and restate the Second Restated Agreement in its entirety for purposes of modifying various terms and provisions thereof.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual representations and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Manufacturer and Distributor, intending to be legally bound, hereby agree as follows:
1. APPOINTMENT; EXCLUSIVITY; MARKETING AND SUPPORT.
A. Appointment and Exclusivity. Subject to the terms and conditions set forth in this Agreement and the carve-out for, and exclusion of, the PMI Markets as set forth in Section 1.A.i. below (the “PMI Exclusion”), Manufacturer hereby appoints Distributor as its exclusive worldwide distributor of the Products, and Manufacturer cannot sell to anyone except Distributor or its designated parties (i.e., KBI (as defined below)) (“Designees”) any Products covered by this Agreement. Distributor accepts the appointment as Manufacturer’s exclusive worldwide distributor of the Products (subject only to the PMI Exclusion) and agrees to buy for resale, upon the terms and conditions set forth herein, the Products in such quantities as Distributor shall need to properly service the market. Manufacturer represents and warrants that the appointment of and sale of the Products to Distributor under this Agreement does not violate any obligations or contracts of Manufacturer. As a condition of exclusivity, Distributor agrees not to represent or sell other products, which Manufacturer may reasonably determine to be competitive with the Products, without written approval from Manufacturer. For purposes of clarification, during the term of this Agreement, Manufacturer will not directly or indirectly sell any Products to any person (Retail Customer or Non-Retail Customer) other than to Distributor and its Designees. Notwithstanding anything to the contrary set forth in this Agreement, “Products” does not include the Excluded Products.
| i. | Distribution of Certain Products in the PMI Markets. The Parties acknowledge and agree: (a) Kaival Brands International, LLC, a Delaware limited liability company (“KBI”) is a wholly owned subsidiary of Distributor; (b) KBI, on the Effective Date, will be entering into the Deed of Licensing Agreement (the “PMI Licensing Agreement”) with Philip Morris Products, S.A. (“PMI”) whereby PMI will be granted a sub-license for certain intellectual property more specifically set forth in the PMI Licensing Agreement in the Markets; (c) in order to fulfill the terms of the PMI Licensing Agreement, KBI and the Manufacturer will be entering into a License Agreement on the Effective Date whereby Manufacturer shall license to KBI all the intellectual property rights that are necessary for KBI to sub-license the intellectual property rights to PMI that are forth in the PMI Licensing Agreement; and (d) in order to fulfill the terms of the PMI Licensing Agreement, Distributor shall contribute its exclusive distribution rights to the Markets (the “PMI Distribution Rights”) to KBI in the form of a Capital Contribution Agreement for the duration of the Term (including any Extension Period and Sell-Out Period) to ensure this Agreement does not conflict with or otherwise include the rights sub-licensed by KBI to PMI pursuant to the PMI Licensing Agreement, including, without limitation, PMI’s right to distribute Products, as well as any New Property included under the scope of the PMI Licensing Agreement, in the Markets. The Parties agree that upon termination of the PMI Licensing Agreement and the completion of any Sell-Out Period, KBI shall contribute the PMI Distribution Rights back to Distributor so that all worldwide distribution rights revert back to Distributor for the duration of the term of this Agreement in the manner prescribed herein and that the PMI Exclusion no longer applies in interpreting this Agreement. Capitalized terms that are used, but not defined, in this Agreement shall have the meanings set forth in the PMI Licensing Agreement. The Parties further agree that Distributor shall grant the PMI Distribution Rights directly to PMI as required by the Deed of Letter dated even date herewith (the “Deed Letter”) for the duration of the Term including any Extension Period and Sell-Out Period. |
| ii. | Before Distributor sells or permits any Products to be sold outside of the United States in a country that is not a Market (or in any Market after the Term concludes): (a) a Freedom to Operate and compliance review with respect to that country shall be conducted by Distributor and shared with Manufacturer; and (ii) both Parties shall agree upon all relevant commercial terms with respect to the sale of Products by Manufacturer to Distributor for that purpose. Manufacturer must agree that the Freedom to Operate and compliance review is sufficient and satisfactory before Distributor can sell Products or permit Products to be sold in the associated country, but such approval shall not be unreasonably withheld. The costs of such Freedom to Operate and compliance review shall be split evenly between the Manufacturer and the Distributor; provided however, that if Distributor does not launch a Product into the country within one year after the Freedom to Operate and compliance review is initiated with respect to that country, then Distributor will reimburse Manufacturer for Manufacturer’s share of the costs of such related Freedom to Operate and compliance review within thirty (30) days after such first (1st) anniversary. Additionally, the price that Distributor pays to Manufacturer for Products to be sold outside of the United States will be agreed upon by the Parties independently of the price Distributor pays to Manufacturer for Products to be sold inside of the United States, and will be agreed upon on a market by market (or territory by territory) basis. These price changes and determinations will follow the same process outlined in Section 2.D. |
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B. Marketing and Support. Manufacturer will be solely responsible to provide Distributor with all branding, logos, and marketing materials to be utilized by Distributor in connection with Distributor’s marketing and promotion of the Products; provided, however, Distributor shall bear all expenses related to reproduction and distribution of the same. Distributor agrees to use its best efforts to promote, develop a market, sell, and distribute the Products worldwide. Among such other actions as may be necessary to generate sales of the Products, Distributor will perform at its expense and to the reasonable satisfaction of Manufacturer the following duties:
| i. | Distributor will engage in sales promotion activities in which the Products shall be designated by their correct names and identified as the Products of Manufacturer being marketed by Distributor as an independent distributor. |
| ii. | Distributor will provide all customer service and support (both to its Retail Customers and Non-Retail Customers and to all end consumers of the Products), and will maintain adequate quality control staffing at all times to perform the required quality control processes and procedures relating to the Products. |
| iii. | Distributor may use internet domains and subdomains that include Manufacturer trademarks to effectuate marketing and sales permitted under this Agreement, subject to the terms and provisions of Section 5. |
| iv. | Distributor shall maintain adequate warehousing and inventory levels of the Products on-hand to meet demand. Distributor understands that Manufacturer will only produce Products for accepted orders from Distributor, and Manufacturer is not obligated to hold any inventory (except as designated for shipment pursuant to an accepted order). Distributor’s warehouse must meet Manufacturer’s reasonable product and storage specifications communicated in advance to Distributor, as well as all applicable laws, regulations, and government orders, and all industry regulations, and shall be able to hold enough inventory to allow it to meet anticipated customer demand. Distributor’s warehouse must be adequately climate controlled for any portion that stores the Products, and must be operated, in a manner consistent with Manufacturer’s reasonable storage and handling instructions for the Products. |
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| v. | Distributor shall at all times conduct its business in a manner that will reflect favorably on Manufacturer and the Products and will not engage in any deceptive, misleading, illegal, or unethical business practice. In performing its obligations hereunder, Distributor agrees not to make any representations or give any warranties or guarantees to any person with respect to the Products, other than in compliance with Section 7.A. hereof or otherwise expressly authorized in writing by Manufacturer. |
| vi. | Distributor shall provide to Manufacturer prior to the time of first use all website content and five (5) copies of all of Distributor’s industry advertising communications, advertising, and sales promotion materials in which any Products are mentioned and five (5) copies of any translations of any manuals or other materials provided or sold to Distributor by Manufacturer. Manufacturer shall have the right (but not the obligation) to promptly comment on such materials for legal and factual compliance related issues (and Distributor shall reasonably consider, and not unreasonably reject, such comments for inclusion in such final copies). Notwithstanding the foregoing, nothing herein shall prohibit Distributor from making disclosures required by law or order of a tribunal of competent jurisdiction (provided, however, that except to the extent prohibited by law or order of a tribunal of competent jurisdiction, Distributor shall provide prior written notice of such disclosures to Manufacturer). |
| vii. | At Distributor’s own cost and not more often than every three (3) months, Distributor shall make reports to Manufacturer, as reasonably requested by Manufacturer, (a) with respect to sales and potential sales of the Products, and (b) regarding information as is reasonably necessary to enable Manufacturer to complete Manufacturer’s post-PMTA survey and other legal obligations. Distributor also shall report to Manufacturer such information as is reasonably necessary to enable Manufacturer to manufacture or supply the Products in compliance with applicable laws and regulations in jurisdictions in which Distributor sells, or has authorized others to sell, the Products. |
| viii. | Distributor will prepare and deliver to Manufacturer three-year rolling forecasts of Distributor’s anticipated sales by Product and SKU category, updated and delivered annually on or before October 1 of each calendar year commencing with the year during which a marketing grant order (an “MGO”) is issued by the U.S. Food and Drug Administration for any one of the stock keeping units (i.e., one of the flavors identified on Exhibit A) (“SKUs”); provided, however, that such forecasts shall only include SKUs that have received an MGO. The parties shall discuss such forecasts concurrently with their meeting on pricing described in Section 2.D. If an MGO is granted with respect to a SKU after the Minimum Purchase Threshold is finally determined pursuant to Section 2.D for a given year, that Minimum Purchase Threshold shall not include such SKU for that year, but such SKU shall be incorporated when the parties meet again beginning the next October 1 pursuant to the normal process prescribed by Section 2.D. |
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| ix. | Distributor will comply with all applicable laws and regulations and will not assist or participate in any violation of laws or regulations applicable to Manufacturer or Distributor. Notwithstanding anything to the contrary in this Agreement, at Distributor’s own cost, Distributor shall: (a) use commercially reasonable youth purchase prevention measures; (b) comply with all of youth-prevention measures necessitated by the results of Manufacturer’s PMTA surveys; and (c) take any other corrective steps required for Distributor (as opposed to Manufacturer) as a result of the PMTA surveys. |
| x. | Distributor shall be responsible for all expenses incurred by it in connection with the implementation and performance of its duties and obligations under this Agreement, including, without limitation: (i) salaries or compensation for its personnel; (ii) costs and expenses associated with establishing and maintaining its sales organization and offices; and (iii) marketing, advertising, and promotion expenses. |
| xi. | On an on-going basis, Distributor must notify Manufacturer within three (3) business days after its receipt of any written notice that Manufacturer’s sale of Products to Distributor, or Distributor’s subsequent marketing, distribution, or resale of those Products, is illegal (a “Notice of Illegality”), provided, that if Distributor fails to do so but an officer of Manufacturer separately has knowledge of some or all of the information contained in that Notice of Illegality, Manufacturer shall be responsible for the portion of those losses that a court, tribunal, or arbitrator with jurisdiction over the Parties finds could have been avoided as a result of that officer’s knowledge, and Distributor shall be responsible for the remainder of those losses that could have been avoided by providing the Notice of Illegality to Manufacturer. |
2. PURCHASE ORDERS; PRICING.
A. Purchase Orders. Distributor shall order the Products in accordance with the terms and conditions of this Agreement. Each order for the purchase of the Products (a “Purchase Order”) must be submitted to Manufacturer by Distributor by email or Manufacturer’s electronic data interchange (EDI) system. Each Purchase Order shall specify: (i) whether the order is being made in connection with the sale by Distributor to Retail Customers or to Non-Retail Customers, (ii) the quantity of the Products being ordered, (iii) the price to be paid by Distributor to Manufacturer for the Products ordered, (iv) payment terms granted by Manufacturer (not to be inconsistent with the requirements of this Agreement), (v) the requested receipt date and delivery instructions for the applicable Products ordered, and (vi) that the quantity of Products includes at least one (1) full container of Products (i.e., at least 504,000 units of Products, as 70 pallets of 7,200 units each pallet can be contained in a container), with any orders for any one flavor of Product being in one pallet quantity denominations (7,200 units per pallet). Receipt dates must be during the term of this Agreement, except Distributor may request, subject to Manufacturer’s acceptance in Manufacturer’s sole and absolute discretion, a Purchase Order with a requested receipt date after the expiration or termination of this Agreement, in which case, if accepted by Manufacturer, the terms and conditions of this Agreement shall apply to such purchase, but under no circumstances should such purchase be deemed to be or construed as being a renewal or extension of this Agreement or the exclusivity rights granted to Distributor herein. The Parties agree that to the extent that any of the terms and conditions of this Agreement conflict or are inconsistent with the terms or conditions of any Purchase Order submitted by Distributor, the terms and conditions of this Agreement shall prevail and control to the extent of any such conflict or inconsistency, unless the Purchase Order containing such conflicting or inconsistent terms and conditions is countersigned by Manufacturer, in which case the terms and conditions set forth in such Purchase Order shall prevail and control to the extent of any such conflict or inconsistency (but with respect to that order only).
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B. Acceptance of Purchase Order. A Purchase Order submitted by Distributor shall be deemed to have been accepted by, and shall be binding upon, Manufacturer when it is countersigned by Manufacturer (which Manufacturer will not unreasonably withhold, condition, or delay) or if it is not rejected by Manufacturer, in whole or in part, by written notice to Distributor that is received by Distributor within ten (10) business days after the receipt of the Purchase Order by Manufacturer (the “Consideration Period”). Notwithstanding anything contained herein to the contrary, Manufacturer may take the following actions with respect to an applicable Purchase Order placed by Distributor:
| i. | Rejection, Cancellation, or Delay After the Consideration Period. After the Consideration Period, Manufacturer may reject, cancel, or delay any Purchased Order: (a) pursuant to Section 4.B. below; or (b) if the Purchase Order contains terms inconsistent with the terms and provisions of this Agreement. |
| ii. | Rejection During the Consideration Period. During the Consideration Period, Manufacturer may reject any Purchase Order: (a) pursuant to Section 4.B. below; (b) if the Purchase Order contains terms inconsistent with the terms and provisions of this Agreement; or (c) if Manufacturer possesses insufficient production capacity to fulfill the order in the time period required by the Purchase Order. |
| iii. | Special Provisions Non-Exclusivity. During any time when the rights granted to Distributor in this Agreement are non-exclusive, Manufacturer may modify a Purchase Order (the “Modified Purchase Order”) as commercially necessary in light of Manufacturer’s production capacity or any other commercial constraint; provided however, that: (a) Manufacturer may not reject, cancel, or delay a Purchase Order for any other reason; and (b) Manufacturer’s stipulation of a reasonable Carrier Possession Date in light of its current production capacity prior to acceptance (or deemed acceptance) shall not constitute a prohibited cancellation, or delay. Manufacturer shall be required to deliver written notice of the Modified Purchase Order to Distributor who shall have five (5) business days after receipt to cancel the Modified Purchase Order at the discretion of Distributor. |
In the event Manufacturer is unable to fill all of a Purchase Order for any reason, it shall promptly notify Distributor in writing and Distributor shall have the right, in its discretion to cancel the subject Purchase Order within five (5) business after its receipt of such written notice. Moreover, if Manufacturer delivers to Distributor updated Written Specifications with respect to Products that are the subject to a Purchase Order at any time at or prior to Manufacturer’s acceptance of that Purchase Order, Distributor shall have the right, in its discretion to cancel the subject Purchase Order within five (5) business after its receipt of such written update.
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C. Invoices and Payment Terms. Manufacturer shall send Distributor invoices via email for each whole or partial Purchase Order shipped. Manufacturer shall send such invoices to Distributor once the Products are in the possession of the shipping carrier, if shipped by sea, or if shipped by air, then once the Products are delivered to the Destination (as defined in Section 4.A. below). Distributor shall notify Manufacturer in writing if Distributor disputes any charges set forth on an invoice within five (5) calendar days after receipt of such invoice, specifying in reasonable detail the items disputed and basis for the dispute. Thereafter, the Parties will work in good faith to resolve such dispute as quickly as is reasonably possible. If any such dispute is not resolved within thirty (30) calendar days after Distributor’s receipt of the applicable invoice, then Manufacturer may suspend any further shipments of the Products under this Agreement until such time as the dispute is resolved and all amounts agreed upon by the Parties to be due are paid in full. All undisputed amounts on each invoice are due and payable within either fourteen (14) calendar days from the date the Product is received at the Destination (as defined in Section 4.A. below) if the Product was shipped by air, or thirty (30) calendar days from the date the shipping carrier has taken possession of the Product if shipped by sea. Payments due hereunder must be made, at Distributor’s option, by ACH, wire transfer, certified check, or such other method as may be agreed to by the Parties. Manufacturer reserves the right to change or modify payment terms upon sixty (60) calendar days’ written notice to Distributor at any time following a default by Distributor of its payment obligations under this Agreement with such changes or modifications to be effective for Purchase Orders submitted after such sixty (60) calendar day period.
D. Prices; Price Reductions; Minimum Purchase Thresholds.
| i. | The price that Distributor shall pay to Manufacturer for each Product order placed by Distributor and accepted by Manufacturer on or before December 31, 2022 for Products distributed and sold in the United States shall be as listed on Exhibit A attached hereto. Distributor agrees to pay Manufacturer the established fixed price per Product identified in Exhibit A attached hereto, or the price per unit of Product established pursuant to the process in Section 2.C or in this Section 2.D (as noted), for all Products purchased from Manufacturer. |
| ii. | Each calendar year (a “Review Year”), the Parties shall meet in the first half of the fourth calendar quarter (i.e., October 1 – November 15), but as promptly as possible on or after October 1st of that Review Year, to negotiate in good faith to both set such prices for the subsequent calendar year, and to set the minimum quantities that must be purchased for a Product for such calendar year with respect to all SKUs subject to an MGO (a “Minimum Purchase Threshold”). Once agreed to and set, the price and Minimum Purchase Threshold shall not change during such subsequent calendar year. In such meetings in the fourth quarter of each Review Year, the Parties have no obligation to share cost or other internal data. For example: (a) if no SKUs were subject to a MGO in the first calendar year, and if two SKUs become subject to an MGO within the second calendar year, then the Minimum Purchase Threshold would not be instituted until the third calendar year and would relate to those two (2) SKUs for that third calendar year; and (b) if in the third calendar year, one additional SKU becomes subject to an MGO within the third calendar year, then the Minimum Purchase Threshold would not change during that third calendar year, and the fourth calendar year Minimum Purchase Threshold would be determined by adding in the effect of such additional SKU that was subject to an MGO in the third year such that the Minimum Purchase Threshold would relate to those three SKUs for that fourth calendar year. |
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| iii. | If the Parties cannot agree on a price and/or Minimum Purchase Thresholds for the subsequent calendar year pursuant to this section by November 15th of a Review Year, then the price and/or Minimum Purchase Threshold, as applicable, shall not change for the coming year, unless either Party provides written notice to the other of its election to invoke the following impasse resolution procedure (“IRP”) on or prior to December 31st of that Review Year. In the event of such a notice, within fifteen (15) calendar days of the delivery of such notice to the notified Party, each Party shall provide to the other Party its preferred third-party (each, a “Consultant”) to resolve the dispute by: (a) with respect to pricing, conducting a transfer pricing, market pricing, or any other type of suitable study to determine average market pricing for similarly situated distributors; and (b) with respect to Minimum Purchase Thresholds, conducting a market study of the total market for the SKUs in question and Distributor’s anticipated market share thereof, and in each case the types of requested studies must be included in the notice, along with the estimated fees for the Consultants, the fees for and types of studies to be conducted, and the estimated timeline for the delivery of the completed price recommendation from the Consultants. The Consultants to perform each of these two (2) types of studies may be different persons. Any Consultant must be reputable, independent, and have commercially reasonable credentials, experience, and qualifications to conduct the required analysis for the study in question. The Parties shall have fifteen (15) calendar days to reach a good faith agreement on the Consultants and the types of studies to use. If the Parties cannot reach an agreement within this fifteen (15) day period, the two Consultants appointed by the Parties with respect to the study in dispute shall themselves appoint another third-party to serve as a Consultant. Each such Consultant must be engaged by Distributor, with all fees to be evenly split between the Parties for such Consultants and studies (i.e., Kaival will pay the Consultants’ fees, but invoice Manufacturer for half the cost of the Consultants, which invoices shall be promptly paid). Every Consultant shall be subject to duties of confidentiality, objectivity, and neutrality in such engagement (which duties shall also be to and for the benefit of both Manufacturer and Distributor, which shall be specified in such third-party’s engagement letter in a manner reasonably satisfactory to the Parties), and their findings shall be binding upon the Parties absent manifest error or mistake of fact. Until any such Consultant completes its work, the then-current price that Manufacturer charged to Distributor for the Review Year, and the Minimum Purchase Threshold (if any) for the Review Year, shall remain in effect; provided, however, that upon receipt by both Parties of the determination of the IRP, if the price has changed from that price that was charged in the disputed year, the Party who benefited from the previously-charged price will have sixty (60) calendar days to provide payment to the other Party for the difference in price (up or down) for orders accepted in the disputed year and actually paid for at such previous price (with all unpaid orders being automatically adjusted to the modified price); and provided further, however, that if this IRP reconciliation results in a refund due to Distributor, then Manufacturer may elect such payment to take the form of credits against future orders; provided that such credits must fully compensate Distributor, even if such credits must extend into future years. Distributor shall use commercially reasonable efforts to cause a Consultant to complete its report within thirty (30) calendar days after that report’s commission. |
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| iv. | Notwithstanding the foregoing provisions of this Section 2.D to the contrary, if this Agreement becomes non-exclusive, then the IRP process shall not apply, and further, Manufacturer may change the price of the Products to Distributor in its discretion, so long as, to the extent permitted by law, such price is generally consistent with, but in no case less favorable than, Manufacturer’s prevailing price to other similarly situated distributors (e.g., distributors purchasing a similar volume) at the time. |
| v. | For the avoidance of doubt, nothing herein shall restrict Distributor from setting or changing (i) its own price for the Products to the entities to which Distributor sells the Products, or (ii) its own list, suggested, minimum advertised or similar prices. |
E. Past Due Amounts. If any undisputed amount due Manufacturer by Distributor, for any reason, becomes past due, Manufacturer shall provide written notice to Distributor and, if such amounts remain outstanding for fifteen (15) calendar days following receipt of such notice, Manufacturer may at its option and without further notice withhold further shipments or deliveries of the Products under this Agreement until such past due invoices are paid in full.
3. Taxes. Unless otherwise expressly stated in this Section 3: (a) Distributor shall be responsible for any national, state, or local sales, use, value added, or other tax, tariff or duty (a “Tax”) (except as set forth below as being Manufacturer’s responsibility), or assessment levied or imposed by the United States or any foreign governmental authority arising out of or related to any of the transactions contemplated by this Agreement, including sales of the Products to Distributor (a “Tax”), other than taxes based upon Manufacturer’s income or to the extent resulting from Manufacturer’s failure to establish applicable tax exemptions within its control; and (b) Distributor must pay directly, or reimburse Manufacturer for, the amount of any Tax that Manufacturer is at any time obligated to pay or collect with respect to or arising out of the sale of the Products under this Agreement, excluding taxes based upon Manufacturer’s income or to the extent resulting from Manufacturer’s failure to establish applicable tax exemptions within its control. Notwithstanding the provisions of the immediately preceding sentence to the contrary, Manufacturer shall be responsible for all Taxes that are import tariffs and duties resulting from Manufacturer’s sale of the Products to Distributor. For the avoidance of doubt, each Party is responsible for its own income tax; and Manufacturer (and not Distributor) shall be responsible for and pay any and all import duties (and other taxes and fees relating to importation) and any cargo insurance costs.
| 4. | SHIPMENTS; PRODUCTS; RIGHT OF FIRST REFUSAL ON CHANGE OF CONTROL TRANSACTIONS. |
A. Shipment Terms; Title and Risk of Loss. All of the Products purchased by Distributor under this Agreement will be packaged for shipment in Manufacturer’s standard containers, marked for shipment or delivery to Distributor at the address specified by Distributor in the Purchase Order (the applicable destination being hereinafter referred to as the “Destination”).
| i. | When Manufacturer confirms the Purchase Order, it will provide to Distributor the estimated date (or dates, if the order is broken into batches) when such Purchase Order or portions of such Purchase Order will be ready for shipment (such date or dates are the “Carrier Possession Date”). For the avoidance of doubt, Distributor may cancel, in whole or part or modify, the Purchase Order within ten (10) business days after Manufacturer’s confirmation or deemed acceptance of the Purchase Order if the Carrier Possession Date is, in Distributor’s discretion, too far into the future for its business needs. |
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| ii. | Upon receipt of the confirmation and information described above, Distributor will promptly inform Manufacturer of its preferred method of shipping (e.g., shipping carrier and method (e.g., air or sea)). |
| iii. | Upon receipt of such shipping method preference from Distributor, Manufacturer shall provide Distributor with shipping quotes, including carrier name, cost, confirming the anticipated Carrier Possession Date, and expected transit time, for the elected shipping methods. |
| iv. | Distributor shall review the shipping quotes provided by Manufacturer and then promptly communicate its approved shipping method and costs to Manufacturer (“Final Approval Notice”). Manufacturer shall then ship the Products accordingly. |
| v. | Manufacturer shall promptly forward via email to Distributor copies of the original shipping invoices, and Distributor shall pay such shipping carrier invoices directly to Manufacturer promptly at least two (2) banking days before the due date on each carrier invoice. Manufacturer shall manage all other aspects of shipment. Manufacturer (and not Distributor) shall be responsible for and pay any and all import duties (and other taxes and fees relating to importation), and cargo insurance costs if Manufacturer elects to carry such coverage, and if these costs are listed as part of the carrier invoice, then Manufacturer shall pay to the carrier (and Distributor shall not be responsible for) the portion of the shipping carrier invoice related thereto. Manufacturer shall have no obligation to release the Products to a shipping carrier unless and until the Distributor has made the payments required by this Section 4.A.v with respect to those Products (and shall suffer no penalties or damages to Distributor directly relating to Distributor’s failure to do so). |
| vi. | Title and risk of loss will pass to Distributor upon the delivery of the Products at the Destination. |
| vii. | Distributor shall be solely responsible for all costs of shipment for the subsequent sale by Distributor to Retail Customers and Non-Retail Customers. |
| viii. | Manufacturer shall use commercially reasonable efforts to ensure that all Products in a Purchase Order placed by Distributor are ready for shipment at Manufacturer’s (or its designee’s) production facility on or before the later to occur of the following (the “Delivery Target Date”): (a) the relevant Carrier Possession Date; or (b) sixty (60) calendar days after the date Manufacturer confirms a Purchase Order to Distributor or the Purchase Order is deemed confirmed as set forth in Section 2.B. Manufacturer shall, as promptly as practicable, notify Distributor when Manufacturer knows that the Carrier Possession Date is, or could reasonably be considered to be, no longer accurate in whole or part for the Products subject to the Purchase Order. When Manufacturer fails to so make Products ready for shipment by a Delivery Target Date, Manufacturer shall have an automatic extension of thirty (30) calendar days plus an additional five (5) business days after the Delivery Target Date to make those Products ready for shipment (the last day of the period of thirty (30) calendar days plus an additional five (5) business days, the “Extension Deadline Date”). A late fee of one percent (1.0%) of the total purchase price of Products that are not ready for shipment by the Extension Deadline Date shall be assessed to Manufacturer for every complete fifteen (15) calendar day period after the Extension Deadline Date that elapses until those Products are made ready for shipment by Manufacturer (each, a “Penalty Period”). For the avoidance of doubt, Manufacturer: (a) is not responsible for (and will not pay any late fees resulting from) any delays caused by shipping carriers, force majeure, or changes to the Purchase Order made by Distributor; (b) shall not be charged a late fee for any partial Penalty Period of less than fifteen (15) days (i.e., if Products are ready for shipment fourteen (14) days or less into a Penalty Period, no late fee (whether pro-rated or otherwise) shall be charged with respect to that Penalty Period, but shall be payable with respect to all previously-completed Penalty Periods relating to those Products, if any). |
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| ix. | Any expense for any special packaging (other than that that relates to compliance with laws for any particular permitted Market or territory) or any special delivery requested by Distributor shall be borne by Distributor. |
B. Manufacturer’s Right to Delay or Cancel. Notwithstanding Manufacturer’s obligations in this Agreement, Manufacturer may refuse, cancel, or delay any shipment of the Products when Distributor is delinquent in any payment for more than (30) calendar days, or when Distributor is in material breach of its obligations under this Agreement, which has not been cured pursuant to Section 11.A.
C. Acceptance of Shipments or Deliveries. Distributor shall have ten (10) business days from the date of arrival of the shipment or delivery of the Products at the applicable Destination or other shipping or delivery location agreed upon by the Parties to inspect the Products and notify Manufacturer in writing of any discrepancies with respect to such Products, including but not limited to any discrepancies in the quantity or quality of the Products. The Products with respect to which Distributor does not notify Manufacturer of any discrepancies in writing shall be deemed accepted by Distributor. Manufacturer shall provide Distributor with proposed inspection procedures for quality checking the Products upon receipt of the Product, and shall keep such proposed procedures up to date. Distributor shall maintain the necessary resources (including qualified personnel available) to conduct such inspections within the time allowed. Manufacturer shall compensate Distributor for any manufacturing and design defects according to the following process: (i) if less than three percent (3.0%) of the items in a “production batch” are so defective, then notwithstanding anything to the contrary set forth in this Agreement, Manufacturer shall not be obligated to provide any reimbursement or replacement of those Products to Distributor or its customers; (ii) if at least three percent (3.0%), but less than ten percent (10.0%), of the items in a production batch are so defective, Manufacturer shall replace the specific defective items; and (iii) if ten percent (10.0%) or more of the items in a production batch are so defective, Manufacturer shall replace the entire production batch. With respect to each Product that is replaced by Manufacturer pursuant to the immediately foregoing sentence, at Manufacturer’s request Distributor shall use commercially reasonable efforts to obtain all replaced Products and destroy them. Notwithstanding anything to the contrary set forth in this Agreement, Manufacturer shall not be responsible for any damage to Products caused: (a) by Distributor or any subsequent person in possession of Products failing to store them in accordance with Manufacturer’s written specifications provided to Distributor in advance; and (b) while they are in a shipping carrier’s custody or control, but only where (i) the shipping carrier has rejected Manufacturer’s claim for damage against the shipping carrier and (ii) Manufacturer’s claim against the shipping carrier was materially prejudiced because Distributor did not perform a brief (but reasonable) visible inspection of the outside of the cargo containers holding the Products at the time after delivery to Distributor at the Destination and report such claimed damage on the bill of lading, shipment invoice, or similar instrument delivered with the cargo. For purposes of this Section 4(C), a production batch is the sum total of the Products bearing the same unique production batch number, which inventory, tracking, and other information shall be maintained by Manufacturer in its ordinary course and which can be reviewed by Distributor if Distributor reasonably believes there may be defects in a production batch.
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D. Adding or Deleting the Products; Manufacturing Changes to the Products. Manufacturer shall have the right at any time upon ninety (90) calendar days’ prior written notice to Distributor to add or delete the Products. Should Manufacturer want to make any changes to the Products, it shall first notify the Distributor at least ninety (90) calendar days before the change is implemented, and such changes shall be agreed to by the Parties in writing before shipment or delivery of any Products that include any such changes. Notwithstanding the foregoing, for changes required by regulatory or certification authorities or otherwise deemed necessary by Manufacturer for any reason, including health, safety, welfare, technology, intellectual property, trade secret, competitive, materials sourcing, or other matters, Manufacturer will notify Distributor at least thirty (30) calendar days before the change is implemented, but Distributor’s approval of such changes shall not be required.
E. Right of First Refusal for Future Products. The Manufacturer shall offer to the Distributor the right to be the exclusive distributor of any and all future products that: (a) arise out of or relate to electronic nicotine delivery systems and related components to electronic nicotine delivery systems (including any variations thereto (e.g., pods)); or (b) arise out of or relate to the nicotine industry (including but not limited to pouches and other accessories) (collectively, the “Future Products”). For the avoidance of doubt, Future Products shall include all flavors and variants of a product, but only such products as are, or are to be, distributed for commercial sale. Notwithstanding the foregoing provisions of this Section 4.E to the contrary, the products or product types listed at Exhibit C as attached hereto are excluded from the definition of Future Products and this right of first refusal for all purposes (the “Excluded Products”). At such time when the Manufacturer wishes to distribute any Future Products, it will offer the opportunity to the Distributor and the parties must engage in good faith negotiations regarding the terms and conditions, including but not limited to pricing and Minimum Purchase Thresholds, pursuant to which the Distributor will have the exclusive right to distribute Future Products (the “Right of First Offer”). If after ninety (90) days the parties have been unable to reach an agreement and have acted in good faith, the Manufacturer may enter negotiations with third parties. If the Manufacturer intends to enter into an agreement with a third party with respect to distribution of the Future Products, it shall first offer to the Distributor a right of first refusal with respect to such agreement (each, a “Right of First Refusal”). Distributor must exercise any such Right of First Refusal within twenty (20) days after the Manufacturer conveys the terms and conditions of such agreement. Exhibit A shall be amended to include any Future Products to be sold by the Distributor. Notwithstanding anything to the contrary in this Section 4.E., (i) to the extent that, and only to the extent that, PMI is granted a right of first offer or refusal with respect to Future Products in the Markets for which Distributor would otherwise have a Right of First Offer or Right of First Refusal under this Section 4.E., then Distributor’s right shall be a right of second offer/refusal, subordinate only to PMI’s right in the PMI Licensing Agreement (as defined above) and/or as set forth in the Deed Letter in the Markets which shall not arise or accrue unless and until PMI no longer has a right to such New Property under the PMI License Agreement; (ii) any Rights of First Refusal may be exercised on a country by country basis; . For the avoidance of doubt, Distributor’s Right of First Offer and Rights of First Refusal shall not be subordinate to PMI for any country that is not identified as a “Market” in the PMI Licensing Agreement.
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F. Right of First Refusal on Manufacturer Change of Control. If the Manufacturer receives an offer that would constitute a Change of Control Transaction (the “Bona Fide Offer”) and the Manufacturer wishes to accept such Bona Fide Offer, then the Manufacturer shall give written notice (the “Seller’s Notice”) to the Distributor, which Seller’s Notice must contain all the terms, conditions, and obligations of the Bona Fide Offer and the identification of the purchaser (the “Buyer”). The Distributor shall have the irrevocable first right to accept such Bona Fide Offer in place of the Buyer on the same terms and conditions set forth in the Seller’s Notice. The Distributor’s Right of First Refusal shall extend for a period of ninety (90) days after delivery of the Seller’s Notice (the “Exercise Period”) to the Distributor. If the Distributor exercises its rights hereunder and elects to accept the Bona Fide Offer in place of the Buyer, then: (a) the Distributor must send written notice during the Exercise Period to the Manufacturer indicating the Distributor is accepting the Bona Fide Offer in place of the Buyer on the terms and conditions set forth in the Seller’s Notice; and (b) the closing for the Distributor’s acceptance of the Bona Fide Offer in place of the Buyer shall occur at the same time on the same terms and conditions set forth in the Seller’s Notice. For purposes of this Agreement, the term “Change of Control Transaction” means any of the following: (w) any person, entity, or “group” (within the meaning of Rules 13(d) and 14(d) under the Securities Exchange Act of 1934) become the beneficial owner (as defined in Rules 13(d)-3 and 13(d)-5 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of any class of equity interests or ownership interests of Manufacturer; (x) the existing members of the Manufacturer at the time of the execution of this Agreement (the “Existing Members of the Manufacturer”), its affiliates and/or any trust established by the Existing Members of the Manufacturer solely for their own benefit and the benefit of their respective spouses and/or issue cease to own in the aggregate more than 50% of any class of outstanding equity interests or ownership interests in Manufacturer; (y) a sale, lease, or other disposition of all or substantially all the Manufacturer’s assets; or (z) any consolidation or merger of Manufacturer with or into any other person, entity, or any other corporate reorganization, in which the Existing Members of the Manufacturer own less than 50% of any class of equity interests or ownership interests of the surviving entity.
| 5. | INTELLECTUAL PROPERTY RIGHTS. |
A. Manufacturer’s Marks. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Manufacturer hereby grants to Distributor a revocable, sublicensable, non-transferable, non-exclusive, limited license to use Manufacturer’s logos, trademarks, and trade names, together with all branding and marketing materials created by or on behalf of Manufacturer in connection with the Products, and the domain www.bidivapor.com (collectively the “Manufacturer IP”), solely in connection with the marketing, advertisement, and sale of the Products. Such license shall immediately terminate upon the expiration or termination of this Agreement. Distributor shall strictly comply with all standards of use for the Manufacturer IP and must at all times display appropriate trademark and copyright notices as instructed by Manufacturer. Distributor acknowledges and agrees that the Manufacturer IP and other intellectual property provided to Distributor by Manufacturer, if any, are the sole and exclusive property of Manufacturer. Distributor shall not acquire any right, title, or interest under this Agreement in any patent, copyright, Manufacturer IP, or other intellectual property right of any kind of Manufacturer. No implied license, patent, copyright, or other intellectual property right of Manufacturer is granted under this Agreement or otherwise. During the term of this Agreement and thereafter, Distributor shall not do anything that will in any manner infringe, impeach, dilute, or lessen the value of the Manufacturer IP, patents, copyrights, or other intellectual property of Manufacturer or the goodwill associated therewith or that will tend to prejudice the reputation of the Manufacturer or the sale of any Products. Without limiting the generality of the foregoing provisions of this Section 5.A, any domain name created by Distributor that incorporates any Manufacturer IP shall be the sole and exclusive property of Manufacturer, and Distributor hereby assigns, transfers, and conveys such domain name to Manufacturer, free and clear of any lien, claim, or encumbrance, subject only to the license set forth above in this Section 5.A.
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B. Distributor Marks. Subject to the terms and conditions of this Agreement, during the term of this Agreement, Distributor hereby grants Manufacturer a non-exclusive, royalty free license to use Distributor’s logos, trademarks, and trade names (the “Distributor Marks”) on Manufacturer’s web sites and marketing materials. Such license shall immediately terminate upon the expiration or termination of this Agreement. Manufacturer shall strictly comply with all standards of use for the Distributor Marks and must at all times display appropriate trademark and copyright notices as instructed by Distributor. Manufacturer acknowledges and agrees that the Distributor Marks and other intellectual property provided to Manufacturer by Distributor, if any, are the sole and exclusive property of Distributor. Manufacturer shall not acquire any right, title, or interest under this Agreement in any patent, copyright, Distributor Marks, or other intellectual property right of any kind of Distributor. No implied license, patent, copyright, or other intellectual property right of Distributor is granted under this Agreement or otherwise. During the term of this Agreement and thereafter, Manufacturer shall not do anything that will in any manner infringe, impeach, dilute, or lessen the value of the Distributor Marks, patents, copyrights, or other intellectual property of Distributor or the goodwill associated therewith or that will tend to prejudice the reputation of the Distributor.
| 6. | CONFIDENTIAL INFORMATION. |
A. Confidential Information. The Parties acknowledge and agree that during the term of this Agreement, each may receive confidential information from the other Party. “Confidential Information” shall mean (i) information relating to a Party’s and its affiliates’ products or business including, but not limited to, the business plans, financial records, customers, suppliers, products, product samples, strategies, inventions, procedures, sales aids or literature, technical data, advice or knowledge, contractual agreements, pricing, price lists, product white papers, plans, designs, specifications, and know-how or other intellectual property, that may be at any time furnished, communicated, or delivered by either Party to the other Party whether in oral, tangible, electronic, or other form and (ii) all other non-public information provided by one Party to the other including, but not limited to, financial, technical, and business information, and all non-promotional materials furnished by one Party to another.
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B. Exceptions. The “Receiving Party” shall not have any obligations to preserve the confidential nature of any Confidential Information that: (i) Receiving Party can demonstrate by competent evidence was rightfully in the Receiving Party’s possession before receipt from the “Disclosing Party”; (ii) is or becomes a matter of public knowledge through no fault of the Receiving Party; (iii) is rightfully received by Receiving Party from a third party without, to the best of Receiving Party’s knowledge, a duty of confidentiality; (iv) is independently developed by Receiving Party without use of the Confidential Information; or (v) is disclosed by Receiving Party with Disclosing Party’s prior written approval.
C. Use of Confidential Information; Standard of Care. The Receiving Party shall maintain the Confidential Information in confidence and disclose the Confidential Information only to its employees, subcontractors, and consultants who have a need to know such Confidential Information in order to fulfill the business affairs and transactions between the Parties contemplated by this Agreement and who are under confidentiality obligations no less restrictive as, or who have been advised of the confidentiality obligations set forth in this Agreement. The Receiving Party shall remain responsible for breaches of this Agreement arising from the acts of its employees, subcontractors, and consultants to whom it provides the Disclosing Party’s Confidential Information. The Receiving Party shall protect Confidential Information by using the same degree of care as Receiving Party uses to protect its own information of a like nature, but no less than a reasonable degree of care, to prevent the unauthorized use, disclosure, dissemination, or publication of the Confidential Information. The Receiving Party agrees not to use the Disclosing Party’s Confidential Information for its own purpose other than in connection with the transactions contemplated by this Agreement or for the benefit of any third party, without the prior written approval of the Disclosing Party. The Receiving Party shall promptly return or certify destruction of all copies of Confidential Information upon request by the Disclosing Party or upon the expiration or earlier termination of this Agreement.
D. Equitable Relief. The Receiving Party hereby agrees and acknowledges that any breach or threatened breach of this Agreement regarding the treatment of the Confidential Information may result in irreparable harm to the Disclosing Party for which there may be no adequate remedy at law. In addition to other remedies provided by law or at equity, in such event the Disclosing Party shall be entitled to seek an injunction, without bond, preventing any further breach of this Agreement by the Receiving Party.
7. INSURANCE. Manufacturer shall maintain, during the term of this Agreement, Commercial General Liability Insurance and Product Liability Policy with minimum limits, including under any General Liability Umbrella Policies, of not less than $2,000,000 per occurrence limit for bodily injury and property damage, on the Products purchased by Distributor for resale. Manufacturer shall use commercially reasonable efforts to provide Distributor with thirty (30) calendar days’ prior written notice of any change or cancellation in any applicable insurance policies. Manufacturer shall make Distributor an additional insured under each policy.
Distributor shall maintain, during the term of this Agreement, Commercial General Liability Insurance and Products Liability Policy with minimum limits, including under any General Liability Umbrella Policies, of not less than $2,000,000 per occurrence limit for bodily injury and property damage. Distributor shall use commercially reasonable efforts to provide Manufacturer with thirty (30) calendar days’ prior written notice of any change or cancellation in any applicable insurance policies. Distributor shall make Manufacturer an additional insured under each policy.
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8. WARRANTY; RECALL.
A. Warranty. Manufacturer warrants to Distributor, for a period of one (1) year from the date of delivery by Manufacturer to the intended recipient thereof, that any Products delivered by Manufacturer pursuant to this Agreement shall conform in all material respects to Manufacturer’s most recent written specifications for such Products that were delivered prior to Manufacturer’s acceptance of a Purchase Order (“Written Specifications”), and shall be free of defects in materials and workmanship. Manufacturer further warrants to Distributor that (i) it has title to the Products to be conveyed hereunder and has the right to sell the same and that at the time of delivery, (ii) such Products shall be free of any security interest or other lien or any other encumbrances whatsoever, (iii) Manufacturer has the appropriate legal approvals and/or legal authority (including but not limited to any regulatory approvals or licensures that may be required) at the time of the sale of Products to sell those Products to Distributor; and (iv) on an on-going basis, Manufacturer must notify Distributor within three (3) business days after its receipt of any Notice of Illegality, provided, that if Manufacturer fails to do so but an officer of Distributor (other than Nirajjkumar Patel) separately has knowledge of some or all of the information contained in that Notice of Illegality, Distributor shall be responsible for the portion of those losses that a court, tribunal, or arbitrator with jurisdiction over the Parties finds could have been avoided as a result of that officer’s knowledge, and Manufacturer shall be responsible for the remainder of those losses that could have been avoided by providing the Notice of Illegality to Distributor (the warranties provided in (i), (ii), (iii), and (iv) being hereinafter referred to as the “Limited Warranty”). Except for the Limited Warranty, Manufacturer makes no warranties or representations to Distributor or any other person with respect to the Products or any services provided to Distributor or any other person. Manufacturer may not change any of the terms of the Limited Warranty at any time, without written consent from Distributor. Distributor will not alter the Limited Warranty, warranty disclaimers, and limitation of liability without the prior written authorization of Manufacturer, nor extend or make any additional warranty or representation regarding the Products unless expressly authorized by Manufacturer. Manufacturer covenants to use commercially reasonable efforts to limit changes to Written Specifications to those that are necessary or otherwise consistent with its ordinary course of business.
THE LIMITED WARRANTY REFERRED TO IN THIS SECTION IS THE ONLY WARRANTY, EXPRESS OR IMPLIED, THAT MANUFACTURER MAKES WITH RESPECT TO THE PRODUCTS. MANUFACTURER SPECIFICALLY DISCLAIMS ALL OTHER IMPLIED WARRANTIES INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.
B. Warranty Claims. The Limited Warranty is effective only if Distributor gives prompt written notice to Manufacturer of any alleged breach of the Limited Warranty, which notice shall specifically describe the problem and shall state the date of sale and name and location of the recipient of the Product originally shipped by Manufacturer. Notwithstanding anything to the contrary contained herein, Manufacturer shall have no obligation under the Limited Warranty unless it receives such notice within thirty (30) calendar days following the expiration of the warranty period. In the event of any breach of the Limited Warranty, Manufacturer’s sole obligation is to replace each non-conforming Product within a reasonable period of time and to pay for the costs of shipment to the original recipient of the Product or as otherwise specified by Distributor.
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C. Recall. In the event that: (i) any applicable federal, state or foreign regulatory authority should issue a request, directive or order that a Product be recalled; (ii) a court of competent jurisdiction orders such a recall; or (iii) Manufacturer determines that the Product represents a risk of injury or customer deception or is otherwise defective and that the recall of a Product is appropriate (“Recall”), Manufacturer shall have the sole right and responsibility for implementing the Recall. Distributor will provide cooperation and assistance to Manufacturer in connection therewith, as may be reasonably requested by Manufacturer. Manufacturer shall be solely responsible for all expenses affecting such Recall (including any reasonable out-of-pocket expenses incurred by Distributor in connection with such cooperation, as directed in writing by Manufacturer), in the event that the Recall is necessitated by a design, manufacturing, or marketing defect caused by Manufacturer, in which case Manufacturer will compensate Distributor for all Product stock held by Distributor subject to the Recall at the price paid by Distributor for those Products, with the compensation being paid one-half (1/2) in cash within sixty (60) days after the Recall and the remaining one-half (1/2) as a credit on future orders. With respect to each Product that is the subject of a Recall, at Manufacturer’s request Distributor shall use commercially reasonable efforts to obtain all recalled Products and destroy them, at Manufacturer’s expense unless resulting from a manufacturing, design, or marketing defect caused by Distributor, in which case the same shall be at Distributor’s expense.
D. Marketing Denial Orders. If a Marketing Denial Order or equivalent restriction is declared enforceable or is enforced by the U.S. Food and Drug Administration or any other U.S. governmental agency, court, or tribunal with jurisdiction (collectively, an “Enforcement Action”) with respect to any of the Products (the “Affected Products”), and Manufacturer has exhausted all available legal remedies to reverse the Enforcement Action, then Manufacturer shall repurchase the Affected Products held by, or returned to, Distributor at the price paid by Distributor to Manufacturer therefor within sixty (60) days after the exhaustion of all legal remedies (and Distributor shall, at Manufacturer’s direction, either return (at Manufacturer’s expense) the Products repurchased or destroy them). The foregoing repurchase obligation shall be: (a) subject to a cap of Two Million Dollars ($2,000,000.00) (the “Repurchase Cap”); and (b) such Repurchase Cap shall be reduced by fifty percent (50%) of Manufacturer’s attorneys’ fees, and other relevant out of pocket costs and expenses (including, without limitation, expert fees), in challenging the Enforcement Action up to One Million Dollars ($1,000,000.00).
| 9. | INDEMNIFICATION. |
A. Indemnity Obligations for Intellectual Property Infringement. Manufacturer agrees to defend, indemnify, and hold harmless Distributor from and against any and all claims, losses, damages, suits, expenses (including reasonable attorneys’ fees), and costs (collectively “Claims”) brought or alleged by a third party that the Manufacturer IP or any Products sold to Distributor infringe any worldwide patent, trademark, or copyright. Notwithstanding any provisions of this Section 9(A) to the contrary, Manufacturer shall have no indemnity, defense, hold harmless, or other obligation for any Claims under this Section 9(A) if: (i) Manufacturer concludes that Manufacturer’s IP may infringe another party’s intellectual property as the result of the Freedom to Operate analysis rendered before selling Products in another country; and (ii) Manufacturer notifies Distributor in writing of the potential infringement, and Distributor proceeds to sell Products in the country after receiving such written notice. Distributor shall reasonably cooperate with Manufacturer, its insurance company, and its legal counsel in its defense of such Claims. If the use or sale of any Products furnished under this Agreement is enjoined as a result of a Claim, Manufacturer shall either obtain on behalf of the Distributor the right to continue to use or sell such Products, substitute an equivalent product reasonably acceptable to Distributor in its place, or reimburse Distributor the purchase price of the Products, costs incurred by Distributor as a result of such cancellation, and any and all losses or costs incurred as a result of Distributor’s breach of any purchaser order or other agreement with its customers. Notwithstanding the foregoing, this indemnity shall not apply or cover any Claims based upon any infringement or alleged infringement of any patent, trademark, or copyright resulting from the alteration or unauthorized (by Manufacturer) use of any Manufacturer IP or the Products by Distributor or a Distributor representative or the combination of any Products with any other products or the combination of any Manufacturer IP with any other mark, if such infringement claim would have been avoided but for such alteration, combination, or unauthorized use by Distributor or any Distributor representative. Distributor shall also have the right to participate in the defense of any such action and have the right to hire its own legal counsel at Distributor’s expense. This indemnity shall not cover any Claims in which Distributor fails to provide Manufacturer with prompt written notice of the Claim that lack of notice materially prejudices the defense of the Claim.
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B. Distributor agrees to defend, indemnify, and hold harmless Manufacturer from and against any and all Claims brought or alleged by a third party based upon any infringement or alleged infringement of any patent, trademark, or copyright resulting from the alteration or unauthorized (by Manufacturer) use of any Manufacturer IP or the Products by Distributor or a Distributor representative or the combination of any Products with any other products or the combination of any Manufacturer IP with any other mark, if such infringement claim would have been avoided but for such alteration, combination, or unauthorized use by Distributor or any Distributor representative. Manufacturer shall reasonably cooperate with Distributor, its insurance company, and its legal counsel in its defense of such Claims. Manufacturer shall also have the right to participate in the defense of any such action and have the right to hire its own legal counsel at Distributor’s expense. This indemnity shall not cover any Claims in which Manufacturer fails to provide Distributor with prompt written notice of the Claim which lack of notice materially prejudices the defense of the Claim.
C. Manufacturer’s Additional Indemnity Obligations. Notwithstanding anything herein to the contrary, in addition to all other rights and remedies available at law or in equity, Manufacturer hereby agrees to defend, indemnify, and hold harmless Distributor from and against any and all third party Claims (i) arising out of or relating to any manufacturing defects and/or design defects in any Products sold by Manufacturer to Distributor that are caused by Manufacturer; (ii) arising out of or relating to any marketing defects in any Products sold by Manufacturer to Distributor where Manufacturer produced, made, wrote, or instituted such marketing material giving rise to the marketing defect; (iii) arising out of or relating to the negligent acts or omissions or willful misconduct of Manufacturer, its employees, agents, or representatives with respect to the Products or its performance of this Agreement; (iv) arising out of or relating to the breach of the Limited Warranty set forth in Section 8(A)(iii). Distributor shall reasonably cooperate with Manufacturer, its insurance company, and its legal counsel in its defense of such Claims. Distributor shall also have the right to participate in the defense of any such action and have the right to hire its own legal counsel at Distributor’s expense. This indemnity shall not cover any Claims in which Distributor fails to provide Manufacturer with prompt written notice of the Claim which lack of notice materially prejudices the defense of the Claim.
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D. Distributor’s Indemnity Obligations to Manufacturer. Distributor hereby agrees to defend, indemnify, and hold harmless Manufacturer, its affiliates, and their respective officers directors, employees, and agents from and against any and all Claims: (i) arising out of or relating to the negligent acts or omissions or willful misconduct of Distributor, its employees, agents, or representatives with respect to its performance of this Agreement, sale of the Products, or otherwise; (ii) arising out of or relating to the alteration or modification of the Products or Manufacturer IP by Distributor or its employees, agents, or representatives, or their failure to transport, store, or use the Products in conformance with Manufacturer’s commercially reasonable written specifications provided to Distributor; (iii) arising out of or relating to any marketing defects in any Products sold by Manufacturer to Distributor where Distributor produced, made, wrote, or instituted such marketing material giving rise to the marketing defect; or (iv) alleging that the Distributor Marks infringe or otherwise violate the intellectual property rights of a third party. This indemnity shall not cover any Claims in which Manufacturer fails to provide Distributor with prompt written notice which lack of notice prejudices the defense of the Claim. Manufacturer shall also have the right to participate in the defense of any such action and have the right to hire its own legal counsel at Manufacturer’s expense.
E. Settlement of Claims. In no event shall a party seeking or entitled to indemnification from a Party hereunder settle, compromise, agree to a judgment, or take any similar action with respect to any Claim without the written consent of the Party from whom indemnification is sought.
10. LIMITATION OF LIABILITY.
EXCEPT FOR THE PARTIES’ INDEMNIFICATION OBLIGATIONS UNDER SECTION 8 OF THIS AGREEMENT AND CONFIDENTIALITY OBLIGATIONS UNDER SECTION 5 OF THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT, STATUTORY, SPECIAL, OR PUNITIVE DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF USE, LOSS OF TIME, INCONVENIENCE, LOSS OF BUSINESS OPPORTUNITIES, DAMAGE TO GOODWILL OR REPUTATION, OR LOSS OF DATA, REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH OF CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE, AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR SUCH DAMAGES COULD HAVE BEEN REASONABLY FORESEEN.
11. TERM. This Agreement shall commence on the Effective Date and shall end on the tenth annual (10th) anniversary of the Effective Date (the “Initial Term”) unless earlier terminated pursuant to Section 11 hereof. The Initial Term shall automatically renew for another ten (10) years (the “Renewal Term”) unless earlier terminated pursuant to Section 11 hereof.
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| 12. | TERMINATION. |
A. Termination for Breach. Either Party may terminate this Agreement at any time in the event of a material breach by the other Party that remains uncured after thirty (30) calendar days following written notice thereof. Such termination shall be effective immediately and automatically upon the expiration of the applicable notice period, without further notice or action by either Party. Termination shall be in addition to any other remedies that may be available to the non-breaching Party.
B. Termination for Financial Insecurity. Either Party may terminate this Agreement and any outstanding Purchase Orders (to the extent the Products have not already been delivered to the carrier for shipment) immediately at its option upon written notice if the other Party: (i) becomes or is declared insolvent or bankrupt; (ii) is the subject of a voluntary or involuntary bankruptcy or other proceeding related to its liquidation or solvency, which proceeding is not dismissed within sixty (60) calendar days after its filing; (iii) ceases to do business in the normal course; or (iv) makes an assignment for the benefit of creditors. This Agreement shall terminate immediately and automatically upon any determination by a court of competent jurisdiction that either Party is excused or prohibited from performing in full all obligations hereunder, including, without limitation, rejection of this Agreement pursuant to 11 U.S.C. §365.
C. Termination for Failure to Meet Minimum Purchase Commitments. A Minimum Purchase Threshold for a given year shall not include any SKUs for which an MGO has not been granted. If any required Minimum Purchase Thresholds are not met, and such failure to meet the Minimum Purchase Thresholds, after a commercially reasonable effort by Distributor, is due to factors reasonably beyond Distributor’s control (including, but not limited to, shipping delays, force majeure, Enforcement Actions, Manufacturer’s refusal or inability to accept Purchase Orders, or Product defects), then the Minimum Purchase Threshold for the year(s) in which such factors exist shall be reduced to the extent that Distributor’s sale of Products are directly affected by such factors. If after taking into account such reduction in a given year, the required Minimum Purchase Threshold is not met for that year, then Manufacturer may provide notice to Distributor that the Agreement’s exclusivity provisions are no longer applicable, and such provisions shall thereafter no longer be applicable and the rights granted to Distributor in this Agreement shall become non-exclusive for all purposes; provided, however, that if Distributor’s first missed Minimum Purchase Threshold is missed by less than fifty percent (50.0%), the Agreement’s exclusivity provisions shall remain applicable unless and until such deficiency remains uncured within 12 months following written notice thereof. For clarity, Distributor shall only have one (1) opportunity to cure any failure to meet a Minimum Purchase Threshold, and any subsequent failure with respect to any Minimum Purchase Threshold shall not be subject to a cure right. If there is a failure to cure such deficiency within such 12 months, then on the day after the cure period has expired, the rights granted to Distributor in this Agreement shall become non-exclusive for all purposes. Notwithstanding the foregoing, at Manufacturer’s option in its sole discretion, Manufacturer may elect to suspend the conversion of certain of Distributor’s exclusive rights where permitted under this Section 12.C. upon written notice to Distributor.
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D. Obligations Upon Termination. Upon termination of this Agreement, Distributor shall cease to be an authorized reseller of the Products and (i) all unaccepted Purchase Orders may be cancelled by Distributor or Manufacturer without liability, and (ii) Distributor may, at its option, resell, and deliver to Manufacturer, free and clear of all liens and encumbrances, any or all of the Products that (A) are subject to Purchase Orders accepted by Manufacturer whether or not the applicable Products have been shipped as of the date of termination and (B) were manufactured, shipped, or received as of the date of termination, in each case that are in new condition and in the original factory packaging at the original purchase price of any such Products that Distributor elects to resell to Manufacturer less a restocking charge of 50% of such amount payable by Manufacturer upon receipt of such Products. Restocking is waived in the event the Manufacturer terminates Distributor, other than if termination is a “Termination for Breach” as outlined in 11.A. Within ninety (90) calendar days of termination of this Agreement, Distributor shall remove and not thereafter use any sign, display, or other advertising or marketing means containing Manufacturer Marks, except as provided in this section. Distributor may continue to use in-store materials containing the Manufacturer IP as reasonably required for the resale of the Products that may be remaining in Distributor’s possession after termination, which materials Distributor may continue to utilize until all remaining Products have been sold or one hundred eighty (180) calendar days after termination, whichever comes first, after which Distributor shall cease the use of any such Manufacturer IP. Notwithstanding anything herein to the contrary, the Parties agree that the PMI Distribution Rights contributed to KBI as set forth in Section 1(A) or the Distributor’s requirement to grant the PMI Distribution Rights directly to PMI as required by Deed Letter shall survive the termination of this Agreement for the duration of the Term including any Extension Period and Sell-Out Period.
13. COMPLIANCE WITH LAWS. Distributor acknowledges and understands that the Products may be subject to restrictions upon export from the United States and upon resale after export. Distributor therefore represents and warrants that it shall comply fully with all relevant regulations of the U.S. Department of Commerce, with the U.S. Export Administration Act, and with any other import and/or export control laws or regulations of the United States or any other jurisdiction.
14. GENERAL TERMS.
A. Independent Contractors. Nothing in this Agreement, and no course of dealing between the Parties, shall be construed to create or imply an employment or agency relationship or a partnership or joint venture relationship between the Parties or between one Party and the other Party’s employees or agents. Neither Manufacturer nor Distributor has the authority to bind the other, to incur any liability, or otherwise act on behalf of the other. Each Party shall be solely responsible for payment of its employees’ salaries (including withholding of income taxes and social security), workers’ compensation, and all other employment benefits.
B. Assignment. Except for: (a) the contribution of the PMI Distribution Rights by Distributor to KBI and/or the transfer of the PMI Distribution Rights from KBI to Distributor; and (b) Distributor providing the PMI Distribution Rights directly to PMI as may be required pursuant to the Deed of Letter dated even date herewith, neither this Agreement, nor any right or interest herein, may be assigned, in whole or in part, without the express written consent of the other Party. Any assignment without such consent shall be null and void. Notwithstanding the foregoing, the Distributor may assign its subcontract its rights or obligations under this Agreement with the prior written consent of Manufacturer, provided however, that the foregoing does not prohibit the sales and distribution of the Product as contemplated in this Agreement. Either party may assign this Agreement if the assignment is carried out as part of a merger, restructuring, or reorganization, or sale or transfer of all or substantially all of a Party’s assets. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, their successors and legal representatives. Except as set forth in Section 8, there are no third-party beneficiaries to this Agreement.
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C. Notices. Unless otherwise agreed to by the Parties, all notices shall be deemed effective when received and made in writing by either (i) certified mail, return receipt requested, (ii) nationally recognized overnight courier, or (iii) fax with confirmation, addressed to the party to be notified at the following address or to such other address as such Party shall specify by like notice hereunder:
If to Manufacturer:
BIDI VAPOR, LLC
401 N. WICKHAM RD.
MELBOURNE, FL 32935
| Attn: | BIDI VAPOR - CORPORATE |
| Email: | ADMIN@BIDIVAPOR.COM |
| Fax: | 833-367-2434 |
(with a copy to, which does not serve as notice):
Nelson Mullins Riley & Scarborough LLP
390 N. Orange Ave., Suite 1400
Orlando, FL 32801
Attention: Matt Armstrong
E-Mail: matt.armstrong@nelsonmullins.com
Fax: 407-425-8377
If to Distributor:
Kaival Brands Innovations Group, Inc.
4460 OLD DIXIE HWY
GRANT-VALKARIE, FL 32949
| Attn: | KAVL - CORPORATE |
| Email: | ADMIN@KAIVALBRANDS.COM |
| Fax: | 833-452-4825 |
(with a copy to, which does not serve as notice):
Baker & Hostetler LLP
200 S. ORANGE AVE., STE 2300
ORLANDO, FL 32801
Attn: KEITH DURKIN
| Email: | kdurkin@bakerlaw.com |
Fax: 407-841-0168
Either Party, by written notice to the other pursuant to this section, may change its address or designees for receiving such notices.
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D. Force Majeure. Neither Party shall be liable hereunder for any failure or delay in the performance of its obligations under this Agreement if such failure or delay is on account of causes beyond its control, including labor disputes, civil commotion, war, fires, floods, inclement weather, governmental regulations or controls, casualty, government authority, strikes, endemic, pandemic, or acts of God, in which event the non-performing Party shall be excused from its obligations for the period of the delay and for a reasonable time thereafter. Each Party shall use reasonable efforts to notify the other Party of the occurrence of such an event within three (3) business days of its occurrence. Notwithstanding anything to the contrary contained herein, in no event shall the COVID-19 pandemic or government actions taken in connection with the same (or any future pandemic or government actions taken in connection with the same) constitute an event of force majeure under this Section 14.D. or otherwise prohibit or restrict Manufacturer’s rights to terminate this Agreement for failure of Distribute to meet the Minimum Purchase Threshold set forth under Section 12.C. hereof.
E. Governing Law; Venue; Jury Waiver. This Agreement shall be governed by the laws of the State of Florida, without giving effect to the principles of conflicts of law of such state and shall be binding upon the Parties hereto in the United States and worldwide. Any claims or legal actions by one Party against the other arising under this Agreement or concerning any rights under this Agreement shall be commenced and maintained in any state or federal court located in Orange County, Florida. Both Parties hereby submit to the jurisdiction and venue of any such court. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM, COUNTERCLAIM, OR ACTION ARISING FROM THE TERMS OF THIS AGREEMENT.
F. Attorney’s Fees. If either Party incurs any legal fees associated with the enforcement of this Agreement or any rights under this Agreement, the prevailing Party shall be entitled to recover its reasonable attorney’s fees and any court, arbitration, mediation, or other litigation expenses from the other Party.
G. Survival. The provisions of this Agreement, which by their sense and context should survive any termination of expiration of this Agreement, including without limitation Sections 6 (confidentiality), 8 (warranty), 9 (indemnification), 10 (limitation of liability), 13 (compliance with laws), and 14 (general terms) shall so survive.
H. Authorized Signatories. It is agreed and warranted by the Parties that the individuals signing this Agreement on behalf of the respective Parties are authorized to execute such an agreement. No further proof of authorization shall be required.
I. Severability. If any provision or portion of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid, or unenforceable, the remaining provisions or portions shall remain in full force and effect.
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J. No Strict Construction. This Agreement shall not be construed more strongly against either Party regardless of which Party is more responsible for its preparation.
K. Counterparts. This Agreement may be executed by facsimile and electronically by DocuSign or digital signature and in one or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument, without necessity of production of the others.
L. Entire Agreement; Modification; Waiver. This Agreement is the entire agreement between the Parties with respect to the subject matter and supersedes any prior agreement or communications between the Parties hereto, whether written or oral. This Agreement may be modified only by a written amendment signed by authorized representatives of both Parties. No waiver of any term or right in this Agreement shall be effective unless in writing, signed by an authorized representative of the waiving Party. The failure of either Party to enforce any provision of this Agreement shall not be construed as a waiver or modification of such provision, or impairment of its right to enforce such provision thereafter.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their duly authorized representatives as of the last date written below, to be effective on the Effective Date.
| MANUFACTURER | ||
| BIDI VAPOR, LLC | ||
| By: | /s/ Nirajkumar Patel | |
| Name: Nirajkumar Patel | ||
| Title: Manager | ||
| DISTRIBUTOR | ||
| KAIVAL BRANDS INNOVATIONS GROUP, INC. | ||
| By: | /s/ Eric Mosser | |
| Name: Eric Mosser | ||
| Title: Chief Operating Officer | ||
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EXHIBIT A
Exclusive Distributor Price
The following prices will be valid for all orders placed by Kaival and accepted by Bidi on or before December 31, 2022. Thereafter, the pricing shall change in the manner set forth in the Agreement.
| Product | Exclusive Distributor Price (i.e., price to be paid by Kaival to Bidi) |
BIDI Stick – per Unit [***] |
[***] |
| Product | Exclusive Distributor Price (i.e., price to be paid by Kaival to Bidi) |
BIDI Acrylic Display [***] |
[***] |
As of the Effective Date of this Agreement, the current flavors are the following (each at 1.4 mL and 6% Nicotine):
| 1. | Arctic | |
| 2. | Classic | |
| 3. | Dawn | |
| 4. | Gold | |
| 5. | Marigold | |
| 6. | Regal | |
| 7. | Solar | |
| 8. | Summer | |
| 9. | Tropic | |
| 10. | Winter | |
| 11. | Zest |
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EXHIBIT B
Specifications
[***]
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EXHIBIT C
Excluded Products from Future Products
[***]
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EXHIBITS 10.24
OFFICE / WAREHOUSE / EQUIPMENT LEASE
(NNN)
THIS OFFICE / WAREHOUSE / EQUIPMENT LEASE (the “Lease”) is made and entered into as of June 10, 2022 (the “Effective Date”), by and between JUST PICK, LLC, a Florida limited liability company (“Landlord”), as landlord, and KAIVAL BRANDS INNOVATIONS GROUP, INC., a Delaware corporation (“Tenant”), as tenant.
WHEREAS, Landlord owns the premises located on the property legally described on Exhibit A hereto and by this reference incorporated herein with an address of 4460 Old Dixie Highway, Grant Valkaria, FL 32949 (the “Land”) and certain furniture, fixtures, and equipment located therein; and
WHEREAS, Landlord desire to lease to Tenant, and Tenant desires to lease from Landlord, the Land and all improvements thereon, and certain furniture, fixtures, and equipment located thereat, pursuant to the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual covenants and conditions contained in this Lease, the Parties agree as follows:
Article
1.
LEASE OF PROPERTY
1.1 Lease of Premises. Landlord leases to Tenant, and Tenant leases from Landlord, on the terms and conditions set forth in this Lease, the Land and all improvements located thereon (collectively, the “Premises”), such improvements including, without limitation, the following: (a) an office building containing approximately one thousand five hundred ninety-five (1,595) square feet, the location of which is generally depicted on Exhibit B attached hereto and by this reference incorporated herein as the “Office” (the “Office Building”); and (b) a warehouse building consisting of approximately nineteen thousand seven hundred thirty-seven (19,737) square feet, the location of which is generally depicted on Exhibit B as the “Warehouse” (the“Warehouse Building”, and together with the Office Building, each a “Building”, and collectively the “Buildings”).
1.2 Lease of Personal Property. Landlord leases to Tenant, and Tenant leases from Landlord, on the terms and conditions set forth in this Lease, the furniture, fixtures, and equipment specifically listed on Exhibit C attached hereto and by this reference incorporated herein (the “Personal Property”, and together with the Premises, collectively the “Property”). Tenant acknowledges and agrees that the Personal Property shall be located at all times during the Term at the Premises, and shall not be moved without Landlord’s prior written consent in each instance, in its sole discretion. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be obligated to replace any Personal Property, whether due to permanent damaged, obsolescence, or otherwise, and Tenant shall be solely responsible for obtaining and maintaining its own replacement personal property to satisfy its needs at the Premises, which replacement personal property shall be and remain the property of Tenant if obtained by Tenant.
Article
2.
TERM
2.1 Initial Term. The Property are leased to Tenant for an initial term (the “Initial Term”) of one (1) year, commencing at 12:01 A.M. on the Effective Date and ending at 11:59 PM on the day immediately prior to the first (1st) anniversary of the Effective Date (the “Initial Expiration Date”), unless sooner terminated in accordance with the provisions of this Lease.
2.2 Renewal. This Lease shall automatically renew beyond the Initial Term as follows:
(a) Unless Tenant delivers a written notice of termination to Landlord at least thirty (30) days prior to the Initial Expiration Date, then subject only to Section 2.2(c), this Lease shall automatically extend for a period of five (5) additional years (the “First Renewal Term”), commencing at 12:01 A.M. on the first (1st) anniversary of the Effective Date and ending at 11:59 PM on the day immediately prior to the sixth (6th) anniversary of the Effective Date (the “First Renewal Expiration Date”), subject to under the terms and conditions contained in this Lease.
(b) Tenant, in its sole and absolute discretion, shall have one (1) option to extend the Term for a period of five (5) years immediately following the First Renewal Term (the “Second Renewal Term”, and together with the First Renewal Term, each a “Renewal Term”) for a period of five (5) additional years commencing at 12:01 AM on the sixth (6th) anniversary of the Effective Date and ending at 11:59 PM on the date immediately prior to the eleventh (11th) anniversary of the Effective Date, subject to under the terms and conditions contained in this Lease. Tenant’s option to renew this Lease for the Second Renewal Term must be exercised by Tenant delivering written notice of its election to Landlord at least four (4) months prior to the First Renewal Expiration Date. Base Rent for the Second Renewal Term shall be adjusted to an amount equal to the current fair market rental rate for reasonably-comparable premises in similarly situated rental areas in the rental market of Brevard County, Florida, at the time that the Second Renewal Term is to commence, together with reasonably forecasted annual adjustments (“Market Annual Rent”). With reasonable promptness following Tenant’s timely delivery of a written notice to extend the Term for the Second Renewal Term, Landlord and Tenant shall cooperate in good-faith to determine the Market Annual Rent, and if Landlord and Tenant cannot agree on Annual Market Rent during the thirty (30) day period after delivery of that notice to Landlord, then a qualified independent certified appraiser shall be promptly employed to determine the Market Annual Rent (the “Appraiser”). If Landlord and Tenant do not promptly agree on the identity of the Appraiser, both Landlord and Tenant shall each appoint a qualified independent certified appraiser, and the two appointed appraisers shall select a third qualified independent certified appraiser to serve as the Appraiser. An appraisal made by the Appraiser pursuant to this Section 2.2(b) shall be final and binding on both Landlord and Tenant, absent manifest error or mistake of fact. The cost of the Appraiser shall be borne equally by Landlord and Tenant. Once Landlord and Tenant agree on Market Annual Rent, or Market Annual Rent is determined by the Appraiser, Landlord and Tenant agree to promptly execute an amendment to this Lease in reasonable form and substance to reflect the amount of Market Rent for the applicable portion of the Additional Term if one party requests such an amendment.
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(c) Notwithstanding the foregoing provisions of this Section 2.2 to the contrary:
(i) If any Event of Default exists and is continuing at any time within the thirty (30) day period immediately prior to the commencement of the applicable Renewal Term, Landlord may (but is not required to) reject a Renewal Term by delivering written notice thereof to Tenant, in which case the Lease shall not be renewed for such Renewal Term and shall terminate upon the conclusion of the then-current Term.
(ii) If at any time during the Term, the U.S. Food and Drug Administration issues one or more non-appealable and binding enforcement orders mandating that all eleven (11) current stock keeping units (or “SKUs”) for the “Bidi Stick” manufactured by Bidi Vapor, LLC (i.e., all eleven (11) current flavors) must be removed from the U.S. market, then Tenant may terminate this Lease by delivering a written notice of termination to Landlord at least thirty (30) days prior to the desired date of termination.
(d) References in this Lease to the “Term” shall mean the Initial Term and, to the extent exercised, each Renewal Term, and references in this Lease to the “Expiration Date” shall mean the last day of the Term.
2.3 Lease Year. As used herein, the term “Lease Year” shall mean a period of one (1) year. Each Lease Year shall commence on the Effective Date (in the case of the first (1st) Lease Year) or an anniversary of the Effective Date (in the case of all subsequent Lease Years), and end on the date immediately prior to the next anniversary of the Effective Date.
Article
3.
RENT
3.1 Base Rent. Tenant shall pay base rent for the Property (“Base Rent”) during the Term as follows, without demand, deduction, or offset, plus all sales, use, transaction privilege, or other excise tax that may at any time be levied or imposed upon, or measured by, any amount payable by Tenant under this Lease:
| Term: | Lease Year: | Annual Base Rent: | Monthly Base Rent: |
| Initial Term | Year 1 | $213,320.001 | $17,776.67 |
| First Renewal Term (if applicable) | Year 2 | $223,986.00 | $18,665.50 |
| Year 3 | $234,652.00 | $19,554.33 | |
| Year 4 | $245,318.00 | $20,443.17 | |
| Year 5 | $266,650.00 | $22,220.83 | |
| Year 6 | $287,982.00 | $23,998.50 | |
| Second Renewal Term (if applicable) | Years 7-11 | Market Annual Rent | One twelfth (1/12) of Market Annual Rent |
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3.1 Payment of Base Rent. Base Rent shall be payable in equal monthly installments in advance, commencing on the first full calendar month of the Term, and continuing on the first (1st) day of each subsequent calendar month until the Expiration Date; provided, however, that in the event that: (a) the Effective Date falls on any date other than the first day of a calendar month, the Base Rent will be prorated for that month and shall be due and payable on the Effective Date; and (b) the Expiration Date falls on any date other than the last day of a calendar month, the Base Rent will be prorated for that month and shall be due and payable on the first day of that month.
3.2 Operating Expenses.
(a) Tenant shall pay one hundred percent (100%) of all costs, fees, charges, and expenses incurred by, or charged to, Landlord in connection with the ownership, operation, maintenance and repair of, and services provided to, the Property, except for the costs, fees, charges, expenses, and obligations assumed by Landlord pursuant to this Lease or set forth in Section 3.3(b) (collectively, “Operating Expenses”), which shall constitute additional rent hereunder. Operating Expenses include, without limitation, all of the fees, charges, and expenses incurred by, or charged to, Landlord in connection with the following: (i) the Insurance Premiums, together with the cost of any deductible paid by Landlord in connection with an insured loss (provided, that any such deductible shall be amortized over the entire period of the estimated economic useful life of any improvement replaced by the insurance proceeds associated with that deductible, determined in accordance with generally accepted accounting principles); (ii) Taxes; (iii) Landlord’s cost to maintain the Property, except as otherwise expressly set forth in this Lease; (iv) the annual amortization (over their estimated economic useful life determined pursuant to generally accepted accounting principles) of the costs (including reasonable financing charges) of capital improvements or replacements to the Premises on a straight-line basis pursuant to generally accepted accounting principles: (v) a management and administrative fee not to exceed three percent (3%) of annual Base Rent for the Lease Year in question; and (vi) exterior painting of the Buildings.
(b) Notwithstanding the foregoing provisions of this Section 3.2 to the contrary, Operating Expenses will not include the following: (i) depreciation on the Buildings or the Property; (ii) financing and refinancing costs (except as provided above), interest on debt or amortization payments on any mortgage, or rental under any ground or underlying lease; (iii) leasing commissions, advertising expenses, tenant improvements or other costs directly related to the leasing of the Property; (iv) income, excess profits or corporate capital stock tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed in lieu of all or any part of any taxes includable in Operating Expenses above; (v) salaries and overhead of personnel employed by Landlord; (vi) expenses for repair or replacement covered by warranties, and any costs due to casualty that are covered by insurance carried by Landlord or that would have been covered by insurance that Landlord is required to carry under this Lease; (vii) repairs or replacements caused by Landlord’s negligence or willful misconduct, or the negligence or willful misconduct of Landlord’s servants, agents, or employees; (viii) rent and other payments by Landlord under any ground lease or other lease underlying this Lease; (ix) payments to servants, agents, or employees of Landlord for services to the Property for supplies or other materials to the extent that the cost of such services, supplies, or materials exceed the cost which would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis; (x) expense reserves; and (xi) tax or assessment expenses in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term. To the extent it is property qualified, licensed, and insured, as applicable, Landlord shall have the right to directly perform (by itself or through an affiliate) any services provided under this Lease provided that the Landlord’s charges included in Operating Expenses for any such services shall not exceed competitive market rates for comparable services.
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3.3 Payment of Operating Expenses; Reconciliation. Operating Expenses shall be payable in equal monthly installments, commencing on the first (1st) full month of the Term, and continuing on the first day of each subsequent month until the Expiration Date. In the event that the Effective Date falls on any date other than the first (1st) day of a calendar month, Operating Expenses will be prorated for that month and shall be due and payable on the Effective Date, and Operating Expenses will be prorated for the last month of the Term if the Expiration Date falls on any date other than the last day of a calendar month. In Landlord’s discretion, it may elect to charge Operating Expenses once per Lease Year, in arrears, when Landlord delivers the statement set forth in Section 3.2(c) (in which case the reconciliation set forth in that section shall not be necessary except to the extent necessary as a result of a permissible audit).
(a) By April 30th of each Lease Year (and as soon as practical after the expiration or termination of this Lease), Landlord shall provide Tenant with a statement of the Operating Expenses for the preceding Lease Year or part thereof. Within thirty (30) days after delivery of the statement to Tenant, Landlord or Tenant shall pay to the other the amount of any overpayment or deficiency then due from one to the other. Landlord’s and Tenant’s obligation to pay any overpayment or deficiency due the other pursuant to this Section shall survive the expiration or termination of this Lease. In the event that all Operating Expenses for any Lease Year are more than five percent (5%) greater than the actual Operating Expenses for the immediately preceding Lease Year, then within thirty (30) days after Tenant’s receipt of Landlord’s statement setting forth actual Operating Expenses for the Lease Year in question, Tenant shall have the right to review and inspect, at Landlord’s local offices and at Tenant’s expense, Landlord’s accounts and records relating to those Operating Expenses; provided, however, that for this purpose a partial Lease Year’s Operating Costs shall be considered to be the total Operating Costs that would have been charged for an entire calendar year based on the actual Operating Costs for such partial Lease Year).
3.4 Late Payment; Interest. In the event that any payment of Base Rent, Operating Expenses, or any other sum due hereunder is not paid within ten (10) days after the date that such payment is due, Tenant shall be responsible for, and shall pay: (a) a late payment fee equal to five percent (5%) of the amount due (except when Tenant pays the administrative charge set forth in Section 15.2(a)); and (b) interest on such unpaid portion at a rate equal to the lesser of the highest rate permitted by applicable law or ten (10.0%) (the “Interest Rate”) with interest commencing on the date that the payment was due (provided, however, that no interest is due and payable if the amount is paid within ten (10) days after the date it is due).
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Article
4.
INSURANCE
4.1 Liability Insurance. Tenant agrees to procure and maintain a policy or policies of liability insurance, at its own cost and expense, insuring Landlord and Tenant from all claims, demands, or actions for injury, death, or damage to property sustained by one or more persons as a result of any one occurrence in the amount of One Million Dollars ($1,000,000.00) combined single limit per occurrence and Two Million Dollars ($2,000,000.00) in the aggregate arising from, related to, or connected with the conduct and operation of Tenant’s business at the Premises. The policy limits requirement may be satisfied by primary general liability insurance or a combination of primary general and excess umbrella liability insurance. Such insurance shall: (a) be endorsed to name Landlord as named insured and this status shall be reflected on the Tenant’s certificate of insurance delivered to the Landlord; (b) not be subject to cancellation except after at least ten (10) days’ prior written notice to Landlord; and (c) be written on an “occurrence” basis and not on a “claims made” basis and shall be endorsed to provide that it is primary to and not contributory to any policies carried by Landlord. The policy or policies, or duly executed certificate or certificates for the same, together with satisfactory evidence of the payment of premium thereon, shall be deposited with Landlord both before Tenant takes possession of the Premises, as well as upon any renewal of said insurance, not less than thirty (30) days prior to the expiration of the term of such insurance.
4.2 Property Insurance. Landlord shall maintain a policy or policies of insurance, in the amount of the full replacement value of the Buildings and the other improvements on the Land, and insuring the Buildings and the other improvements on the Land against loss or damage by fire, wind and storm damage, explosion or other such hazards or risks in a standard extended coverage policy. In Landlord’s discretion, Landlord may include the Property in such policy or policies as covered property. Landlord shall provide to Tenant a detailed accounting of the cost of all premiums with respect to such policy or policies (each, an “Insurance Premium”). The cost of each Insurance Premium for such policy or policies that is attributable to the Term shall be payable by Tenant to Landlord as an Operating Expense.
4.3 Tenant’s Personal Property Insurance; Other Insurance. Tenant shall be solely liable hereunder for insuring Tenant’s personal property. Tenant shall also maintain a policy of business interruption insurance so as to cover Tenant’s obligations hereunder.
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4.4 Subrogation. Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned by either Landlord or Tenant, as the case may be, their respective property, the Premises, or its contents or to other portions of the Buildings or the Land, or to the Property, arising from any risk actually covered or to be covered by the insurance policies required hereunder. Landlord and Tenant hereby release each other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by fire or any of the extended coverage or supplementary contract casualties, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. If required by either party, Landlord or Tenant shall use commercially reasonable efforts to have all such property insurance policies which may be carried by it endorsed with a clause providing that any release from liability of, or waiver of claim for recovery from, the other party entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of said policy or the right of the insured to recover thereunder, and providing, further that the insurer waives all rights of subrogation which such insured may have against the other party.
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5.
UTILITIES, AND TAXES AND ASSESSMENTS
5.1 Utilities. Landlord at its expense agrees to make available to Tenant water, sewer, phone and electrical services to the Premises as of the Effective Date. Tenant shall be liable and agrees to pay the charges for all public utility services rendered or furnished to the Premises, including, but not limited to heat, water, electricity, sewer, and sewage treatment facilities, and shall obtain all such service in its own name and timely pay all charges directly to the provider. Landlord shall not be responsible or liable for any interruption in such services except to the extent caused by the negligence or willful misconduct of Landlord, nor shall such interruption affect the continuation or validity of this Lease. Any wiring, cabling or other equipment necessary to connect Tenant’s telecommunications equipment shall be Tenant’s responsibility and shall be installed in a manner approved by Landlord, such approval not to be unreasonably withheld, conditioned, or delayed.
5.2 Taxes and Assessments. For purposes hereof, “Taxes” shall mean all real estate and/or property taxes, rates, levies, charges and assessments, general and special, ordinary and extraordinary, of every kind and nature whatsoever, whether now known to law or hereafter created, which are levied, assessed, imposed or become due and payable during the Term (and, if attributable to a period of time, to the extent attributed to the Term) upon: (a) the Land; (b) the Buildings and the other improvements located on the Land; (c) the Property; (d) the leasehold estate hereby created; and/or (e) or arising with respect to the occupancy, use, or possession of the Premises, and/or the use and possession of the Personal Property, by Tenant. Landlord shall use commercially reasonable efforts to minimize, reduce, protest, negotiate or otherwise adjust Taxes. Any cost incurred by Landlord in an effort to minimize, reduce, protest, negotiate or otherwise adjust any real estate tax bill, tax assessment or assessed valuation, including the cost of appraisals, witness fees and attorneys’ fees related thereto, shall be included in the definition of Taxes (provided, however, that such costs shall not result in a net overall increase to the amount of Taxes). If a special assessment is payable in installments, Taxes for any year shall include the installment of such assessment for that year to the extent of the length of the Term that occurs during such year. If at any time during the Term, the methods of taxation prevailing at the commencement of the Term shall be changed or altered so that in lieu of, in addition to, or as a substitute for the whole or any part of the taxes now levied, assessed or imposed on real estate, there shall be levied, assessed or imposed a different method of taxation, then the same shall be included in the definition and computation of Taxes hereunder. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not be obligated to pay, and Operating Expenses shall not include, any succession, transfer, gift, franchise, income, estate, or inheritance taxes or impositions which may be levied upon, required to be collected by, or assessed against Landlord. Expiration of the Term shall not affect Tenant’s obligation to pay Taxes with respect to any deficiency in Tenant’s payment thereof for the final Lease Year.
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Article
6.
SUBLEASING OR ASSIGNMENT
6.1 Assignment With Consent. Tenant shall not assign, sell, transfer, sublease, or mortgage its interest in this Lease without the prior written consent of the Landlord, which consent shall not be unreasonably withheld, conditioned, or delayed so long as both: (a) the transferee has a net worth at least equal to or greater than Tenant at the Effective Date hereof, calculated in accordance with generally accepted accounting principles as applied in the United States; and (b) no Event of Default has occurred and is continuing.
6.2 Requirements. If Tenant requests Landlord’s consent to assign, sell, transfer, or sublease its interest in the Lease, Tenant shall provide Landlord, at least fifteen (15) days prior to the proposed transaction, current financial statements of the transferee certified by an executive officer of the transferee, a complete copy of the proposed transfer or sublease documents, and any other information Landlord reasonably requests. Immediately following any approved sale, assignment, transfer, or sublease, Tenant shall deliver to Landlord an assumption or sublease agreement (as applicable) reasonably acceptable to Landlord executed by Tenant and the transferee, together with a certificate of insurance evidencing the transferee’s compliance with the insurance requirements of Tenant under this Lease. Tenant agrees to reimburse Landlord for reasonable administrative and attorneys’ fees in connection with the processing and documentation of any sale, transfer, assignment, or sublease for which Landlord’s consent is requested.
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7.
ALTERATIONS, REPAIRS AND MAINTENANCE
7.1 Alterations and Improvements.
(a) Tenant shall not make any structural or exterior changes in, or additions or alterations to the exterior of, the Premises, or any additions or alterations to the Personal Property, without Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned, or delayed.
(b) Tenant shall not make any material interior change in, or addition or alteration to the interior of, the Premises that either: (i) costs in excess of Twenty-Five Thousand Dollars ($25,000); (ii) either cannot be removed by Tenant at the end of the Term such that the Premises cannot be restored by Tenant to the same condition as it exists on the Effective Date; or (iii) requires work within the walls, below the floor or above the ceiling, in each case without Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned, or delayed.
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(c) If Landlord consents to any changes, additions, or alterations, or such changes, additions, or alterations are otherwise permitted, they shall be made at Tenant’s sole cost and expense and shall be performed in a first-class and workmanlike manner on a level consistent with the age and condition of the Buildings and other improvements comprising the Premises on the Effective Date, or of the Personal Property, as applicable, and in accordance with all applicable legal and insurance requirements and the terms and provisions of this Lease. Upon completion of changes, additions, or alterations to the Premises, Tenant shall deliver to Landlord: (i) a sworn affidavit from Tenant and its general contractor (if Tenant is not acting as its own general contractor) in form and substance reasonably acceptable to Landlord stating – (A) in reasonable detail the actual costs paid by Tenant for construction and completion of the alterations, (B) the names and addresses of all architects, contractors, subcontractors or suppliers in respect of the alterations, and (C) that all of the persons identified in the sworn affidavit required pursuant to clause (i)(B) have been paid in full; and (ii) full and final mechanic’s lien waivers, in form and substance reasonably acceptable to Landlord, from each person identified in the sworn affidavit required pursuant to clause (i)(B).
(d) Changes, alterations, additions, and improvements to the Property made by Tenant shall become the property of the Landlord upon the Expiration Date unless Tenant, prior to the Expiration Date, removes such improvements and restores the Property to the same condition as existed on the Effective Date.
7.2 Tenant’s Duty to Repair, Maintain and Replace. Except for Landlord’s responsibilities set forth in Section 7.3, Tenant covenants and agrees to keep and maintain the Property in good order, condition and repair including, without limitation, such maintenance and repair as may be needed to keep the Buildings, the exterior areas of the Premises (which shall include any landscaped areas as well as the parking lot, walkways, and sidewalks, if any), and automatic gates at the access point of the Premises in good order, condition, and repair and in substantially the same order, condition, and repair as they were as of the Effective Date, reasonable wear and tear and damage from fire and other casualty for which insurance has been procured (or is required to be procured pursuant to this Lease) excepted. Tenant shall not overload the electrical, water and/or plumbing facilities serving the Premises. Tenant, at its cost, shall purchase and maintain throughout the Term a maintenance contract for a reputable company or companies providing maintenance of the plumbing, heating, ventilation, air-conditioning, and fire sprinkler and suppression systems or equipment serving the Premises (collectively, the “Equipment”), in accordance with the manufacturer’s suggested service and maintenance requirements and all requirements of applicable laws, and shall be responsible for the costs of any required repairs, maintenance, and replacement of the Equipment (but, in any event, no less than quarterly service).
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7.3 Landlord’s Duty to Repair and Replace Interior and Exterior Structural Issues and Other Items. Landlord covenants and agrees to: (a) keep and maintain the Buildings’ foundations, outer walls, footings, structural steel columns, and girders, and roof at Landlord’s sole expense and not as an expense of Tenant or as an Operating Expense; and (b) make any necessary replacements to the Equipment, the cost of which shall be considered an Operating Expense in the manner set forth in Section 3.2(a)(iv). Landlord, at its sole expense and not as an expense of Tenant, shall perform or cause to be performed any and all repairs and replacements which are the responsibility of Landlord necessary to restore the Premises and other areas for which Landlord is responsible to a state of good condition and repair. Landlord shall complete such repairs within sixty (60) days after Landlord has received written notice from Tenant of such state of disrepair, or if such repairs cannot reasonably be completed within such sixty (60) day period, Landlord shall commence such repairs within sixty (60) days after notice and proceed diligently thereafter. Landlord agrees to use commercially reasonable efforts to minimize disruption to or interference with Tenant’s use and enjoyment of the Premises in making repairs or replacements or in maintenance. In the event of an emergency, Tenant shall have the right to prosecute immediately any and all necessary repairs and shall deliver contemporaneous notification to Landlord of the emergency and related repairs and offset the reasonable cost of such repairs against the next monthly installment or installments of Base Rent due hereunder; provided, however, that if contemporaneous notice is not practicable, as determined by Tenant in its reasonable judgment, then Tenant shall provide such notice as soon thereafter as reasonably practicable. Notwithstanding the foregoing provisions of this Section 7.3 to the contrary, Landlord shall not be obligated to make any repairs or replacements referenced in this Section 7.3 to the extent that those repairs to these components are caused by Tenant, any subtenant, or its or their respective agents, contractors, servants, employees, subtenants, concessionaires or licensees, in which case Landlord shall make repairs and Tenant shall be reimburse Landlord within ten (10) days of receipt of Landlord’s invoice therefor.
7.4 Tenant’s Failure to Maintain, Repair or Replace. If Tenant shall refuse or neglect to commence or complete any item of maintenance, repair or replacement necessary to keep the Property in good condition and repair during the Term hereof as required by Section 7.2 (including, without limitation, a suitable contract for maintenance of the Equipment), Landlord may, but shall not be required to, arrange for such maintenance, repair or replacement to be performed, and present an invoice or invoices evidencing the cost thereof to Tenant for immediate payment as additional rent hereunder. For non-emergency repairs, Landlord shall provide Tenant with a ten (10) business day prior written notice of Landlord’s intent to repair, should Landlord decide to repair pursuant to this section.
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8.
LIENS
8.1 Liens not Permitted. Tenant shall not do anything or cause anything to be done whereby the Property or any portion thereof may be encumbered by any mechanic’s or other material liens. If a lien is filed against any Property purporting to be for labor or materials furnished or to be furnished to the Tenant, the Tenant shall remove the lien of record by the payment or by bonding with a surety company authorized to do business in the State of Florida, within thirty (30) days from the date of the filing of said mechanic’s or other lien. Should the Tenant fail to take the foregoing steps within said thirty (30) day period, then the Landlord shall have the right, among other things, to pay said lien without inquiring into the validity thereof, and the Tenant shall immediately reimburse the Landlord for the total expense incurred by it in discharging said lien including (without limitation) any reasonable attorneys’ fees and costs incurred by the Landlord in doing so.
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Article
9.
USE
9.1 Permitted Use. Tenant may use the Property for warehousing, storage, and general office uses, and all other related or ancillary purposes (the “Permitted Use”), and for no other use. Tenant shall not use the Property for the purposes of storing, manufacturing or selling any explosives, flammables, or other inherently dangerous substance, chemical, thing or device, except for items used in Tenant’s ordinary course of business on the Effective Date. Tenant shall, at its expense, promptly comply with all applicable laws now or subsequently pertaining to Tenant’s use of the Property or occupancy of the Premises. Neither Tenant nor its servants, employees, or agents shall use the Premises in any manner that under any applicable law would require Landlord to make any alteration to or in the Building (without limiting the foregoing, Tenant shall not use the Premises in any manner that would cause the Premises or any Building to be deemed a “place of public accommodation” under the Americans with Disabilities Act of 1990 (42 U.S.C. § 1201 et seq.), as amended and supplemented from time to time, if such use would require any such alteration).
9.2 Hazardous Substances. Tenant, its servants, agents or employees, shall not treat, store, or dispose of any hazardous, special, or medical wastes on the Premises except in compliance in all material respects with applicable local, state or federal laws or regulations relating to protection of the environment or pollution (the “Environmental Laws”). For the purposes of this Lease, the term “store” shall be defined in the same manner as that used in the Resource Conservation and Recovery Act, as amended and the applicable regulations under that act. Tenant shall promptly notify Landlord of any notice, claim, report of violation, or other matter of similar import received by Tenant from the U.S. EPA, the Florida Department of Environmental Protection, or any other governmental body having jurisdiction, which relates to or arises from any actual or alleged pollution, spill, discharge or other release of hazardous materials on the Premises. Tenant shall indemnify Landlord and its successors and assigns against and hold them harmless from any liabilities, claims, demands, and out-of-pocket costs, response costs, and expenses (including reasonable attorney’s fees, site remedial investigation or feasibility studies, site clean-up, or defense costs) which relate to the Premises and arise by reason of any act or omission of Tenant or its employees, agents, contractors, vendors, or customers in breach of Tenant’s obligations under this Section, or by reason of the breach of Tenant’s obligations under any Environmental Law. Landlord shall indemnify Tenant and its successors and assigns and hold them harmless from any liabilities, claims, demands, and out-of-pocket costs, response costs, and expenses (including reasonable attorney’s fees, site remedial investigation or feasibility studies, site clean-up, or defense costs) to the extent they relate to the Premises and arise by reason other than a breach of Tenant’s obligations under this Section or any Environmental Law, including with respect to any hazardous materials existing on, under, in or about the Premises on or before the Effective Date.
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Article
10.
SIGNS
10.1 Signage. All Tenant signage shall be subject to the approval of Landlord (not to be unreasonably withheld, conditioned, or delayed by Landlord) and the applicable governmental authorities. Tenant shall have the right to install signage on the Premises, at its expense, at a location and of a design as shall be approved by Landlord (such approval not to be unreasonably withheld, conditioned, or delayed). Signage must always be in good operating condition. Tenant shall be obligated, at its expense, to obtain any governmental permit required with respect to any sign to be placed by Tenant on the Premises on or after the Effective Date, and such sign shall comply with all applicable governmental or quasi-governmental ordinances, rules and regulations.
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11.
SUBORDINATION; ESTOPPEL CERTIFICATE AND QUIET ENJOYMENT
11.1 Subordination. Landlord reserves the right and privilege to subject and subordinate this Lease at all times to the lien of any mortgage or mortgages now or hereafter placed upon the Landlord’s interest on any Property, provided that such subordination does not disturb the possession or other rights of Tenant under this Lease so long as no Event of Default has occurred and is continuing. Tenant agrees to execute and deliver, within ten (10) business days after written request from Landlord, such further instrument or instruments as may be required by Landlord’s lender to subordinate this Lease to the lien of any such mortgage as shall be desired by Landlord, so long as such subordination agreement conforms with the requirements of this section; provided, however, that the ground lessor or the mortgagee or trustee named in said mortgage or trust deed shall deliver to Tenant a subordination and non-disturbance agreement in form and substance reasonably agreeable to both parties.
11.2 Estoppel Certificates. Either party to this Lease will, at any time from time to time, within ten (10) business days after written request from the other party, execute, acknowledge and deliver to the requesting party a statement in writing certifying that this Lease is unmodified (or, if modified then disclosure of such modification shall be made) and in full force and effect on the date to which the rents and other charges have been paid, and stating whether or not said party has knowledge of any default hereunder on the part of the other party in the performance of any covenant, agreement or condition contained herein, and if so, specifying each such default in reasonable detail, it being intended that any such statement delivered pursuant to this Section may be relied upon by any prospective purchaser, mortgagee or holder of a deed of trust of the Property or any portion thereof, or any assignee of any such party.
11.3 Quiet Enjoyment. If and so long as Tenant shall timely pay Base Rent and all additional rent required by this Lease (including, without limitation, Operating Expenses) and shall perform and observe all the covenants and conditions contained in this Lease, Tenant’s possession of the Property will not be disturbed by Landlord, or anyone claiming by, through or under Landlord, or any mortgagee thereof.
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Article
12.
CONDEMNATION OR EMINENT DOMAIN
12.1 Total Condemnation. If all of the Premises shall be taken (“Total Taking”) for any public or quasi-public use under any statute, or by right of eminent domain, or by way of purchase in lieu of eminent domain, this Lease shall automatically terminate upon the date possession is surrendered and Base Rent and Operating Expenses shall be prorated to the date of termination.
12.2 Partial Condemnation. If a part of the Premises shall be so taken (“Partial Taking”) so that Tenant, in its reasonable discretion, determines that the Premises are no longer fit for its use, Tenant may terminate the Lease upon thirty (30) days’ written notice to Landlord, so long as such notice is received within one hundred eighty (180) days after the date of the Partial Taking.
12.3 Base Rent Adjustment. In the event of a Partial Taking which results in the size of the Premises being reduced, the annual Base Rent payable by Tenant hereunder shall, from and after the date on which the condemning authority takes possession, be reduced in the same proportion as the rentable square foot area of that portion of the Premises so taken bears to the total rentable square foot area of the Premises on the Effective Date.
12.4 Temporary Taking. If the Premises shall be so taken for temporary use or occupancy (a “Temporary Taking”), the foregoing provisions of this Article shall not apply, and Tenant shall continue to pay the full amounts of the Base Rent and Operating Expenses due hereunder. Only to the extent that Tenant may be prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall perform and observe all of the other terms, covenants, conditions and obligations of this Lease as though the Temporary Taking had not occurred. In the event of a Temporary Taking, Tenant shall be entitled to receive the entire amount of the condemnation award made for such taking (the “Temporary Taking Award”), whether paid by the way of damages, rent or otherwise, unless the period of temporary use of occupancy shall extend beyond the Expiration Date, in which case the Temporary Taking Award shall be apportioned between Landlord and Tenant as of the Expiration Date. Upon the expiration of the term of any Temporary Taking, Landlord shall, at its sole cost and expense, restore the Premises, as nearly as possible, to the condition in which they existed prior to the Temporary Taking.
12.5 Prosecution of Condemnation Claim. Landlord shall be entitled to prosecute any action or proceeding relating to any taking and, except as specifically provided in Section 12.4, shall be entitled to all awards, damages, consequential damages and compensation for such taking, and Tenant shall not be entitled to share in any such award or have any claim against Landlord for any part of such award; provided, however, that Tenant may make a separate claim against the condemning authority for its trade fixtures, personal property, moving expenses and consequential damages.
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Article
13.
RIGHT TO INSPECT
13.1 Landlord’s Access. The Landlord reserves the right to enter upon the Premises and inspect and examine the Property during business hours, provided that Landlord has given Tenant forty-eight (48) hours written notice of Landlord’s intent to do so. Notwithstanding the foregoing, however, such advance written notice shall not be required in the event of an emergency requiring access to the Premises.
13.2 “For Rent” Signage and Premises Access. Within one hundred eighty (180) days prior to the Expiration Date, Tenant agrees to allow Landlord reasonable access to the Premises to show the premises, and to place “for rent” signs on the Premises.
Article
14.
DESTRUCTION OF THE PREMISES
14.1 Complete Casualty. In the event the Premises shall be destroyed or so damaged by fire, explosion, windstorm or other casualty as to be entirely untenantable, Landlord may either:
(a) terminate this Lease by providing written notice to Tenant within ninety (90) days of such damage or destruction; or
(b) notify Tenant of Landlord’s intent to restore the Premises within a reasonable period of time, at Landlord’s sole cost and expense, by providing written notice of such intent within ninety (90) days of such damage or destruction; provided, however, that (i) Landlord shall not be obligated to expend for such restoration an amount in excess of the insurance proceeds actually received by Landlord as a result of such damage or destruction, and (ii) Tenant shall be solely responsible for the repair and replacement of any of Tenant’s furnishings, fixtures or equipment, as well as all items of Tenant’s personal property. Landlord shall provide Tenant with an estimate of the time that will be needed to repair the Premises.
14.2 Tenant’s Right to Terminate. In the event that the Premises cannot be repaired within one hundred eighty (180) days after the date of the damage or destruction, or with an amount that is equal to or less than the amount of the insurance proceeds actually received by Landlord as a result of such damage or destruction, then Tenant shall have the right to terminate this Lease by providing Landlord written notice of its intent to terminate within sixty (60) days following Tenant’s receipt of written notice pursuant to Section 14.1(b). In the event that the Premises is not actually repaired within one hundred eighty (180) days after the date of the damage or destruction, Tenant shall also have the right to terminate this Lease by providing Landlord written notice of its intent to terminate within sixty (60) days after the one hundred eightieth (180th) day following the date of the damage or destruction.
14.3 Partial Casualty. If the Premises shall be damaged but not unfit for occupancy, then the Landlord shall repair and restore the same with reasonable promptness to as near as practicable its preexisting condition.
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14.4 Rent Abatement. During any period of time that the Premises, or any portion thereof, is not useable by Tenant as a result of a complete casualty described in Section 14.1, or a partial casualty as described in Section 14.3, Base Rent shall be abated on a pro rata basis.
Article
15.
TENANT’S DEFAULT
15.1 Tenant’s Default. The following shall be considered “Events of Default” by the Tenant under this Lease:
(a) Failure to pay Base Rent or Operating Expenses after the date that such Base Rent or Operating Expenses are due, which failure continues for a period of five (5) days after Tenant receives written notice of such failure from Landlord;
(b) Failure to pay any other amount due under this Lease within thirty (30) days after Tenant receives written notice of such failure from Landlord;
(c) Failure to do, observe, keep and perform any of the terms, covenants, conditions, agreements and/or provisions of this Lease where such failure continues for thirty (30) days after written notice of such failure by Landlord to Tenant, except that this thirty (30) day period shall be extended for a reasonable period of time if the alleged default is not reasonably capable of cure within said thirty (30) day period and Tenant proceeds to diligently cure the default;
(d) The adjudication of the Tenant as bankrupt or the appointment of a permanent receiver or trustee in bankruptcy for the Tenant’s property, or the appointment of a temporary receiver which is not vacated or set aside within ninety (90) days from the date of such appointment.
15.2 Landlord’s Remedies. In the event of any such uncured Events of Default by Tenant, after notice, if so required, and at any time thereafter, Landlord may, at its option, exercise of any other right or remedy it may have on account of such default, and without any further demand notice:
(a) Landlord, without any obligation to do so, may elect to cure the Event of Default on behalf of Tenant, in which event Tenant shall reimburse Landlord upon demand for any reasonable sums paid or costs incurred by Landlord (together with an administrative fee of ten percent (10.0%) thereof) in curing the Event of Default, plus interest at the Interest Rate, from the respective dates of Landlord’s incurring such costs until they are repaid by Tenant, which sums and costs together with interest at the Interest Rate shall be deemed additional rent;
(b) Subject to Landlord’s compliance with all applicable Laws, to enter the Premises and repossess the Property, by breaking open locked doors if necessary, and remove all persons and all or any property, by action at law or otherwise, without being liable for prosecution or damages. Landlord may, at Landlord’s option, make alterations and repairs in order to relet the Property and relet all or any part(s) of the Property for Tenant’s account. Tenant agrees to pay to Landlord on demand any deficiency (taking into account all costs incurred by Landlord, except any costs and expenses that Tenant reasonably establishes could have been avoided) that may arise by reason of such reletting, provided that Landlord uses commercially reasonable efforts to mitigate its damages. In the event of reletting without termination of this Lease, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.
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(c) To accelerate the whole or any part of the Base Rent for the balance of the Term, and declare the same to be immediately due and payable, subject to reduction by rent and additional rent received by a replacement tenant the during the period of the Term and provided that Landlord uses commercially reasonable efforts to mitigate its damages.
(d) To terminate this Lease and the Term without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken.
Article
16.
LANDLORD’S DEFAULT
16.1 Landlord’s Default. Landlord shall be deemed to be in default under this Lease if Landlord fails to comply with any condition of this Lease within thirty (30) days after Tenant provides written notice of such failed condition to Landlord; provided, however, that Landlord shall have such longer period of time as may be reasonably necessary to cure the default so long as Landlord proceeds promptly to commence the cure within the said thirty (30) days and then diligently proceeds to cure.
16.2 Tenant’s Remedies. In the event of an uncured default by Landlord, after notice, if so required, Tenant may, at its option:
(a) Terminate this Lease by providing written notice to Landlord within sixty (60) days following notice to Landlord of such default; or
(b) Exercise any other right or remedy available at law or in equity.
Article
17.
INDEMNIFICATION
17.1 Tenant agrees to indemnify, defend, and hold harmless Landlord from and against any and all claims and out-of-pocket damages and expenses, including reasonable attorneys’ fees for the defense thereof (collectively, “Losses”), arising from Tenant’s use or occupancy of the Property or from any default on the part of Tenant under the terms of this Lease, or from any act or negligence of Tenant, its agents, contractors, servants, employees, subtenants, concessionaires or licensees, or others for whose acts Tenant is responsible. Landlord shall not be liable, and Tenant waives all claims, for damage to person or property sustained by Tenant or Tenant’s employees, agents, servants, invitees and customers resulting from Tenant’s use or occupancy of the Property, or by reason of the Property or any appurtenances thereof becoming out of repair, or resulting from any accident in or about the Premises or the Land or use of the Property, in all cases except due to Landlord’s negligence or willful misconduct. All property belonging to Tenant or any occupant of the Premises shall be there at the risk of Tenant or such other person only, and Landlord shall not be liable for damage thereto or theft or misappropriation thereof, unless due to the negligence or willful misconduct of Landlord or its agents, contractors, servants, employees, subtenants, concessionaires or licensees, or others for whose acts Landlord is responsible.
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17.2 Landlord agrees to indemnify, defend, and hold harmless Tenant from and against any and all Losses arising from any default on the part of Landlord under the terms of this Lease, or from the negligence or willful misconduct of Landlord, its agents, contractors, servants, employees, subtenants, concessionaires or licensees, or others for whose acts Landlord is responsible.
17.3 In connection with any indemnification or defense obligation by one party (the “Indemnifying Party”) to the other party (the “Indemnified Party”) under this Lease that results from, or arises out of, any claim or legal proceeding by a person who is not a party to this Agreement (a “Third Party Claim”), the Indemnified Party shall give the Indemnifying Party written notice as promptly as reasonably practicable after it becomes aware of such Third Party Claim, which notice shall specify in reasonably sufficient detail (to the extent known) the facts alleged to give rise to a claim and, if applicable, the amount the Indemnified Party is seeking from the Indemnifying Party. The Indemnifying Party may, at its sole cost and expense and promptly and timely upon receiving written notice of the Third Party Claim from the Indemnified Party, assume the defense of the Third Party Claim on behalf of the Indemnified Party; provided, however, that the Indemnifying Party shall not settle any Third Party Claim without the prior written consent of the Indemnified Party unless such settlement both: (a) contains no admission of wrongdoing, culpability, or other liability of the Indemnified Party; and (b) contains a complete, total, and unconditional release of the Indemnified Party with respect to the Third Party Claim. The Indemnified Party shall be entitled to participate in (but not control) the defense of any Third Party Claim, with its counsel and at its own expense. If the Indemnifying Party does not assume the defense of a Third Party Claim, the Indemnified Party may defend against the Third Party Claim in such manner as the Indemnified Party may deem appropriate, including, but not limited to, settling such Third Party Claim on such terms as the Indemnifying Party may deem appropriate after giving notice thereof to the Indemnifying Party, and the Indemnified Party shall be entitled to prompt indemnification from the Indemnifying Party for all of the Losses incurred in connection with the Indemnified Party’s defense and resolution of such Third-Party Claim. Failure or delay by the Indemnified Party to give prompt notice of any Third Party Claim shall not release, waive or otherwise affect an Indemnifying Party’s obligations with respect to the Third Party Claim, except to the extent that the Indemnifying Party can demonstrate actual loss or prejudice as a result of such failure or delay.
Article
18.
NOTICES
18.1 Form of Notice. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests, consents or other communications given or required to be given under this Lease shall be effective only if given in writing signed by the party giving the same, or its attorney, and sent by (a) certified or registered U.S. mail, postage prepaid, return receipt requested, (b) personal delivery, or (c) a nationally recognized overnight courier service, addressed as follows:
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If to Landlord:
Just Pick, LLC
401 N. Wickham Road
Melbourne, FL 32835
Attention: Niraj Patel
With a copy to (which shall
not constitute notice):
Nelson Mullins Riley & Scarborough, LLP
390 N. Orange Ave.
Suite 1400
Orlando, FL 32801
Attention: Matt Armstrong
Phone: (407) 839-4200
If to Tenant:
Kaival Brands Innovations Group, Inc.
401 N. Wickham Road
Melbourne, FL 32835
Attention: KAVL-Corporate
with a copy to (which shall
not constitute notice):
Baker & Hostetler LLP
200 S. Orange Ave., Suite 2300
Orlando, FL 32801
Attention: Keith Durkin
18.2 Timing of Notice. Any such bill, statement, notice, demand, request, consent or other communication shall be deemed to have been rendered or given on the date which is: (a) three business (3) days after the date mailed; (b) one (1) business day after deposit with a nationally recognized overnight courier service for overnight delivery; or (c) on the date of personal delivery, as the case may be. Either party may change its address for delivery by giving notice to the other party as provided in this Article 18.
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Article
19.
MISCELLANEOUS
19.1 No Waiver. The receipt of Base Rent or additional rent by Landlord with knowledge of any breach of this Lease by Tenant or of any default on the part of Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any of the terms, covenants or conditions of this Lease. No failure on the part of either the Landlord or the Tenant to enforce any term, covenant or condition of this Lease, nor any waiver of any right by Landlord or Tenant shall discharge or invalidate such term, covenant or condition, or affect the right of Landlord or Tenant to enforce the same in the event of any subsequent breach or default. Efforts by Landlord to mitigate the damages caused by Tenant’s default shall not constitute a waiver of Landlord’s right to recover damages hereunder. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the total amount due Landlord under this Lease shall be deemed to be other than on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of Rent due, or Landlord’s right to pursue any other available remedy.
19.2 Captions. The Article and Section headings in this Lease are inserted only as a matter of convenience in reference and are not to be given any effect in construing any provision of this Lease. All references in this Lease to Article and Section numbers shall be deemed to refer to Articles and Sections and of this Lease unless otherwise stated.
19.3 Successors and Assigns. The covenants and agreements contained in this Lease shall apply to, inure to the benefit of, and be binding upon Landlord and Tenant and upon their respective successors and permitted assigns, except as otherwise stated to the contrary in this Lease.
19.4 Amendments; Modifications. This Lease may not be changed, cancelled or discharged orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. All understandings and agreements between Landlord and Tenant are merged in this Lease which represents the entire agreement between the parties and which fully and completely sets forth all terms and conditions of the transactions embodied in this Lease.
19.5 Severability. If any term or provision of this Lease or any portion of a term or provision of this Lease or the application of any such term or condition to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.
19.6 Integration; Modification. This Lease, and any rider or Exhibit thereto, constitutes the entire agreement among the parties, and contains all of the agreements among the parties with respect to the subject matter hereof. This Lease supersedes any and all agreements, either oral or in writing, among the parties hereto with respect to the subject hereof, all of which shall be of no further force or effect for any purpose and in connection with which Landlord and Tenant shall have no further rights, obligations, liabilities, or responsibilities from and after the Effective Date, all of which are hereby expressly waived and released by the parties. This Lease replaces any other lease between the parties with respect to the Property and supersedes any prior terms or agreements of the parties with respect thereto. Furthermore, the amounts owed under this Lease supersede and replace any prior amounts, fees or credits owed to or by any party hereto with respect to the Property, except for all unpaid monthly rent of $1,000.00 per month for space within the Office Building that has been occupied by Tenant prior to the Effective Date, which shall be paid in full by Tenant to Landlord within thirty (30) days after the Effective Date.
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19.7 Construction. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and without implying a presumption that the terms in the Lease shall be more strictly construed against one party by reason the rule of construction that a document is to be construed more strictly against the person who himself or through his agent prepared the Lease, it being agreed that representatives of both parties have reviewed and participated in the preparation of the Lease.
19.8 Computation of Time. All periods of time referred to in this Lease shall include all Saturdays, Sundays and state or federal holidays; provided, however, that if the date or last day to perform any act or give any notice with respect to this Lease shall fall on a Saturday, Sunday, or state or federal holiday, such act or notice shall be timely performed if given on the next succeeding day which is not a Saturday, Sunday, state or federal holiday. Time is of the essence for all rights and obligations under this Lease.
19.9 No Agency. The parties agree that the business relationship created under this Lease is solely that of Landlord and Tenant. Nothing contained in the Lease shall constitute Tenant as an agent, legal representative, partner, subsidiary, joint venturer or other business relationship between Landlord and Tenant. Tenant shall have no right or power to and shall not bind or obligate Landlord in any way, manner or thing whatsoever, nor represent that it has the right to do so.
19.10 Authority. The persons signing this Lease on behalf of Landlord and Tenant each represent and warrant that they have the legal right and authority to sign the Lease on behalf of the party he is signing for, and that no other signature or action is required in order to bind such party to the terms of this Lease.
19.11 Brokers. Landlord and Tenant each represent and warrant to the other that it has not engaged the services of any real estate broker or agent in any way connected with this transaction. Each party agrees to indemnify and hold the other party harmless from Losses resulting from a commission or other fee due as a result of this transaction due to the act(s) or omissions of one party. This provision shall survive expiration or termination of this Lease.
19.12 Other Representations, Warranties, and Covenants of Landlord. Landlord represents and warrants to Tenant that: (a) the Premises are separately taxed and assessed with all utilities available and separately metered; (b) the Premises are not subject to any cost-sharing, contribution or any other financial arrangement or agreement involving any other property with respect to common area maintenance costs, insurance costs, taxes, utilities and/or any other costs or fees; and (c) there are no declarations, covenants, conditions, and restrictions, or similar instruments that are recorded on the Effective Date in the public records of any jurisdiction in which the Premises are located that would materially impair or affect Tenant’s occupancy of the Premises or the Permitted Use at the Premise during the Term.
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19.13 Counterparts. This Lease may be signed in any number of counterparts, each of which when taken together shall be deemed to be a complete document.
19.14 Governing Law. This Lease shall be governed by the internal laws of the State in of Florida, without regard to principles of conflicts of law. Each of the parties hereby irrevocably and unconditionally submits, for itself or himself and its or his property, to the exclusive jurisdiction of the state and federal courts in Brevard County, Florida (the “Chosen Courts”), in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding shall be heard and determined in any such Chosen Court. Each of the parties irrevocably and unconditionally waives, to the fullest extent the party may legally and effectively do so, any objection (whether as a matter of state or federal Law) that the party may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any Chosen Court. Without limiting the foregoing, each Party agrees that service of process on such Party as provided for notice in Section 18.1 shall be deemed effective service of process on such Party.
19.15 Radon Gas. As required by Florida statute, the following notification is provided: “RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department.”
[Remainder of page left intentionally blank. Signature page follows.]
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IN WITNESS WHEREOF, the Landlord and Tenant have respectively signed this Lease as of the Effective Date.
| LANDLORD: | ||||
| Date Signed: June 10, 2022 | JUST PICK, LLC, a Florida limited liability | |||
| company | ||||
| Attest/Witness: | ||||
| By: /s/ Nirajkumar Patel | ||||
| [signature] | ||||
| Print Name: Nirajkumar Patel, Manager | ||||
| Print Name:_____________________ | ||||
| [signature] | ||||
| Print Name:________________________ | ||||
| TENANT: | ||||
| Date Signed: June 10, 2022 | KAIVAL | BRANDS | INNOVATIONS | |
| GROUP, INC., a Delaware corporation | ||||
| Attest/Witness: | ||||
| By: /s/ Eric Mosser | ||||
| [signature] | ||||
| Print Name: Eric Mosser | ||||
| Print Name:_____________________ | ||||
| Its: Chief Operating Officer | ||||
| [signature] | ||||
| Print Name:________________________ | ||||
[Remainder of Page Intentionally Blank. Exhibit A Follows.]
SIGNATURE PAGE TO LEASE
EXHIBIT A
Legal Description of THE LAND
[Remainder of Page Intentionally Blank. Exhibit B Follows.]
EXHIBITS TO LEASE
EXHIBIT B
PREMESIS LAYOUT
[Remainder of Page Intentionally Blank. Exhibit C Follows.]
EXHIBITS TO LEASE
EXHIBIT C
Personal Property
[To be provided.]
[End of Lease.]
EXHIBITS TO LEASE
Exhibit 10.25
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND REPLACED WITH “[***]”. SUCH IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS (1) NOT MATERIAL AND (2) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF DISCLOSED.
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this “Agreement”) is entered into this 10th day of June, 2022 (the “Effective Date”), by and between BIDI VAPOR, LLC, a Florida limited liability company (“Licensor”), KAIVAL BRANDS INTERNATIONAL, LLC, a Delaware limited liability company (“Licensee”), and KAIVAL BRANDS INNOVATIONS GROUP, INC., a Delaware corporation (“KBIG”), solely for purposes of Sections 4(i) and 4(j) only. Licensor and Licensee are, at times, each individually referred to in this Agreement as a “Party”, and collectively as the “Parties”.
RECITALS
A. Licensor, and Licensee’s sole member, KBIG have been parties to that certain Second Amended and Restated Exclusive Distribution Agreement dated April, 2021, pursuant to which KBIG was appointed as Licensor’s exclusive worldwide distributor of all electronic and non-electronic nicotine delivery systems and related components (the “Second A/R Distribution Agreement”).
B. On the Effective Date, Licensee and PM (as defined below) are entering into the PM License (as defined below).
C. In order to enter into the PM License, Licensee requires: (1) a license of certain intellectual property rights from Licensor; and (2) a contribution of certain of KBIG’s distribution rights with respect to certain products manufactured by Licensor.
D. In furtherance thereof, Licensor has agreed to enter into this Agreement on the further condition that, concurrently herewith, Licensee take the following actions in further consideration of the license and other obligations undertaken by Licensor under this Agreement: (1) cause KBIG to enter into that certain Third Amended and Restated Exclusive Distribution Agreement (the “Third A/R Distribution Agreement”) with Licensor; and (2) enter (and cause KBIG to enter) into that certain Limited Liability Company Agreement of Licensee dated June 10, 2022.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, Licensor and Licensee hereby agree as follows:
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1. Definitions. Capitalized terms that are used, but not defined, in this Agreement shall have the meanings given to those terms in the PM License. As used in this Agreement, the following terms shall have the following meanings assigned to them:
(a) “Bidi IP” means all of the Materials and IPR set forth on Schedule 2 of the PM Agreement.
(b) “Bidi Manager” means Nirajkumar K. Patel, and such person’s successors from time to time who are designated by Licensor as set forth in the Licensee Operating Agreement.
(c) “Confidential Information” means: (i) all confidential information, documentation, designs, drawings and data, of whatever nature, disclosed, whether orally or in writing, by one Party to the other, or obtained by one Party from the other, whether before or after the date of commencement of the Agreement, relating to or connected with the Licensed IP or the business, affairs, clients/customers, prospective clients/customers, operations, processes, strategies, plans, IPR, developments or Know-How of a Party and/or its Affiliates, together with any information derived by a Party from, and any data underlying such information, and any other information designated by a party as being confidential (whether or not it is marked as “confidential”) or which ought to reasonably be considered to be confidential; (ii) the terms of the PM License; and (iii) all “Confidential Information” (as defined in the PM License) of PM that is disclosed to Licensee and provided to Licensor in connection with Licensor’s performance of its covenants and agreements hereunder.
(d) “Kaival Manager” means Eric Mosser, and such person’s successors from time to time who are designated by Licensee as set forth in the Licensee Operating Agreement.
(e) “KBI Failure” has the meaning set forth in the Side Letter.
(f) “Licensed IP” means the Technology, Documentation, Bidi IP, and all Developed IPR assigned to Licensor pursuant to Section 3(a).
(g) “Licensee Operating Agreement” means that certain Limited Liability Company Agreement of Licensee dated June 10, 2022.
(h) “Manager” means the Bidi Manager or the Kaival Manager, as the context requires. “Managers” means both the Bidi Manager and the Kaival Manager, collectively.
(i) “PM” means Philip Morris Products S.A. and its successors and permitted assigns.
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(j) “PM License” means that certain Deed of Licensing Agreement by and between Licensee and PM with respect to the manufacturing, promotion, sale, and distribution of certain current and future products in various international markets.
(k) “Scope” means the performance of Licensee’s duties and obligations under the PM License, including, without limitation, the grant of sub-licenses by Licensee to PM and its successors and permitted assigns under the PM License.
(l) “Side Letter” means the Deed of Letter dated on or around the date hereof by and between Licensor, KBIG, and PM.
(m) “Transactions” means the commercial transactions contemplated by the PM License, generally being the manufacture, marketing, and sale of Products and New Property in the Markets.
2. Grant of License.
(a) Licensor hereby grants to Licensee an irrevocable license to use the Licensed IP during the Term and the Sell-Out Period to the extent (but only to the extent) of the Scope, and for no other purpose, which license: (i) is exclusive to Licensee in relation to the Markets for the Scope; (ii) includes the right of Licensee to grant sub-licenses to PM under the PM License for the express purposes set forth in the PM Agreement, but for no other purpose; (iii) includes the right of Licensee to grant to PM the right to grant sub-sub-licenses in the manner set forth in the PM License, but for no other purpose; and (iv) includes the KBI Branding to the extent (but only to the extent) necessary to permit Licensee to perform its obligations to PM as set forth in clause 10.3 of the PM License (the “License”).
(b) Notwithstanding anything to the contrary set forth in this Agreement, except as expressly set forth in Section 2(a), Licensor conveys no right, title, or interest of any kind in and to the Licensed IP or any other IPR (including, without limitation, [***]), all of which are reserved by Licensor in all respects. For clarity, except as otherwise set forth in Section 2(c), the License shall continue with respect to each Extension Period and any Sell-Out Period as set forth in the PM License.
(c) Notwithstanding the provisions of Section 2(a) to the contrary, the License shall not expand in scope or duration as a result of the direct action of Licensee unless that action was taken by Licensee at the direction of both Managers as presently required by the Licensee Operating Agreement.
(d) At Licensor’s written direction and sole expense, all IPR registered in the Markets by Licensee or PM shall be registered in the name of Licensor.
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(e) Notwithstanding anything to the contrary set forth in this Agreement, Licensor shall not be in breach of this Agreement by virtue of a direct license of any Licensed IP to PM (a “Direct License”) pursuant to the Side Letter, or by virtue of Licensor’s performance of its any of its other obligations thereunder. To the extent Licensor is required to grant a Direct License to PM pursuant to the Side Letter, the scope of the License shall be amended to exclude the Licensed IP to the extent, and for the duration, of that Direct License
3. Assignment of Rights.
(a) Licensee acknowledges and agrees that Licensor shall own, and Licensee hereby assigns and, upon future creation, automatically assigns, to Licensor, all right, title, and interest in and to any IPR that is assigned to, accrues to, or is otherwise acquired by Licensee under the PM License and/or in connection with the transactions contemplated thereby, or that is otherwise based thereon or results therefrom, including, without limitation, all IPR arising out of or in connection with the data verification and related data and results referenced in clause 9.7 of the PM License, and all [***] (collectively, “Developed IPR”). Licensee acknowledges and agrees that all Developed IPR will be and shall become the sole and exclusive property of Licensor, subject only to the License, the terms and conditions of the PM License, and the terms and conditions of the Third A/R Distribution Agreement, as applicable. Licensee covenants and agrees to refrain from taking any actions inconsistent with the provisions of this Section 3(a), and to use commercially reasonable efforts to avail itself of any of its rights with respect to Developed IPR under the PM License for the purpose of securing the full extent of the right, title, and interest for which it is entitled thereunder. At Licensor’s written request and sole expense, Licensee agrees to perform any acts reasonably requested by Licensor to transfer, perfect, and defend Licensor’s ownership of Developed IPR, including, without limitation, executing all documents and instruments (including additional written assignments to Licensor), whether for filing an application or registration for protection of the Developed IPR (an “Application”) or otherwise under any form of intellectual property laws whether in the United States or elsewhere in the world, or providing any other assistance reasonably required for the orderly prosecution of Applications. Licensee acknowledges and agrees that Licensee’s covenants, agreements, and assignments contained in this Section 3(a) are given to Licensor in partial consideration of the License, without which covenants, agreements, and assignments Licensor would not grant the License.
(b) If, at any time, Licensee receives any license of [***] in the manner contemplated by the PM License, Licensee hereby grants to Licensor an irrevocable sub-license of all right, title, and interest of Licensee in and to that [***] for the duration of such license, for the purpose of Licensor fulfilling its obligations to Licensee under this Agreement. Licensor shall not have any obligations with respect to any Improvements or similar activities that rely on any [***], except to the extent that Licensor is granted a valid sub-license by Licensee with respect to such [***].
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4. Payments and Reimbursements.
(a) It is the express intention of Licensor and Licensee that: (a) the total net royalties and similar amounts payable to Licensee under the PM License shall be apportioned equally among Licensor and Licensee in a manner such that each Party shall ultimately receive fifty percent (50%) thereof; and (b) payments by PM in respect of a reimbursement to an individual or entity, or in satisfaction of any losses or damages incurred by an individual or entity, shall be paid to, and be the property of, that individual or entity.
(b) Without limiting the generality of Section 4(a), Licensee shall pay to Licensor fifty percent (50%) of the following amount (the “Adjusted Royalty Payment”):
(i) The total amount of all royalties, the Guaranteed Royalty, and similar amounts actually paid by PM under the PM License, after reduction of any [***] by PM as set forth in the PM License (collectively, the “Royalty Payments”); plus
(ii) All [***] and other credits and reimbursements payable to Licensee under the PM License, other than [***] and any other credits or reimbursements paid by PM that pertain specifically to [***] in furtherance of the Transactions, which amounts shall be paid directly to Licensor (to the fullest extent permitted by the PM License) or Licensee, as applicable; minus
(iii) Any amounts allocated to the “Cash Reserve” in the manner permitted by Section 4.2 of the Licensee Operating Agreement, if any; minus
(iv) All out-of-pocket costs and expenses mandated by the PM License that are actually incurred by Licensee or Licensor, including, without limitation, in satisfaction of all indemnity and defense obligations thereunder; minus
(v) All amounts paid by Licensee to Licensor and KBIG (each, a “Guaranty Party”) in connection with that certain Deed dated on or about the Effective Date by and between PM, Licensor, and KBIG (the “Guaranty”), and/or the Side Letter, at any such time as one Guaranty Party’s total aggregate payments and monetary obligations incurred under the Guaranty and Side Letter exceed the total aggregate payments and monetary obligations incurred by the other Guaranty Party thereunder; and minus
(vi) All reimbursement and contribution payments actually made by Licensee to Licensor pursuant to Section 5(c)(i).
(c) In further consideration of the License and the representations, warranties, covenants, and other agreements of Licensor in this Agreement, Licensee shall pay to Licensor an Adjusted Royalty Payment within ten (10) days after the end of any calendar month in which Licensee received a Royalty Payment from PM.
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(d) The Parties acknowledge and agree: (i) the PM License Agreement contains provisions regarding [***] for modifications, improvements, or other changes to the Products at the request of PM; (ii) Licensor, utilizing commercially reasonable efforts, shall be responsible for fulfilling all of [***] and shall invoice Licensee for all costs and expenses arising out of or relating to [***], which invoices shall be promptly submitted by Licensee to PM for payment; and (iii) all cash received by Licensee from PM for the invoiced [***] shall be remitted to Licensor from Licensee within ten (10) business days after receipt. If [***] are incurred by Licensor with Licensee’s acknowledgment or approval, but ultimately not reimbursed by PM for any reason, the amount of all subsequent Adjusted Royalty Payments shall be modified to the extent necessary to achieve the intention expressed in Section 4(a)(i) and ensure that the Parties equally share the burden of such [***].
(e) In the event that any repayment by Licensee to PM is mandated by clauses [***] or [***] of the PM License, Licensor shall repay to Licensee, and Licensee shall cause KBIG to contribute to Licensee, all amounts necessary to ensure that the intention of Section 4(a) is achieved.
(f) In the event that an adjustment pursuant to this Section 4 (other than Section 4(d)) would result in a negative amount payable to Licensor in connection with a Royalty Payment, Licensor shall not be required to pay any amount to Licensee, but rather the remaining adjustment shall be included in the allocation of the next succeeding Adjusted Royalty Payments as necessary to achieve the intention of Section 4(a).
(g) All payments made by Licensee to Licensor pursuant to this Agreement shall be made pursuant to wire instructions delivered in writing by Licensor to Licensee.
(h) If Licensee receives any payment from PM in satisfaction of PM’s obligation to indemnify Licensor or any of Licensor’s officers, directors, employees, or agents, Licensee shall promptly remit the full amount of such payment to such indemnified person.
(i) If either Licensor or KBIG (the “Excess Contributor”) is required to make any payment to PM or its affiliated companies, or otherwise incurs any monetary obligation in connection with its obligations under, the Guaranty and/or the Side Letter that together with all other such payments and monetary obligations exceeds the total amount of all such payments and obligations of the other person (the “Deficit Contributor”) under the Guaranty and Side Letter (each, an “Excess Payment”), then Licensee, first, or the Deficit Contributor, second to the extent that Licensee is unable or unwilling, shall make a payment to the Excess Contributor within thirty (30) days after such Excess Payment by the Excess Contributor to the extent necessary to ensure that the total amounts paid by Licensor and KBIG pursuant to the Guaranty and Side Letter on a collective basis are equal, but subject in all cases to adjustment as necessary to achieve the intention of Section 4(a).
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(j) The Parties and KBIG acknowledge and agree: (i) the Side Letter provides that Licensor and/or KBIG may be required to perform certain of KBI’s contractual obligations set forth in the PM License Agreement (collectively, the “Contractual Obligations”) if a KBI Failure occurs as more fully set forth in the Side Letter; (ii) the Side Letter provides that Licensor and/or KBIG shall perform the Contractual Obligations on the same terms as set forth in the PM License; and (c) to compute and share the Adjusted Royalty Payment as necessary to achieve the intention of Section 4(a) if PM pays any portion of the royalty due under the PM License to KBIG and/or Licensor after a KBI Failure. This Section 4(j) shall survive the termination of the Agreement for so long as the Contractual Obligations are being performed.
5. Representations, Warranties, and Covenants.
(a) Mutual Representations and Warranties. Each Party represents and warrants to the other Party that each of the following is true and correct on the Effective Date: (i) such Party has the full right, power, and authority to execute and deliver this Agreement to the other Party and to perform all of such Party’s obligations set forth in this Agreement; (ii) this Agreement constitutes a valid and legally binding obligation of such Party; and (iii) none of the execution of this Agreement, the grant of the License, or any of the other transactions contemplated by this Agreement will constitute a violation of or default under, or conflict with, any law, judgment, decree, statute, or regulation of any governmental authority applicable to such Party or any contract, commitment, agreement, or restriction of any kind to which such Party is, or by which any of such Party’s assets are, bound, and will not, violate any contract, agreement, or understanding (whether oral or written) of any kind applicable to such Party.
(b) Representations and Warranties By Licensor. Licensor hereby represents and warrants to Licensee that each of the following is true and correct on the Effective Date for the purpose of supporting Licensee’s representations and warranties to PM in clause 28.1 of the PM License:
(i) Licensor is the legal and beneficial owner of the Licensed IP and KBI Branding.
(ii) Licensor has the unconditional and irrevocable right, power, and authority to grant the License set forth in this Agreement, subject to the terms and conditions of the Side Letter.
(iii) Neither the grant of the License by Licensor, nor Licensor’s performance of any of its obligations set forth in this Agreement does, or, to its knowledge will: (A) violate any applicable law; (B) require the consent, approval, or authorization of any governmental or regulatory authority or other third party; or (C) require the payment of any consideration to any third party.
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(iv) Other than the Third A/R Distribution Agreement and the Side Letter, Licensor has not granted any licenses or any other right, waiver, covenant not to assert or sue, option or other beneficial right under or in connection with the Licensed IP or the KBI Branding in relation to any Market.
(v) To Licensor’s knowledge, no information, fact, condition, circumstance, or prior art exists that would negatively affect the validity, enforceability, term, or Scope of the Licensed IP or the KBI Branding.
(vi) There is no pending, or to its knowledge threatened litigation or reissue application, re-examination, post-grant, inter partes or covered business method patent review, interference, derivation, opposition, claim of invalidity or other claim or proceeding: (i) alleging the unpatentability, invalidity, misuse, unregisterability, unenforceability, or non-infringement or, or error in any Licensed IP or KBI Branding; (ii) challenging Licensor’ ownership of, or right to practice, or license the Licensed IP or KBI Branding; or (iii) alleging that the sale of any product that uses or embodies the Licensed IP does or would infringe, misappropriate, or otherwise violate any patent, trade secret, or other intellectual property of any third party.
(c) Licensor Covenants.
(i) Licensor covenants and agrees to take all actions (or, as applicable, refrain from taking such actions) within its control that are necessary in order to enable Licensee to satisfy its obligations to PM under PM License to the extent that it is commercially impractical for Licensee and/or KBIG to satisfy those obligations themselves. Notwithstanding the foregoing provision of this Section 5(c)(i) to the contrary, if Licensor’s performance of any obligation pursuant to this covenant requires substantial additional time or capital commitments outside of Licensor’s ordinary course of business (including, but not limited to, additional staffing, and materials and equipment), Licensor may reasonably condition its performance of such obligation on Licensee’s agreement to reimburse Licensor for fifty percent (50.0%) of the cost of such additional commitments as an operating expense from the income of Licensee (and not as part of Adjusted Royalty Payments), which if approved by Licensee (such approval not to be unreasonably withheld, conditioned, or delayed), shall be timely paid pursuant to the terms of such agreement (and, in any event, within thirty (30) days after Licensee receives reasonable documentation evidencing such operating expenses).
(ii) Licensor shall promptly notify the Licensee in writing of: (A) any infringement claim or challenge to the Licensed IP or the KBI Branding of which Licensor becomes aware; or (B) any claim or lawsuit of which Licensor becomes aware that would affect or reasonably affect the Licensed IP or the KBI Branding.
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(iii) Notwithstanding anything to the contrary set forth in this Agreement, nothing in this Agreement shall require Licensor to disclose [***] or any material information relating thereto in any manner, except in the manner required by clause 3.3 of the PM License.
(iv) Licensor shall not be obligated under Sections 5(c)(i) during any period of time when Licensee is in material breach of its obligations set forth in Section 4 or that Section 5(c)(i) after receipt of written notice from Licensor and fifteen (15) days’ opportunity to cure.
(v) Licensor covenants and agrees to take all actions necessary to facilitate [***] for use permitted by the PM License, either to PM or to PM’s designated manufacturers, in the manner required by clause 3.5 of the PM License; provided, however, that in no event shall Licensor be required to [***] except where otherwise required by Section 5(c)(iii).
(vi) Licensor covenants and agrees that it will not knowingly take any action (unless otherwise required by this Section 5(c)) that would cause any of the representations and warranties set forth in Section 5(a) to become untrue in any material respect as if they were made at the time of such action, to the extent such action causes, or is reasonably likely to cause, any material liability, loss, or damage of or to Licensee in respect of the PM License.
(d) Licensee’s Covenants.
(i) Licensee covenants and agrees to: (A) not amend, restate, or otherwise modify any term or provision of the Licensee Operating Agreement, Licensee’s certificate of formation, or PM License, unless the same is approved by the Bidi Manager; (B) waive any material right of Licensee, or material obligation of PM, under the PM License or any other agreement between Licensee and PM relating thereto, in each case without the prior consent of the Bidi Manager (such consent not to be unreasonably withheld, conditioned, or delayed); (C) not remove the Bidi Manager as a limited liability company manager of Licensee, increase the number of limited liability managers of Licensee above two (2), or pursue or permit KBIG to pursue any claim against Bidi Manager for breach of a express or implied duty (fiduciary or otherwise) in its role as a limited liability company manager of Licensee; and (D) not refuse or unreasonably condition or frustrate the Bidi Manager’s exercise of any right of the Bidi Manager under the Licensee Operating Agreement.
(ii) Licensee further covenants and agrees that, as promptly as practicable following a request by Licensor, to provide copies of all documentation and information provided, or otherwise made available, to Licensee under the PM License or otherwise developed by Licensee and PM in connection therewith (including, without limitation, the Registration Strategy, PMI Product Standards, and information regarding Market Applicable Law), or request and obtain copies of such documentation and information that Licensee has the right to obtain, in each case to the extent necessary to facilitate the performance of Licensor’s covenant pursuant to Section 5(c)(i).
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(iii) Licensee further covenants and agrees to actively, diligently, and timely enforce all provisions of the PM License that are reasonably necessary to protect the Licensed IP and Licensor’s right, title, and interest thereto. Licensee and Licensor shall not unreasonably refuse to equally share the cost and expense of Licensee’s activities in this regard, in which case any proceeds, damage awards, income, royalties, or other payments resulting therefrom shall constitute a Royalty Payment. Otherwise, if Licensee cannot or will not participate in such sharing of cost and expense, Licensee shall, at Licensor’s election, perform such activities at Licensor’s sole cost and expense, with any proceeds, damage awards, income, royalties, or other payments resulting therefrom that are received by Licensee to be promptly paid directly to Licensor for Licensor’s sole benefit (and shall not constitute a Royalty Payment or any other payment subject to Section 4 in any respect). Licensee shall further actively, timely, and diligently pursue all rights of indemnification and defense owed by PM under the PM License to Licensor, or to Licensee in respect of the Licensed IP. Notwithstanding anything to the contrary set forth in this Agreement, in no event shall Licensee approve or authorize any settlement that materially affects Licensor without Licensor’s consent.
(iv) Licensee further covenants and agrees to reasonably coordinate with Licensor with respect to all of Licensee’s material activities regarding Improvements and/or new versions of the Products involving PM.
(v) Licensee further covenants and agrees to not unreasonably refuse, condition, or delay its consent to any action requested by Licensor to protect and defend the Licensed IP and implement the [***].
(vi) Licensee covenants and agrees to take all actions necessary to assist Licensor with performing all of Licensor’s covenants, obligations, and duties under the Side Letter, except where those covenants, obligations, and duties arise as a result of Licensor’s breach of this Agreement or any other agreement between Licensor and Licensee.
(e) Mutual Covenants.
(i) The Parties acknowledge and agree: (i) Licensee is required to acquire and maintain a Ten Million Dollar ($10,000,000.00) public liability insurance policy, employer’s liability policy, and professional indemnity insurance policy as set forth in the PM License Agreement (the “Insurance Policies”); and (ii) the cost for acquiring and maintaining the Insurance Policies shall be paid in equal shares by the Parties, with Licensor reimbursing Licensee for fifty percent (50%) of the Insurance Policies premiums within ten (10) days after being provided written notice of the Insurance Policies premium and a copy of the invoice therefor. Licensee agrees to use commercially reasonable efforts to add Licensor and KBIG as additional insureds to the Insurance Policies, to the extent it does not result in a material increase to the amount of the premium to do so.
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(ii) If Licensee incurs any liability or obligation to PM under the PM License that requires Licensee to pay any amount to PM or its Affiliates, and Licensee’s “Cash Reserve” does not contain enough cash to fund such payment (a “Shortfall”), then Licensor shall pay fifty percent (50.0%) of that Shortfall to Licensee, and Licensee shall cause KBIG to contribute fifty percent (50.0%) of that Shortfall to Licensee, which Licensee shall promptly use to make the required payment. As necessary, the pro-rata amount of the payment required of Licensor, or the contribution required of KBIG, shall be adjusted to the extent necessary to achieve the intention expressed in Section 4(a)(i).
(f) Indemnification.
(i) Each Party agreed to indemnify, defend, and hold the other Party, its Affiliates, and its and their respective officers, directors, employees, agents, and representatives harmless of and from all claims, demands, causes of action, judgments, fines, and direct damages, costs, expenses, charges, and fees to the extent arising out of or relating to any inaccuracy in or breach of a representation, warranty, or covenant of that Party set forth in this Agreement.
(ii) For all third-party claims, demands, complaints, actions, suits, proceedings, and other matters that give rise, or might give rise, to a right of indemnification under Section 5(e) (each, a “Claim”), the indemnifying party shall be entitled to timely assume the defense of the Claim on behalf of the indemnified party upon the indemnifying party’s receipt of written notice of the Claim. As a condition of the indemnifying party’s assumption of the Claim, the Claim shall be fully tendered to the indemnifying party for defense and settlement. Failure or delay by the indemnified party to give prompt notice of any Claim shall not release, waive, or otherwise affect the indemnifying party’s obligations with respect to the Claim, except to the extent of any loss or prejudice to the indemnifying party resulting from such failure or delay. The indemnified party shall be entitled to participate in (but not to control) the defense of a Claim, with the indemnified party’s own counsel and at its own expense. If the indemnifying party does not assume the defense of a Claim, the indemnified party may defend against the Claim in such manner as the indemnified party may deem appropriate, including, but not limited to, settling such Claim on such terms as the indemnified party may deem appropriate after giving reasonably advance prior notice thereof to the indemnifying party, and the indemnified party shall be entitled to prompt indemnification from the indemnifying party for all of the expenses incurred in connection with the indemnified party’s defense and resolution of the Claim, but only if that Claim gives rise to a right of indemnification against the indemnifying party under this Agreement. The indemnified party shall provide all assistance reasonably requested by the indemnifying party in connection with the defense of a Claim.
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(iii) Pass-through Indemnification. To the extent that Licensee is defended, indemnified and/or held harmless by PM for any reason under the PM License, such rights to be defended, indemnified and held harmless shall be passed through to Licensor to the extent permissible under applicable law.
6. Confidentiality.
(a) Subject to Sections 6(b) and 6(c), each Party undertakes to the other Party: (i) to keep all Confidential Information strictly confidential; (ii) not to disclose the Confidential Information in whole or in part to any third party except when required under the PM License; and (iii) to use the Confidential Information solely in order to comply with its obligations under this Agreement or the PM License, as applicable, or to receive the benefit of this Agreement or that PM License (the “Purpose”), and not otherwise for its own benefit or the benefit of any third party.
(b) Each Party may disclose the other Party’s Confidential Information:
(i) To its Affiliates and its and their respective its employees, officers, contractors, subcontractors, representatives and advisers (“Representatives”) who need to know such information for the Purpose. Each Party shall ensure that Representative to whom a disclosure is made is subject to equivalent obligations of confidentiality as those that bind the party under this Section 6(b) and each Party shall be liable for the acts and omissions of each such Representative that lead to a breach of that party’s obligations under this Section 6(b); and
(ii) As may be required by law, a court of competent jurisdiction, a Governmental Authority or a recognized securities exchange provided that: (A) the Party to which the Confidential Information relates has been notified by the party intending to disclose it of the intended disclosure prior to the disclosure taking place (where permitted); and (B) the Party intending to disclose the Confidential Information has provided (where permitted) such assistance as has been reasonably requested by the Party to which the Confidential Information relates in order to restrict the scope of the intended disclosure to the maximum effect.
(iii) As is reasonably necessary and permitted under the PM License: (A) in order to comply with, or take the benefit of, clause 3 of the PM License; (B) to apply for, obtain and maintain Regulatory Approvals and make related filings in relation to the Products in any Markets; and (C) to apply for, prosecute and maintain any IPR.
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(c) The obligations of confidentiality under this Agreement shall not apply (or shall cease to apply as the case may be) to any Confidential Information which: (i) becomes public knowledge other than as a result of a breach of this Section 6; (ii) was or is lawfully obtained by the receiving Party without any obligation of confidentiality from a third party who was or is entitled to disclose it; or (iii) was independently created by the receiving Party without the use of, or reference to, any of the disclosing party’s Confidential Information.
(d) Each Party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this Section 6, and that any violation by a Party of this Section 6 may cause irreparable injury to the disclosing Party that is not adequately compensable by money damages and for which the disclosing Party may not have an adequate remedy available at law. On that basis, each Party agrees that a disclosing Party is entitled to seek injunctive or other equitable relief to prevent or curtail any such threatened or actual violation without posting a bond or security and without prejudice to any other rights available to the disclosing Party.
7. Other Provisions.
(a) Incorporation By Reference. The recitals set forth above are all true and correct and are incorporated into this Agreement by this reference.
(b) Notice. Unless otherwise agreed to by the Parties, all notices shall be deemed effective when received and made in writing by either: (i) certified mail, return receipt requested; (ii) nationally recognized overnight courier; or (iii) electronic mail with proof of delivery, addressed to the Party to be notified at the following address or to such other address as such Party shall specify by like notice hereunder:
If to Licensor:
Bidi Vapor, LLC
401 N. Wickham Road
Melbourne, FL 32835
Attention: Bidi Vapor – Corporate
E-Mail: admin@bidivapor.com
With a copy to, which copy does not serve as notice:
Nelson Mullins Riley & Scarborough LLP
390 N. Orange Ave.
Suite 1400
Orlando, FL 32801
Attention: Matt Armstrong
E-Mail: matt.armstrong@nelsonmullins.com
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If to Licensee:
Kaival Brands International, LLC
401 N. Wickham Road
Melbourne, FL 32835
Attention: KAVL-Corporate
E-Mail: admin@kaivalbrands.com
With a copy to, which copy does not serve as notice:
Baker & Hostetler LLP
200 S. Orange Ave., Suite 2300
Orlando, FL 32801
Attention: Keith Durkin
E-Mail: kdurkin@bakerlaw.com
Either Party, by written notice to the other pursuant to this section, may change its address or designees for receiving such notices
(c) Severability. If any of the provisions of this Agreement shall contravene the laws of any country, it is agreed that such invalidity or illegality shall not invalidate this Agreement, but instead this Agreement shall be construed as if it did not contain the provision(s) claimed or held to be invalid or illegal in the particular jurisdiction concerned, insofar as such construction does not materially affect the substance of this Agreement, and the rights and obligations of the Parties shall be construed and enforced accordingly. In the event, however, that such claimed invalidity or illegality shall substantially alter the relationship between the Parties, materially affecting adversely the interest of either Party in such jurisdiction, then the Parties shall negotiate an alternative provision not conflicting with such laws so as to maintain, to the degree reasonably possible, the business and economic benefits and liabilities as initially set forth herein. If such invalidity or illegality is such that it is not possible to reasonably restore the business and economic benefits and liabilities of the Parties, then the Party whose interests are adversely affected shall have the right to terminate only that portion of this Agreement that is materially impacted by such invalidity or illegality.
(d) Binding Effect. The terms of this Agreement shall be binding upon the direct or indirect successors or assigns of the Parties.
(e) Entire Agreement; Amendments. This Agreement and the Licensee Operating Agreement collectively set forth the entire understanding of the Parties relating to the subject matter hereof and cancels and supersedes all other agreements or understandings leading up to the execution of this Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Parties unless made in writing and signed on behalf of the Parties by their respective duly authorized representatives. Notwithstanding the foregoing provisions of this Section 7(e) to the contrary, references herein to the terms and definitions contained in the PM License shall be afforded the meaning set forth in the PM License with respect to interpretation of such terms, and, only to the extent necessary, interpretation of this Agreement may be performed with reference to the PM License. In the event of a conflict between the PM License and this Agreement, this Agreement shall control.
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(f) Assignment. This Agreement, and the rights and licenses provided herein, may not be assigned by either Party without the prior written consent of the other Party.
(g) Waiver. No act, delay or omission by any Party shall be deemed a waiver of any right, power, or remedy of such party unless such waiver is in writing, and then only to the extent set forth therein. All remedies, either under this Agreement or by law or otherwise afforded to a party, shall be cumulative and not alternative. No waiver of any provision, right or remedy under this Agreement on any one occasion shall constitute a waiver of any other provision, right or remedy on said occasion or the same or any other provision, right or remedy on any other occasion.
(h) Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by Licensor to Licensee are, and shall otherwise be deemed to be, for the purpose of Section 365(n) of the United States Bankruptcy Code, as amended (the “Bankruptcy Code”), licenses of rights to “intellectual property” as defined under Section 101 (35A) of the Bankruptcy Code. The parties hereto agree that Licensee, as licensee of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the Bankruptcy Code. The Parties further agree that, if a Bankruptcy Code case is commenced by or against Licensor and this Agreement is rejected as provided in the Bankruptcy Code, then Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Bankruptcy Code trustee) shall take such steps as are necessary to permit Licensee to exercise all of its rights under this Agreement. All rights, powers and remedies of Licensee provided under this Section 7(h) are in addition to and not in substitution for any and all other rights, powers, and remedies now or hereafter existing at law or in equity (including, without limitation, the Bankruptcy Code) in the event of any such commencement of a bankruptcy proceeding by or against Licensor. Licensee, in addition to the rights, powers and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including the Bankruptcy Code) in such event. Licensor acknowledges that the payments described in Section 4 represent at least equivalent value for the rights granted under this Agreement.
(i) Governing Law; Venue; Jury Waiver. This Agreement shall be governed by the laws of the State of Florida, without giving effect to the principles of conflicts of law of such state and shall be binding upon the Parties hereto in the United States and worldwide. Any claims or legal actions by one Party against the other arising under this Agreement or concerning any rights under this Agreement shall be commenced and maintained in any state or federal court located in Orange County, Florida. Both Parties hereby submit to the jurisdiction and venue of any such court. THE PARTIES FURTHER AGREE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM, COUNTERCLAIM, OR ACTION ARISING FROM THE TERMS OF THIS AGREEMENT.
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(i) If any dispute arises between or among the Parties in connection with this Agreement, the Parties shall first proceed in good faith to submit the matter to mediation before instituting any legal proceeding in a state or federal court. Costs related to mediation shall be mutually shared by the Parties. Unless otherwise agreed in mediation, the Parties retain their rights to proceed to litigation. In no event shall this Section 7(i)(i) apply with respect to any action by a Party for injunctive or other similar equitable relief with respect to a breach of this Agreement by a Party.
(j) No Strict Construction. This Agreement shall not be construed more strongly against either Party regardless of which Party is more responsible for its preparation.
(k) No Partnership or Joint Venture. Nothing in this Agreement, and no course of dealing between the Parties, shall be construed to create or imply an employment or agency relationship or a partnership or joint venture relationship between the Parties or between one Party and the other Party’s employees or agents. Neither Licensor nor Licensee has the authority to bind the other, to incur any liability, or otherwise act on behalf of the other. Each Party shall be solely responsible for payment of its employees’ salaries (including withholding of income taxes and social security), workers’ compensation, and all other employment benefits (subject only to the reimbursements contemplated by Section 4).
(l) Headings. All titles used in this Agreement herein are for the convenience of reference only and shall not affect the construction of this Agreement.
(m) Counterparts; Electronic Signatures. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument, without necessity of production of the others. Delivery of executed signature pages hereof by facsimile, DocuSign, or electronic mail transmission shall constitute effective and binding execution and delivery thereof.
[Remainder of Page Intentionally Blank. Signature Page Follows.]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their duly authorized representatives as of the Effective Date.
| LICENSOR: | ||
| BIDI VAPOR, LLC, a Florida limited liability | ||
| company | ||
| By: | /s/ Nirajkumar Patel | |
| Nirajkumar Patel, as its Manager | ||
| LICENSEE: | ||
| KAIVAL BRANDS INTERNATIONAL, LLC, a | ||
| Delaware limited liability company | ||
| By: | Nirajumar Patel | |
| Nirajkumar Patel, as a Manager | ||
| By: | /s/ Eric Mosser | |
| Eric Mosser, as a Manager | ||
| KAIVAL BRANDS INNOVATIONS GROUP, | ||
| INC., a Delaware corporation | ||
| By: | /s/ Eric Mosser | |
| Eric Mosser, Chief Operating Officer | ||
Kaival Brands Innovations Group, Inc., a Delaware corporation is signing this Agreement solely with respect to Sections 4(i) and 4(j)
[End of Agreement.]
17
EXHIBIT 10.26
CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND REPLACED WITH “[***]”. SUCH IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS (1) NOT MATERIAL AND (2) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF DISCLOSED.
| DATED 2022 | ||
| PHILIP MORRIS PRODUCTS S.A. | (1) | |
| and | ||
| KAIVAL BRANDS INTERNATIONAL, LLC | (2) |
DEED OF LICENSING AGREEMENT
|
Contents
| 1 Interpretation | 3 |
| 2 Term | 15 |
| 3 Grant OF Licence | 15 |
| 4 Exclusivity | 16 |
| 5 know-how and technical assistance | 18 |
| 6 compliance with standards and laws | 19 |
| 7 development services | 19 |
| 8 KBI initiated product development | 20 |
| 9 testing | 20 |
| 10 PRODUCT BRANDING AND PACKAGING | 21 |
| 11 initial MARKETS AND expansion | 21 |
| 12 regulatory approvals | 22 |
| 13 marketing and sales | 22 |
| 14 Key performance indicators | 23 |
| 15 cessation of sales | 24 |
| 16 Royalty payments | 24 |
| 17 defects | 27 |
| 18 PRODUCT INDEMNITIES | 28 |
| 19 new PROPERTY | 30 |
| 20 registration and maintenance of intellectual property | 30 |
| 21 development of intellectual property | 32 |
| 22 ENFORCEMENT OF INTELLECTUAL PROPERTY | 33 |
| 23 INFRINGEMENT CLAIMS BY THIRD PARTIES | 35 |
| 24 liability | 37 |
| 25 Parent company guarantee, ip side letter and IP WAIVER LETTER | 38 |
| 26 insurance | 38 |
| 27 corporate REPRESENTATIONS and WARRANTIES | 38 |
| 28 KBI REPRESENTATIONS and WARRANTIES | 39 |
| 29 termination | 40 |
| 30 consequences of termination | 41 |
| 31 CONFIDENTIALITY | 42 |
| 32 Child/Forced labour | 43 |
| 33 Anti-Bribery and Corruption and Anti-Money Laundering | 43 |
| 34 FORCE MAJEURE EVENT | 45 |
| 35 Notices | 45 |
| 36 Further assurance | 46 |
| 37 Assignment and other dealings | 46 |
| 38 Waiver | 47 |
| 39 Entire agreement | 47 |
| 40 Variation | 47 |
| 41 Severance | 47 |
| 42 Third party rights | 47 |
| 43 No partnership or agency | 48 |
| 44 COSTS | 48 |
| 45 Counterparts | 48 |
| 46 Language | 48 |
| 47 Governing law | 48 |
| 48 dispute resolution | 48 |
| 49 arbitration | 49 |
| 50 Interim relief | 49 |
i
THIS DEED is dated
Parties
| (1) | PHILIP MORRIS PRODUCTS S.A., a corporation incorporated under the laws of Switzerland (registered no. CH-105-950.151), with offices at Quai Jeanrenaud 3, 2000 Neuchatel, Switzerland (“PMI”). |
| (2) | KAIVAL BRANDS INTERNATIONAL, LLC, a corporation incorporated under the laws of Delaware, USA with (registered no. 6670323), whose registered office is at 401 N. Wickham Road, Suite 130, Melbourne, Florida 32935 (“KBI”). |
Background
| (A) | PMI has been a pioneer in the development and commercialization of science-based smoke-free reduced-risk products and has developed a sizeable intellectual property portfolio relating to such technologies and has substantial expertise in selling such products; |
| (B) | PMI is interested in exploring the manufacture and sale of smoke-free products that may ultimately be used to replace cigarettes; |
| (C) | Bidi has developed a range of smoke-free products such as the “BIDI Stick” for sale in the United States of America and has licensed all of the intellectual property rights relating thereto to KBI, an Affiliate of Bidi, on an exclusive basis as necessary to enable KBI to license those rights on an exclusive basis to PMI pursuant to the terms of this agreement; |
| (D) | PMI wishes to manufacture, promote, sell and distribute such products on an exclusive basis in various markets outside the United States of America; |
| (E) | KBI has agreed to grant, and PMI has agreed to take, a license of certain intellectual property rights relating to such products on an exclusive basis on the terms set out in this agreement. |
Agreed Terms
| 1 | Interpretation |
The following definitions and rules of interpretation apply in this agreement.
| 1.1 | Definitions: |
| “Acceptance Criteria” | means the criteria against which the Design Specification or Consumable will be assessed during EVT, DVT or PVT. |
| “Affiliate” | means, in relation to a party, any person that from time to time directly or indirectly Controls, is Controlled by, or is under common Control with, that party and, in the case of KBI, includes Bidi, and any person that from time to time directly or indirectly Controls, is Controlled by, or is under common Control with, Bidi (but in all cases, excluding the other party and any person who is an Affiliate of the other party at the Effective Date); |
| “Anti-Bribery and Corruption Laws” | means, to the extent applicable: the Foreign Corrupt Practices Act 1977 of the United States of America, as amended (“FCPA”), any rules and regulations thereunder; the Bribery Act 2010 of England and Wales, any rules and regulations thereunder, any similar laws or regulations in any other jurisdiction; and any other national and international laws enacted to implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as each may be amended. |
3
| “Applicable Law” | means all applicable laws, statutes, regulations, directives, decisions, rulings, decrees, government policies, enactments or instruments (including national, regional, local or municipal laws, regulations or by-laws of any kind whatsoever including where made by any Governmental Authority), and mandatory requirements, standards and codes which may from time to time be in force. |
| “[***]” | [***] |
| “Base Price” | [***] |
| “Bidi” | means Bidi Vapor, LLC incorporated and registered in the State of Florida, US with registration # L19000072294 and having its registered address at 200 S. Orange Ave., Suite 2300, Orlando, FL 32801. |
| “Business Day” | means a day other than a Saturday, Sunday or public holiday in Switzerland, when banks in Switzerland are open for business. |
| “Change of Control” | means the occurrence of any of the following events:
(a) a change of Control of KBI or Bidi or any Holding Company of KBI or Bidi (as defined in section 1159 of the Companies Act 2006);
(b) the merger or consolidation of KBI or Bidi or any Holding Company of KBI or Bidi, other than a merger or consolidation in which: (i) the shareholders of that entity immediately prior to the consolidation or merger owns, directly or indirectly, at least a majority of the shares in the capital of the continuing or surviving corporation immediately after such consolidation or merger; or (ii) the board of directors of that entity immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation, which liquidation, merger, or consolidation has been approved by the shareholders of that entity; or
(c) the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of KBI or Bidi or any Holding Company of KBI or Bidi. |
| “Claim” | means an assertion, or an actual or threatened claim, action, suit, or proceedings (whether civil, criminal, administrative, arbitral, investigative, or otherwise), including border enforcement actions, whether or not such actions involve law enforcement. |
4
| “COGS” | means the cost of goods sold as defined under the US Generally Accepted Accounting Principles. |
| “[***]” | [***] |
| “[***]” | [***] |
| “Commencement Date” | means 13 May 2022. |
| “Competing Product” | means a product that competes with, and is the same as or similar to, any of the Products made and sold by PMI pursuant to this agreement, [***] |
| “Confidential Information” | means all confidential information, documentation, designs, drawings and data, of whatever nature, disclosed, whether orally or in writing, by one party to the other, or obtained by one party from the other, whether before or after the date of commencement of this agreement, relating to or connected with the Licensed Rights or the business, affairs, clients/customers, prospective clients/customers, operations, processes, strategies, plans, IPR, developments or Know-How of a party and/or its Affiliates, together with any information derived by a party from, and any data underlying such information, and any other information designated by a party as being confidential (whether or not it is marked as “confidential”) or which ought to reasonably be considered to be confidential. The terms of this agreement shall be Confidential Information. |
| “Control” | has the meaning given in section 1124 of the Corporation Tax Act 2010, and “Controls” and “Controlled” shall be construed accordingly. |
| “Consumable” | has the meaning given in clause 7.1(a). |
| “Defect” | means any Product (including the KBI Packaging but excluding any Product Branding, text or other content on such KBI Packaging) that fails to:
(a) be of high quality;
(b) function properly and reliably for its intended purpose;
(c) comply with its Functional Specifications;
(d) comply with the Applicable Law, including any applicable environmental, health, employment and safety laws and regulations and Regulatory Approvals in the Market in which it is intended for sale; and
(e) comply with the PMI Product Standards
and “Defective” shall be construed accordingly. |
5
| “Design Defect” | means a Defect arising from the Design Specification which is not a Manufacturing Defect or Excluded Defect. |
| “Design Specification” | means the detailed specification setting out the process, materials and other requirements necessary for the manufacture, assembly and production of a Product or any KBI Packaging. |
| “Development Services” | [***] |
| “Disclosed” | means disclosed by KBI prior to the Effective Date in writing in the data room [***] and in such manner and in such detail as to enable a reasonable licensee to identify and make a reasonably informed assessment of the nature and scope of the matter concerned. |
| “Distribution Agreement” | means the Third Amended and Restated Exclusive Distribution Agreement between Kaival and Bidi dated 10 June 2022. |
| “Documentation” | means any and all Materials (and IPR therein) from time to time: (a) relating to the Exploitation of the Products or KBI Packaging; and/or (b) subsisting in the Product Regulatory Data or the Specifications. |
| “DVT” | means so-called “design validation testing” which includes testing to deliver objective verification that the component parts of the device have, and the device as a whole has, been designed and specified to deliver their/its intended functions correctly for a user and meet the Functional Specification and other requirements in this agreement. |
| “E-Cigarette” | means a disposable electronic delivery product that produces an aerosol for human inhalation. |
| “Effective Date” | means the date of this agreement. |
| “E-Liquid” | means the finished and produced ‘e-liquid’, being the liquid that forms a nicotine-containing aerosol when heated. |
| “E-Liquid Defect” | means a Defect arising from the KBI E-Liquid. |
| “[***]” | [***]. |
| “Encumbrance” | means any mortgage, charge (whether fixed or floating), pledge, lien, hypothecation, option, assignment by way of security, security interest, restriction, right of first refusal, right of pre-emption, third party right or interest, covenant not to sue or enforce, or other encumbrance or security interest of any kind, or another type of agreement or arrangement having similar effect including anything analogous to any of the foregoing under the laws of any jurisdiction, or an agreement or commitment to create any of the foregoing. |
| “EVT” | means so-called “engineering validation testing” which includes testing first engineering prototypes to ensure that the unit performs to the Functional Specification and other requirements in this agreement. |
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| “Excluded Defect” | has the meaning set out in clause 17.2(b).
|
| “Excluded Products” | [***] |
| “Expansion Criteria” | means the non-binding criteria for PMI’s plans for expansion into further Markets, as set out in Schedule 5. |
| “Expansion Business Plan” | means a plan provided by PMI to KBI under clause 11.3 or 11.4 as updated by PMI from time to time. |
| “Exploit” | means to make, use, stock, keep, import, export, apply for Regulatory Approvals, Promote, sell and/or distribute, and “Exploitation” shall be construed accordingly. |
| “Extension Period” | means a period of five (5) years. |
| “First Sale” | means the sale of a unit of a Product by PMI or an Affiliate of PMI in a Market to (a) a Third Party distributor or reseller; or (b) a final consumer where PMI or the Affiliate of PMI sells the Product through its own channels directly to final consumers. |
| “Force Majeure Event” | 1.2 means any event beyond the relevant party’s reasonable anticipation and control including fire, flood, storm and other acts of God, epidemic and pandemic, trade union disputes, riot, war or hostilities between any nations (or preparations for the same), imposition of Sanctions or embargo, terrorism or rebellion provided that, in each case where possible for such party to take reasonable and proportionate measures to avoid such event arising, such measures were taken. |
| “Freedom to Operate” | means, with respect to the Products, that such Products and their design, manufacturing, use and sale (excluding the Product Branding) do not infringe, misuse, or misappropriate the IPR of any Third Party. |
| “Functional Specification” | means the detailed specification describing the functionality, performance, features and characteristics of the Products to which KBI develops the Design Specification, as agreed by the parties in writing (including in or pursuant to a Work Order) or, with respect to the period before the Effective Date only, as specified by PMI. |
| “Government Official” | means: (a) an employee, officer, or representative of, or any person otherwise acting in an official capacity for, or on behalf of, a Governmental Authority; (b) a legislative, administrative, or judicial official, regardless of whether elected or appointed; (c) an officer of or individual who holds a position in a political party; (d) a candidate for political office; or (e) an officer or employee of a supra-national organization (e.g., World Bank, United Nations, International Monetary Fund, Organization for Economic Co-operation and Development). |
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| “Governmental Authority” | means any supra-national, national, federal, state, provincial, municipal, or local government (including any sub-division, court, administrative agency, commission, or other authority thereof) or private body exercising any regulatory, taxing, customs, importing, or quasi-governmental authority, including but not limited to state-owned or state-controlled entities or enterprises, in each case having jurisdiction or authority. |
| “Guarantors” | mean Kaival and Bidi. |
| “Handover Confirmation” | means a written confirmation from both parties that the Design Specification or Consumable has passed the pre-manufacturing testing and verification required under this agreement. |
| “Improvement” | means any improvement, enhancement or modification. |
| “Initial Period” | means the period commencing as of the Commencement Date and ending five (5) years from the Effective Date. |
| “Insolvency Event” | means if any of the following occur:
(a) KBI suspends, or threatens to suspend, payment of its debts or is unable to pay its debts as they fall due or admits inability to pay its debts or is deemed unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986 (IA 1986) as if the words “it is proved to the satisfaction of the court” did not appear in sections 123(1)(e) or 123(2) of the IA 1986;
(b) KBI commences negotiations with all or any class of its creditors with a view to rescheduling any of its debts, or makes a proposal for or enters into any compromise or arrangement with any of its creditors;
(c) KBI applies to court for, or obtains, a moratorium under Part A1 of the Insolvency Act 1986;
(d) a petition is filed, a notice is given, a resolution is passed, or an order is made, for or on connection with the winding up of KBI;
(e) an application is made to court, or an order is made, for the appointment of an administrator or a notice of intention to appoint an administrator is given or an administrator is appointed over KBI;
(f) the holder of a qualifying floating charge over the assets of KBI has become entitled to appoint or has appointed an administrative receiver;
(g) a person becomes entitled to appoint a receiver over all or any of the assets of KBI or a receiver is appointed over all or any of the assets of KBI;
(h) a creditor or encumbrancer of KBI attaches or takes possession of, or a distress, execution, sequestration or other such process is levied or enforced on or sued against, the whole or any part of its assets and such attachment or process is not discharged within seven (7) days;
(i) any event occurs, or proceeding is taken, with respect to KBI in any jurisdiction to which it is subject that has an effect equivalent or similar to any of the events mentioned in (a) to (h) above; or
(j) KBI ceases, or threatens to cease, to carry on all or substantially the whole of its business other than in connection with an internal group reorganisation. |
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| “Intellectual Property Rights” or “IPR” | means patents, rights to inventions, copyright and related rights, rights in software, trade secrets, proprietary formulae, trade marks, business names and domain names, rights in get-up, goodwill and the right to sue for passing off, rights in designs, utility models, database rights, rights to use, and protect the confidentiality of, confidential information (including Know-How) and all other intellectual property rights, in each case whether registered or unregistered and including all applications and rights to apply for and be granted, renewals or extensions of, and rights to claim priority from, such rights and all similar or equivalent rights or forms of protection which subsist or will subsist now or in the future in any part of the world. |
| “IP Side Letter” | means the deed of letter between PMI and Bidi set out in Schedule 9. |
| “IP Waiver Letter” | means the letter between the parties set out in Schedule 10. |
| “Joint Improvements” | means any Improvement to the Technology, Documentation or Licensed IPR related to the Products, or to the Products or their method of manufacture that is developed by the parties and/or their respective Affiliates jointly. |
| “Joint Improvement IPR” | has the meaning set out in clause 21.1. |
| “Kaival” | means Kaival Brands Innovations Group, Inc. with registered address at 401 N. Wickham Road, Suite 130, Melbourne, Florida 32935. |
| “KBI Branding” | means the trade marks, names and branding set out in Schedule 3 which are licensed to KBI by Bidi. |
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| “KBI E-Liquid” | means the E-Liquid developed by or on behalf of KBI and/or any of its Affiliates and used in or with a Product. |
| “KBI E-Liquid Composition” | [***] |
| “KBI IP” | means the Materials (and IPR therein) and IPR listed in Schedule 2. |
| “KBI Markets” | means the US and any other territory that is outside the Markets. |
| “KBI Packaging” | means the external polystyrene packaging, inner box and cardboard sleeve used to package the Products (excluding any KBI Branding on such packaging, box or sleeve). |
| “Know-How” | means any secret or covert knowledge or information, including trade and other secrets, knowledge, ideas, inventions, concepts, discoveries and know-how. |
| “KPIs” | means the key performance indicators set out in, or determined by PMI from time to time in in accordance with, Schedule 5. |
| “Launch” | means the first sale of a Product in a Market to (a) a Third Party distributor or reseller, or (b) a final consumer where PMI or an Affiliate of PMI sells the Product through its own channels directly to final consumers, as applicable. “Launching” and “Launched” shall be construed accordingly. |
| “Licensed IPR” | means all IPR comprised in or relating to the Technology, Documentation and KBI IP that is licensed to PMI under clause 3.1 including any Joint Improvement IPR and IPR in Improvements that become a part of the Licensed Rights pursuant to clause 21. |
| “Licensed Rights” | has the meaning set out in clause 3.1. |
| “Manufacturing Defect” | has the meaning set out in clause 17.2(a). |
| “Market Applicable Law” | has the meaning set out in clause 6.1(a). |
| “Markets” | means the countries and markets set out in Schedule 1. |
| “Market Specific Terms” | means the terms and conditions that relate to and apply to a particular Market as set out in Schedule 6, as amended by the parties pursuant to clause 4.2 or 40. |
| “Materials” | means: (a) regardless of whether IPR actually inhere in any such items, all processes, methodologies, technologies, algorithms, techniques, designs, reports, works of authorship, video recordings, audio recordings, photographs, software (in both source code and object code form and including all related data), mask works, models, formulae, programmer interfaces, specifications, operating instructions, drawings, compositions, processes, research and development results, technology, technical data, drawings, data and commercial, technical, manufacturing and production activities, notes, manuals, documentation, training materials, job aids and materials; (b) all Know-How; and (c) all translations, adaptations, derivations, and combinations of any of the foregoing. |
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| “Minimum KPIs” | means the key performance indicators identified as such and set out in, or determined in accordance with, Schedule 5. |
| “Negative Factor” | means any matter, fact or circumstance outside of PMI’s control including any breach by or act or omission of KBI, any material adverse change (including negative reputational development affecting KBI, its Affiliates or its or their products outside the Markets), any material adverse change in laws or regulations, any change in exchange rates or commodity prices, or any Force Majeure Event, but excluding any change in conditions generally affecting the industry, changes in financial markets or general economic conditions other than those specified in the foregoing part of this definition. |
| “New Property” | means a Nicotine E-Cigarette product that is outside the product categories set out in the definition of the term “Products” (including any system of a “pod mod” or “pod product” for nicotine E-Liquid or nicotine salts that involve a vaping product making use of a pre-filled or refillable “pod” or pod cartridge containing a vaporizer system, intended to be used with a separate external battery, that is currently being or may be developed by Bidi or its Affiliates) excluding in all cases Nicotine E-Cigarettes to the extent they are Excluded Products. |
| “Nicotine E-Cigarette” | means an electronic delivery product that produces a nicotine-containing aerosol for human inhalation. |
| “[***]” | [***]. |
| “[***]” | [***]. |
| “Parent Company Guarantee” | means the deed of guarantee between PMI and the Guarantors set out in Schedule 8. |
| “PMI Background IP” | means any IPR from time to time owned by, or licensed from a Third Party by, PMI and/or any of PMI’s Affiliates. |
| “PMI Branding” | means the trade marks, names and branding used on the Products that are owned by PMI or licensed by PMI from a Third Party. |
| “PMI Product Standards” | means PMI’s standards on product quality, safety, and chemistry that PMI applies to its own products, that are provided by PMI to KBI on or prior to the date of this agreement, and as may be amended by PMI in its sole discretion from time to time on notice to KBI, the first version of which is set out in Schedule 4. |
| “Product Branding” | has the meaning set out in clause 10.1. |
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| “Product Packaging” | has the meaning set out in clause 10.1. |
| “Product Regulatory Data” | means with respect to each Product all testing, pre-clinical and clinical trial data, including data from all experiments, information, results, testing designs and protocols, information useful for, contained in, or submitted in, any application for any product licence, registration, regulatory approval or similar before any Governmental Authority, all government certifications and findings, and related materials, data from any safety databases, adverse event reporting or other consumer testing or user database; |
| “Products” | means disposable Nicotine E-Cigarettes containing an E-Liquid developed by, for, or on behalf of KBI and/or any of its Affiliates, commonly referred to as ‘disposable e-cigarettes’, (including disposable Nicotine E-Cigarettes that are currently commercialized by or on behalf of KBI and/or any of its Affiliates as of the date of this agreement) and any evolution, or new, enhanced, updated or substituted versions, of such products, and any accessories intended for use with any such products, excluding in all cases any such Nicotine E-Cigarettes that are only Excluded Products. |
| “Promote” | means to market, advertise and promote, and “Promotion” shall be construed accordingly. |
| “PVT” | means so-called “production validation testing” which includes verifying that the Design Specification will deliver Products that conform to the Functional Specification and other requirements of this agreement at mass production yields and at mass production rates. |
| “Quarter” | means each period of three (3) months commencing on 1 January, 1 April, 1 July and 1 October respectively, and “Quarterly” shall be construed accordingly. |
| “Recall” | means any action to withdraw, recall, collect, recover or return a Product from, or prevent further Promotion, release or distribution of a Product in or to, any part of the supply chain or any end-user, or have a third party take those actions, at the request of any Governmental Authority or as a voluntary corrective or preventive action of PMI, an Affiliate of PMI or any of its or their distributors. This includes any action by a Governmental Authority to seize, detain or destroy a Product. |
| “Recommended Sales Price” | means the recommended price for the sale of the relevant Product to a final consumer in the relevant Market as suggested by PMI or an Affiliate of PMI. |
| “Regulatory Approvals” | means regulatory, legal and antitrust approvals, permission, licence, dispensation, waiver or consent (including product registration) required to import, export, Promote, sell and/or distribute a Product in a Market. |
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| “Relevant Affiliates” | means, with respect to a party, any Affiliates of such party that are engaged in activities related to the performance of this agreement (including by owning the Licensed IPR). |
| “Relevant Defect” | has the meaning given in clause 17.1. |
| “[***]” | [***]. |
| “Representatives” | has the meaning given in clause 31.2. |
| “Royalties” | means the royalties payable by PMI to KBI with respect to the First Sale of Products in the Markets calculated in accordance with clause 16.1. |
| “Royalty Statement” | (a) has the meaning given in clause 16.10. |
| “Sanctioned Party” | (a) means any person (i) that is the subject of any Sanctions including by inclusion on the list of specially designated nationals maintained by the US Department of Treasury’s Office of Foreign Assets Control or other applicable restricted parties list maintained by the US, the United Nations Security Council, Switzerland, the European Union, or any member state thereof, or Her Majesty’s Treasury; or (ii) located or organized within, or doing business or operating from a country or territory that is the subject of comprehensive Sanctions at the relevant time. |
| “Sanctions” | means any all applicable sanctions laws including U.S. laws (including those administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State or the U.S. Department of Commerce) or any sanctions imposed by the United Nations Security Council, Switzerland, the European Union, or Her Majesty’s Treasury that have a material adverse impact on the operation of this agreement or any aspect of its operation. |
| “Sell-Out Period” | has the meaning set out in clause 30.1. |
| “[***]” | [***]. |
| “Specifications” | means the Design Specifications and Functional Specifications for Products to be sold in Markets under this agreement. |
| “Tax” | means taxes and/or duties on or targeting a specific component, e.g. nicotine, or product (whether fixed, based on quantity, weight, strength or similar, administered on an ad valorem basis or otherwise), excluding VAT. |
| “Technology” | means any and all Materials (and IPR therein) from time to time: (a) subsisting in or related to the Products or KBI Packaging, excluding the KBI Branding and the PMI Branding; or (b) enabling or required for the best use, practice, performance or exploitation of such Materials (and IPR). |
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| “Term” | means the duration of this agreement. |
| “Third Party” | means any person that is not a party to this agreement or an Affiliate of such a party. |
| “US” | means United States of America. |
| “USD” | means United States Dollars. |
| “VAT” | means tax on sales, revenue or turnover including value added tax or any equivalent tax chargeable in anywhere in the world. |
| “Vendor Disclosure Agreement” | means the PMI non-disclosure agreement relating to sensitive materials that are provided to PMI which governs the usage and disclosure of such materials. |
| “VEEV” | means the E-Cigarette sold under the name “VEEV”. |
| 1.3 | In this agreement, save where the context requires otherwise: |
| (a) | references to clauses and Schedules are to the clauses and Schedules of this agreement and references to paragraphs are to paragraphs of the relevant Schedule; |
| (b) | clause, Schedule and paragraph headings shall not affect the interpretation of this agreement. The Schedules form part of this agreement and shall have effect as if set out in full in the body of this agreement. Any reference to this agreement includes the Schedules; |
| (c) | a person includes a natural person, corporate or unincorporated body (whether or not having separate legal personality) and a reference to a company shall include any company, corporation or other body corporate, wherever and however incorporated or established; |
| (d) | unless the context otherwise requires, words in the singular shall include the plural and in the plural shall include the singular and a reference to one gender shall include a reference to the other gender; |
| (e) | a reference to this agreement or to any other agreement or document referred to in this agreement is a reference to this agreement or such other agreement or document as varied or novated (in each case, other than in breach of the provisions of this agreement) from time to time; |
| (f) | a reference to a statute or statutory provision shall include all subordinate legislation made from time to time under that statute or statutory provision and is a reference to it as amended, extended or re-enacted from time to time; |
| (g) | any undertaking by or obligation on a party to do any act or thing, or not to do any act or thing, includes an undertaking to procure the doing of that act or thing, or the not doing of that act or thing, by a party’s Affiliates; |
| (h) | any undertaking by or obligation on a party not to do any act or thing includes an undertaking not to encourage, solicit, cause, permit or assist the doing of that act or thing; |
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| (i) | any reference to KBI’s knowledge or similar shall be deemed to include the knowledge or similar of KBI’s Affiliates and Niraj Patel; |
| (j) | a reference to writing or written includes email but not fax; and |
| (k) | any words following the terms including, include, in particular, for example or any similar expression shall be construed as illustrative and shall not limit the sense of the words, description, definition, phrase or term preceding those terms. |
| 1.4 | This agreement shall be binding on, and enure to the benefit of, the parties to this agreement and their respective personal representatives, successors and permitted assigns, and references to any party shall include that party’s personal representatives, successors and permitted assigns. |
| 2 | Term |
| 2.1 | This agreement shall be deemed to have commenced on the Commencement Date and, unless terminated earlier in accordance with clause 29, shall remain in force until the end of the Initial Period. |
| 2.2 | The parties acknowledge that PMI has manufactured a limited quantity of Products prior to the Effective Date pursuant to a letter agreement between PMI, KBI, Bidi and Kaival dated 13 May 2022. The parties agree that, notwithstanding the manufacture of such Products prior to the Effective Date, the terms and conditions of this agreement shall apply to such Products and their Exploitation. |
| 2.3 | Upon expiry of the Initial Period this agreement shall automatically renew for an Extension Period unless PMI has failed to meet the Minimum KPIs, in which case it shall terminate automatically without notice at the end of the Initial Period. |
| 2.4 | At least nine (9) months before the end of an Extension Period, the parties will meet to discuss and decide whether or not to renew the agreement for a further Extension Period, such decision to be made at least three (3) months before expiry of the then-current Extension Period. |
| 2.5 | If the parties agree in writing to renew this agreement for a further Extension Period then this agreement shall, unless terminated earlier in accordance with clause 29, remain in force until the end of such Extension Period when it shall terminate automatically without notice. |
| 2.6 | If the parties do not agree to renew this agreement for a further Extension Period then this agreement shall terminate automatically without notice at the end of the then-current Extension Period. |
| 3 | Grant OF Licence |
| 3.1 | KBI hereby grants to PMI an irrevocable licence to use the Technology, Documentation and KBI IP during the Term and the Sell-Out Period to: |
| (a) | manufacture the Products (excluding the KBI E-Liquid) and KBI Packaging, and apply the Product Branding to the Products and KBI Packaging, anywhere in the world; |
| (b) | to export and import the Products and KBI Packaging into and from the Markets; |
| (c) | use, stock, keep, Promote, sell and distribute the Products and KBI Packaging in the Markets, and apply for Regulatory Approvals for the Products in the Markets, |
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on the terms of this agreement (the “Licensed Rights”); and
| (d) | sub-license such Licensed Rights to PMI’s Affiliates, [***] and/or any other Third Party through multiple tiers, provided that: |
| (i) | all sub-licences granted under this clause 3.1(d) shall be in writing and shall terminate automatically on termination or expiry of PMI’s corresponding right under this agreement; and |
| (ii) | PMI shall monitor the performance of any sub-licensee and shall be primarily liable to KBI for any sub-licensee’s breach of terms of this agreement regarding use of the Licensed Rights. |
| 3.2 | Nothing in clauses 3, 5 and 6 of this agreement shall oblige KBI to disclose Documentation, Specifications, Know-How, Materials or Technology to PMI or its Affiliates unless such Documentation, Specifications, Know-How, Materials or Technology is relevant or related to, or required for, the exercise or performance of PMI’s or its Affiliates’ rights or obligations under this agreement (including PMI’s, its Affiliates or its sub-licensee’s enjoyment of the Licensed Rights). |
| 3.3 | [***]. |
| 3.4 | KBI shall disclose the KBI E-Liquid Composition to PMI in accordance with the Vendor Disclosure Agreement to the extent necessary for legal, regulatory or toxicology compliance purposes. |
| 3.5 | KBI confirms that with effect from the Effective Date and throughout the Term and Sell-Out Period, it shall supply [***]. If PMI and/or an Affiliate of PMI appoints any other Third Party to manufacture the Products, [***] ordered by PMI and/or such Affiliate from the relevant Third Party. |
| 3.6 | [***]: |
| (a) | [***]; or |
| (b) | [***]. |
| 4 | Exclusivity |
| 4.1 | Subject to the Market Specific Terms, the licence granted by KBI under clause 3.1 shall be exclusive in relation to the Markets and KBI shall not, and shall procure that its Affiliates shall not, directly or indirectly (including as principal or partner, alone or jointly with, through or as manager, adviser, consultant or agent or in any other capacity whatsoever): |
| (a) | subject to clause 4.3, Promote, exploit, use, sell or distribute any of the Licensed Rights or Products in the Markets, grant any third party the right to do so, or actively enable, assist, encourage or facilitate any third party to do so (including by waiving or settling any claim or agreeing not to sue in respect of any rights in the Licensed Rights or the Products); |
| (b) | subject to clause 4.3, Promote, exploit, use, sell or distribute in the Markets any Competing Product, or actively enable, assist, encourage, or facilitate any third party to do so (including by licensing any Materials or KBI Branding, or by directly or indirectly supplying or permitting the manufacture of any KBI E-Liquid, for use in connection with any such Competing Product, or waiving or settling any claim or agreeing not to sue in respect of any rights in any such Competing Product), other than New Property in respect of which KBI is unrestricted pursuant to clause 19.7 and Excluded Products; or |
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| (c) | apply for, or hold any Regulatory Approval for any Product within any of the Markets or make any notifications to any Governmental Authority or Government Official with respect to any Products (whether in anticipation of a Launch or otherwise) within any of the Markets. |
| 4.2 | The parties acknowledge and agree that it may be necessary to vary the scope of restrictions under this agreement that apply to KBI and/or its Affiliates in relation to one or more Markets for the purposes of compliance with competition law. If either party notifies the other that it wishes to vary such restrictions, the other party shall consider such request and if it accepts such variation, the parties shall record such variation by way of an amendment to Schedule 6. No variation shall be effective unless signed in writing by both parties. |
| 4.3 | The restrictions in clauses 4.1(a) and 4.1(b) and the obligation in clause 4.4: |
| (a) | with respect to sales, shall only restrict active sales with respect to the Markets that are within the European Economic Area and not, for the avoidance of doubt, restrict passive sales into such Markets; |
| (b) | with respect to Promotion, shall only restrict active Promotion by KBI and/or its Affiliates; and |
| (c) | shall not restrict KBI or its Affiliates from manufacturing and storing Products or Competing Products within the Markets and exporting such Products and Competing Products from the Markets into the KBI Markets, provided that: (i) such Products and Competing Products are actually exported outside the Markets and (ii) KBI complies with clauses 4.1(a) and 4.1(b) with respect to the Promotion, sale and distribution of such Products and Competing Products and with clauses 4.6, 4.8, 4.9 and 4.10. |
| 4.4 | If KBI or any of its Affiliates or any of their distributors sells or distributes any of the Products in any Market as at the Effective Date, KBI shall cease to sell or distribute, or procure the cessation of sale or distribution of, such Products in such Market as soon as reasonably practicable and in any event within two (2) months of the Effective Date and clause 4.1(a) shall not apply to the sale and distribution of such Products in such Market for such period. |
| 4.5 | KBI shall, and shall procure that its Affiliates shall, act in good faith with respect to the exclusivity granted to PMI and shall not authorize, engage in, or otherwise implement, directly or indirectly, any practice so as to circumvent, avoid, or otherwise not deliver the intended benefit of the exclusivity provisions set out in this clause 4. |
| 4.6 | KBI shall take reasonable steps to ensure that any Products that it or any of its Affiliates sell in a KBI Market are not re-sold outside the KBI Market. The parties shall invoke protective mechanisms permitted at law to limit ‘grey market’ goods entering the Markets by taking steps to limit exhaustion of rights principles. |
| 4.7 | PMI shall take reasonable steps to the extent reasonably available to PMI as licensee of the Licensed IPR to ensure that any Products and New Property that it or any of its sub-licensees and Affiliates sell in the Markets are not re-sold outside the Markets and shall use reasonable efforts to invoke protective mechanisms permitted at law to limit ‘grey market’ goods entering the US by taking steps to limit exhaustion of rights principles. |
| 4.8 | KBI shall not, and shall procure that its Affiliates shall not, sell any Product in the KBI Markets to any person or entity whom it knows or ought reasonably to know is engaged in any illegal trade, nor sell any Product to any customers of KBI or KBI’s Affiliates in quantities in excess of what KBI or KBI’s Affiliates reasonably believe to be the legitimate demand from that customer for or in the KBI Markets. |
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| 4.9 | If KBI receives from PMI a request to terminate the direct or indirect supply of the Products in the KBI Markets to a customer of KBI or one of its Affiliates because of involvement in the illegal trade of ‘e-cigarettes’, cigarettes, or other tobacco or tobacco-related products, KBI will consider such request and any supporting documentation provided by PMI in good faith and act accordingly, recognising the right and interest of PMI to take steps to ensure that its Products do not find their way directly or indirectly into illegal channels. |
| 4.10 | KBI shall implement and maintain “know-your-customer” policies and procedures for customers to whom it will sell the Products. KBI agrees to provide PMI with information sufficient for PMI to evaluate the adequacy of these policies and procedures, if so requested by PMI, and at least twice annually, conduct an annual volume check to confirm adherence to such policies and procedures. |
| 4.11 | PMI shall not, and shall procure that its Affiliates and sub-licensees shall not, sell any Product in the Markets to any person or entity whom it knows or ought reasonably to know is engaged in any illegal trade, nor sell any Product to any of its customers in quantities in excess of what it reasonably believes to be the legitimate demand from that customer for or in the Markets. |
| 4.12 | If PMI receives from KBI a request to terminate the direct or indirect supply of the Products in the Markets to a customer of PMI or one of its Affiliates or sub-licensees because of involvement in the illegal trade of ‘e-cigarettes’, cigarettes, or other tobacco or tobacco-related products, PMI will consider such request in good faith and act accordingly, recognising the right and interest of KBI to take steps to ensure that Products do not find their way directly or indirectly into illegal channels. |
| 4.13 | PMI shall implement and maintain “know-your-customer” policies and procedures for customers to whom it will sell the Products. PMI agrees to provide KBI with information sufficient for KBI to evaluate the adequacy of, and compliance with, these policies and procedures, if so requested by KBI. |
| 4.14 | Each party acknowledges that it has obtained advice on the provisions of this clause 4 and consider that the restrictions contained in this clause 4 are reasonable for the protection of their respective, legitimate business interests. |
| 4.15 | Each party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this clause 4. |
| 5 | know-how and technical assistance |
| 5.1 | On the Effective Date KBI shall make available to PMI all Documentation in existence as at the Effective Date, subject to clauses 3.2 and 3.3. |
| 5.2 | Throughout the Term and Sell-Out Period KBI shall, subject to clauses 3.2 and 3.3, make available to PMI: |
| (a) | any modified, updated or new version of the Documentation and any new Documentation promptly after their creation; and |
| (b) | such reasonable additional information and assistance (including Know-How and technical assistance) as may be requested by PMI from time to time in relation to and for the exercise of the Licensed Rights in accordance with this agreement, |
promptly upon request.
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| 5.3 | KBI warrants, represents and undertakes on an ongoing basis that the Documentation (including the Specifications). [***] and any other Know-How supplied to PMI and/or any Governmental Authority pursuant to this agreement is accurate, up to date, complete, and relevant to and adequate for the Exploitation of the Products. |
| 5.4 | KBI shall make available to PMI the services of its staff on reasonable notice and as reasonably necessary to advise PMI on the use of the Documentation for the exercise of the Licensed Rights under this agreement for such period as requested by PMI, free of charge but PMI shall be responsible for assessing the advice given and for its implementation. |
| 5.5 | Throughout the Term and Sell-Out Period, KBI shall promptly update the Documentation to reflect any Improvements to the Products or KBI Packaging. |
| 6 | compliance with standards and laws |
| 6.1 | PMI shall notify KBI as soon as reasonably practicable of: |
| (a) | the Applicable Law in a Market in which a Product is to be (or has been) Launched (“Market Applicable Law”); |
| (b) | all forthcoming or anticipated changes to the PMI Product Standards; and |
| (c) | all forthcoming or anticipated changes to Market Applicable Law of which PMI becomes aware. |
| 6.2 | KBI shall ensure that the Specifications and the Products, when made in accordance with their Specifications, will comply with the Market Applicable Law. |
| 6.3 | KBI shall use all reasonable endeavours to ensure that the Specifications and the Products, when made in accordance with the Specifications, will comply with the PMI Product Standards. |
| 7 | development services |
| 7.1 | PMI may from time to time request that KBI: |
| (a) | makes changes and/or Improvements to the Design Specifications for the Products; or |
| (b) | develops [***] or for any other reason at PMI’s sole discretion. |
| 7.2 | As soon as reasonably practicable and within [***] of KBI receiving PMI’s written request for any Development Services, KBI shall, acting reasonably and in good faith, provide to PMI [***] setting out, without limitation: |
| (a) | a breakdown of the Development Services that are required; |
| (b) | a breakdown of the [***] and the payment schedule for the same; and |
| (c) | an estimated time frame for completion of the Development Services. |
| 7.3 | Upon receipt of [***] PMI shall either confirm its acceptance of [***] or inform KBI that it rejects the [***]. If PMI rejects [***] the parties shall act in good faith and use reasonable endeavours to agree the terms of the [***] of PMI’s rejection. Any dispute as to the agreement of the [***] shall be resolved by either party [***] clause 48 [***]. If KBI has not received confirmation of acceptance, or proposed changes to, [***] will be deemed rejected. |
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| 7.4 | Once a [***] has been agreed in writing by both parties, such [***] shall become [***] and KBI shall provide the Development Services specified in such [***] in accordance with that [***] and the terms of this agreement including clause 28.1(l). |
| 7.5 | KBI shall invoice PMI for the [***] specified in the [***], and PMI shall pay such [***] of receipt of a valid invoice for such sums. Such [***] shall be [***] payable by PMI to KBI under this agreement in accordance with clause 16. |
| 8 | KBI initiated product development |
| 8.1 | Save as required under clauses 6 and 7 of this agreement and as permitted under clauses 8.3 and 21.3, neither KBI nor any of its Affiliates shall make any alteration or Improvement to any Design Specification to a Product for any Market (including to the Technology or Documentation therefor) without PMI’s prior written consent. |
| 8.2 | The parties shall from time to time discuss potential Improvements to, and new versions of, then-current Products for use in the Markets [***]. |
| 8.3 | KBI may, at its own initiative, cost and expense, and independently of PMI, develop and suggest an Improvement to, or new versions of, a then-current Product for use in the Markets (“KBI Product Improvement”). KBI shall promptly notify PMI providing all necessary details thereof. Provided that KBI successfully develops the Design Specifications for such KBI Product Improvements, [***]. Nothing in this clause 8.3: |
| (a) | [***] restrict PMI’s right to choose and change the Product Branding and Product Packaging in accordance with clause 10; |
| (b) | shall operate to assign any IPR in and to such KBI Product Improvement to PMI. |
| 8.4 | KBI may, at its own initiative, cost and expense, and independently of PMI, develop and suggest improvements to the design of any Product or part thereof aimed at maintaining or exceeding performance versus consumer expectations and decreasing the COGS of that Product. Subject to PMI’s acceptance and implementation of such improvement following receipt of the Design Specification and signature of a [***] therefor, [***]. |
| 8.5 | If any Improvement to the design of any Product for the Markets would result in a Product that uses any technology or invention whose use or Exploitation would infringe any patent, design or utility model owned by PMI and/or an Affiliate of PMI, then the parties shall negotiate a mutually satisfactory agreement [***]. |
| 9 | testing |
| 9.1 | KBI shall carry out reasonable testing in relation to any changes it makes to the Design Specifications or any [***] to ensure such changes do not result in any defect, reduction in performance or functionality. |
| 9.2 | Without limiting clause 9.1, with respect to any Development Services undertaken pursuant to this agreement, KBI shall [***]. |
| 9.3 | The parties shall work together in good faith and using reasonable endeavours to agree the [***] by the relevant date set out in the Work Order. |
| 9.4 | If the Design Specification or Consumable fails to pass the testing to be performed by KBI under this clause 9 [***], KBI shall notify PMI and [***]. This clause 9.4 shall apply to [***]. |
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| 9.5 | Throughout the Term and Sell-Out Period, KBI shall promptly provide to PMI the results of the testing [***] carried out by or on behalf of KBI [***], [***]. PMI may conduct [***]. |
| 9.6 | Once PMI has [***] under clause 9.5, PMI shall notify KBI and [***]. |
| 9.7 | [***]. |
| 9.8 | If prior to Launch of a Product in a Market, PMI becomes aware that a Design Specification or a Product, when made in accordance with its Design Specification, does not comply with Market Applicable Law [***]. |
| 10 | PRODUCT BRANDING AND PACKAGING |
| 10.1 | Subject to clause 10.3, PMI shall have absolute discretion for Products to be sold in Markets under this agreement, in relation to: |
| (a) | the names, trade marks, logos, branding, graphics and other content used on or in connection with the Products and their Promotion and distribution (“Product Branding”); and |
| (b) | the packaging, packaging materials, labels, package inserts, manuals, instructions and retail displays for, and other marketing and packaging materials relating to the Products (“Product Packaging”) including the design and composition of such Product Packaging and the Product Branding on and relating to such Product Packaging. |
| 10.2 | PMI shall be solely responsible for, and KBI shall not have any liability for, any Product Branding, text or other content used on the Product Packaging which is not Licensed IPR. |
| 10.3 | Subject to clauses 10.4 and 10.5, PMI shall not use the KBI Branding or anything confusing similar to the KBI Branding for or as a part of the Product Branding or Product Packaging without KBI’s prior written consent, save where required for any Regulatory Approval or by Applicable Law. Where such use is required for any Regulatory Approval or by Applicable Law and displayed publically, PMI shall only use the name “Bidi” in word format and not any stylised logo as depicted in Schedule 2. For the avoidance of doubt, the Product Branding may include any trade marks owned or licensed from a Third Party by PMI and/or its Affiliates. |
| 10.4 | PMI may use images, shapes and other graphical representations of the Products (or parts thereof) in the Product Branding and Product Packaging. For the avoidance of doubt, PMI’s use of colours shall also be unrestricted. |
| 10.5 | PMI may apply for and register trade marks that include representations of the Products and/or the Product Packaging on the condition that such trade marks are surrendered upon expiry or termination of the Sell-Out Period. |
| 10.6 | PMI shall ensure that the Products and Product Packaging made pursuant to this agreement shall contain all patent markings, disclosures and disclaimers required by Applicable Law in the Markets in which they are intended for sale. |
| 11 | initial MARKETS AND expansion |
| 11.1 | PMI shall have the right to determine, on a Market by Market and Product by Product basis: |
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| (a) | in which of the Markets to Launch the Products; |
| (b) | which of the Products shall be Promoted, sold and/or distributed in such Market from time to time; and |
| (c) | subject to clause 9.8, when the Launch of such Products in the Markets will take place, based on the Expansion Criteria. |
| 11.2 | Subject to clause 9.8, PMI shall initially Launch the Product currently known at the Effective Date as the “BIDI Stick” in [***] (the “Initial Markets”). PMI shall have the right to substitute the Initial Markets for alternate Markets by giving KBI written notice reasonably in advance. |
| 11.3 | After Launching in the Initial Markets as set out in clause 11.1, PMI will provide KBI with a business plan detailing the process for expanding into additional Markets (and PMI shall have the sole discretion to select such additional Markets having reasonable regard to the anticipated Market opportunity). |
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| 11.4 | PMI will provide KBI with a further Expansion Business Plan detailing the process for expanding into further Markets (and PMI shall have the sole discretion to select all such additional Markets having reasonable regard to the anticipated Market opportunity). |
| 11.5 | PMI shall use reasonable endeavours to follow the Expansion Business Plan, subject always to Applicable Law, Regulatory Approvals being in place, and PMI’s discretion having regard to the anticipated Market opportunity and any Negative Factors. |
| 11.6 | Notwithstanding that the Expansion Criteria are not met in the relevant number of Markets as set out in clauses 11.3 and 11.4, PMI shall be entitled to Launch the Products in any new Markets. |
| 12 | regulatory approvals |
| 12.1 | Prior to Launching any Product in any Market, PMI shall, at PMI’s cost, apply for and obtain the necessary Regulatory Approvals to Promote, sell and distribute that Product in that Market. |
| 12.2 | Without limiting clause 12.1 but subject to clause 3.3, KBI shall promptly provide PMI with: |
| (a) | the Product Regulatory Data and such other assistance, data and information as PMI reasonably requests to enable PMI and/or its Affiliates to apply for, obtain and maintain Regulatory Approvals or any antitrust approvals required in connection with this agreement (including by applying in its own name and/or with PMI); and |
| (b) | updates and relevant information relating to any Regulatory Approvals that KBI and/or its Affiliates have applied for or shall apply for and keep KBI updated (including details of the progress of any such Regulatory Approvals). |
| 13 | marketing and sales |
| 13.1 | PMI shall invest in the commercialization of or marketing the Products in each Market where they have been Launched at a level commensurate to achieve the KPIs for such Markets. |
| 13.2 | PMI shall have full discretion on all commercial decisions relating to the Exploitation of the Products in the Markets in accordance with the Licensed Rights, including marketing toolbox, online, channels and pricing. |
| 13.3 | KBI shall from time to time and upon reasonable request provide a set of professionals, representatives or other persons designated by PMI with timely access to KBI’s and its Affiliates’ marketing materials concerning the Products. Use of such marketing materials shall be at PMI’s sole risk. |
| 13.4 | PMI shall from time to time and upon reasonable request provide KBI with copies of PMI’s and its Affiliates’ marketing materials relating to the Products. KBI shall have the right to consult on the marketing activities conducted by PMI in relation to the Products, but PMI shall not be required to implement any changes or suggestions made by KBI except where necessary to rectify any breach of legal duty, non-compliance with Applicable Law or Regulatory Approvals. |
| 13.5 | PMI shall be responsible for the sales and marketing plan for each Launched Market (the “Sales and Marketing Plan”), which shall include specific implementation measures for, without limitation, distribution/penetration ratio, advertising (if legally permitted), promotion, customer service, after-sales service, and the costs and expenses relating thereto. |
| 13.6 | PMI shall provide KBI with an annual business plan (“Annual Business Plan”) per Launched Market which shall set out the business direction and key figures for the upcoming twelve (12) month period in the relevant Launched Market and shall include the then current Sales and Marketing Plan. PMI shall use its reasonable endeavours to achieve the sales and marketing goals set out in such Annual Business Plan. Each Annual Business Plan shall be updated at the latest sixty (60) days after the start of each calendar year following the Effective Date. |
| 13.7 | PMI shall be entitled to amend or revise the Sales and Marketing Plan and the Annual Business Plan in its sole discretion and shall provide KBI with any such amended or revised Sales and Marketing Plan or Annual Business Plan. |
| 13.8 | PMI shall promptly inform KBI of any material changes (whether prospective or actual) in Market Applicable Law or of any other material new developments (whether prospective or actual) in any Launched Market which PMI reasonably expects to have an adverse effect on the Sales and Marketing Plan in the Launched Markets. |
| 13.9 | KBI shall provide PMI with details of any material complaints KBI or any of its Affiliates has received, or may receive in the future, relating to the Products (including those sold or intended for sale in the KBI Markets), together with reports on the manner in which such complaints are being, or have been, dealt with. If a complaint relates to a Product sold in the Markets, including where applicable under clauses 18.5, 22.4, 22.8 and 23.5, the relevant complaint shall be handled and controlled by PMI. KBI shall otherwise handle and control complaints related to a Product sold in the KBI Markets. |
| 14 | Key performance indicators |
| 14.1 | Following Launch of a Product in a Market, PMI shall use reasonable endeavours to ensure that the KPIs for that Product with respect to such Market are met. |
| 14.2 | Subject to clause 14.3, if PMI fails to meet the Minimum KPIs in a Market in the Initial Period then KBI may give PMI written notice that it wishes PMI to terminate sales of the Products in that Market. Upon receipt of such notice, PMI shall be entitled to a [***] grace period to remedy such failure. At the end of such [***] grace period, if PMI has still not satisfied such Minimum KPIs then KBI shall be entitled to terminate the sales of the Products in such Market on [***] written notice to PMI, whereupon the Sell-Out Period and the associated rights of PMI and obligations of KBI under clause 30.1 shall apply in respect of that Market. |
| 14.3 | PMI shall not be liable and KBI shall not serve notice to terminate the sales of Products in any Market under clause 14.2 where PMI’s failure to meet the Minimum KPIs in that Market was due to any Negative Factors and/or a cessation of sales under clause 15.2 and such failure would not have occurred but for those matters. |
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| 15 | cessation of sales |
| 15.1 | If in the reasonable judgment of PMI, the commercialisation of a Product in a Launched Market has not been profitable (including, for example, if revenue earned by PMI minus all sales and marketing expenses incurred by PMI minus royalties, costs of production and other costs paid or due to be paid by PMI in connection with such Market results in a profit margin [***] as per the Expansion Business Plan, PMI shall have the right (in its absolute discretion) to cease sales of the Product in such Market by providing KBI with not less than [***]. |
| 15.2 | Notwithstanding any provision to the contrary in this agreement, PMI may unilaterally cease, without prior notice, the sale of any Products in any Launched Market if, in respect of that Launched Market: |
| (a) | there are allegations or proceedings issued for infringement of any third party IPR in connection with the Products or facts and circumstances exist that are reasonably likely to give rise to such allegations or proceedings; |
| (b) | there is any administrative order, governmental direction, order, revocation of approval, decree or similar arrangement with, or commitment letter or similar submission to, or instances that may breach or infringe Applicable Law or create a risk of non-compliance, or threat of any of the foregoing, which PMI reasonably believes will adversely or materially affect sales of such Products in that Launched Market; or |
| (c) | there is any event which PMI reasonably believes will adversely or materially affect sales of such Products in that Launched Market, and/or cause significant adverse reputational issues (such as product Recalls, product liability Claims, product defects, product, health and scientific standards, PMI’s public principles, or youth access issues in that Launched Market or in other jurisdictions) and/or result or be reasonably likely to result in material liabilities, fines, or other punitive or restrictive measures imposed by any Governmental Official or Governmental Authority (including any actual or anticipated failure to obtain or maintain any Regulatory Approval). |
| 15.3 | PMI shall have the right, upon providing prior written notice to KBI, to recommence or reintroduce sales or commercialization of any or all Products in any or all Markets in which it has previously ceased sales (excluding any Markets terminated by KBI pursuant to clauses 14.2) if, in PMI’s reasonable opinion, the underlying conditions or reasons for which sales were discontinued in such Markets have materially improved or ceased to exist or are likely to do so unless, where sales ceased under clause 15.2(a), no order for Products for the affected Market is placed by PMI or its Affiliates and no Products have been sold in the affected Market in the period of [***] after the related allegations have been withdrawn or the proceedings have been settled or finally determined in circumstances where no right of appeal (or further right of appeal) subsists and KBI has, [***], given PMI written notice that PMI that PMI will longer have the right to sell or commercialise the affected Product in the affected Market on such date. |
| 16 | Royalty payments |
| 16.1 | In consideration for the grant of the Licensed Rights by KBI to PMI, PMI shall, subject to the remainder of this clause 16 and clause 20.12, pay to KBI a royalty calculated by reference to the Base Price of the First Sale of each unit of each Product manufactured pursuant to this agreement as follows: |
| Base Price (USD) (per Product) | Royalty (per Product) |
| [***] | [***] |
| [***] | [***] of Base Price |
| [***] | [***] of Base Price |
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| 16.2 | The parties agree that only a single royalty shall be payable in respect of each unit of a Product and that if any Base Price has more than two decimal places it shall be rounded up to the nearest two decimal places. |
| 16.3 | PMI shall give KBI written notice of any change in Recommended Sales Prices for Products sold in the Markets as soon as reasonably practicable. |
| 16.4 | Before the Launch of the first Product in a Market and each anniversary of such Launch (unless the parties mutually agree to a different date), PMI shall pre-pay to KBI a guaranteed minimum royalty equal to twenty (20%) per cent of the estimated Royalties payable by PMI 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 (as the case may be), based on PMI’s reasonable projections for such Markets in the Annual Business Plan (“Guaranteed Royalty”), subject to an aggregate maximum Guaranteed Royalty payment of one million ($1,000,000) USD for all Markets for each applicable twelve (12)-month period. |
| 16.5 | The Guaranteed Royalty constitutes an advanced payment of Royalties by PMI and shall be credited against any and all Royalties due to KBI from PMI under this agreement before any other credits are applied ([***]). PMI shall not be obliged to pay any Royalties to KBI until the Guaranteed Royalty has been fully utilised. |
| 16.6 | The value of any [***] paid by or due from PMI under this agreement [***] that accrue with respect to the Product (but not, for the avoidance of doubt, any other Products) arising out of [***], or in the case of any [***], any Royalties that accrue with respect to such Product, in each case, irrespective of which Market the Product is sold in (in each case, the “Relevant Royalties”) as set out in clause 16.7 below. For the purposes of this clause 16.6, [***]. |
| 16.7 | [***] shall, subject to clause 16.8, be [***] the Relevant Royalties due from PMI with respect to [***], provided that if: |
| (a) | [***]; |
| (b) | [***]; |
| (c) | [***]; and |
| (d) | [***]. |
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| 16.8 | [***]: |
| (a) | [***]; |
| (b) | [***]; |
| (c) | [***]; and |
| (d) | [***]. |
| 16.9 | [***]. |
| 16.10 | Within sixty (60) days of the end of each Quarter, PMI shall submit or cause to be submitted to KBI a statement in writing (“Royalty Statement”) recording, in reasonably sufficient detail for KBI’s audit purposes, the calculation of: |
| (a) | Royalties due under this agreement in respect of that Quarter (including any credits against such Royalties); and |
| (b) | [***]. |
| 16.11 | Following receipt of a Royalty Statement from PMI under clause 16.10, KBI shall invoice PMI for the Royalties [***] specified in such Royalty Statement. |
| 16.12 | Royalties payable under this agreement shall be paid within thirty (30) days following receipt of an undisputed and valid invoice from KBI pursuant to clause 16.11 to a bank account notified by KBI to PMI in writing. |
| 16.13 | Disputes over the accuracy of Royalty Statements or invoices rendered under clause 16.11 shall be raised within ten (10) Business Days of receipt and shall be determined in accordance with clauses 48 and 49. Any undisputed amounts in Royalty Statements shall be invoiced and paid in accordance with the foregoing, notwithstanding that other amounts are disputed. Interest will be payable on any disputed amounts that are resolved in KBI’s favour at the rate specified in clause 16.17 from the date payment would have been due (but for such dispute) and the payment date inclusive. |
| 16.14 | PMI shall maintain records regarding the Royalties, their calculation and related sales and orders of Products. Such records shall be accurate in all respects and applied on a consistent basis. KBI shall have the right to request access to copies of such records once every calendar year during the Term and Sell-Out Period upon providing thirty (30) days’ prior written notice to PMI and PMI shall not unreasonably deny such request or access to copies of specific records, unless such information is legally privileged and/or its provision would breach any duty of confidence owed by PMI and/or its Affiliates. Where PMI denies access to any such information on the basis that it is legally privileged and/or its provision would breach any duty of confidence owed by PMI and/or its Affiliates, KBI may request that PMI provides such information to an independent auditor appointed by PMI and who owes a duty of confidence to PMI, to verify the calculation of the Royalties at KBI’s cost, provided that the provision of such information does not itself breach confidence or result in the loss of privilege. |
| 16.15 | KBI shall maintain records regarding the sums charged to PMI under this agreement [***], and the calculation of such sums. Such records shall be accurate in all respects and applied on a consistent basis. PMI shall have the right to request access to copies of such records once every calendar year during the Term and Sell-Out Period upon providing thirty (30) days’ prior written notice to KBI and KBI shall not unreasonably deny such request or access to copies of specific records, unless such information is legally privileged and/or its provision would breach any duty of confidence owed by KBI and/or its Affiliates. Where KBI denies access to any such information on the basis that it is legally privileged and/or its provision would breach any duty of confidence owed by KBI and/or its Affiliates, PMI may request that KBI provides such information to an independent auditor appointed by KBI and who owes a duty of confidence to KBI, to verify the calculation of the Royalties at PMI’s cost, provided that the provision of such information does not itself breach confidence or result in the loss of privilege. |
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| 16.16 | Where this agreement states or requires that an amount shall be converted from a local currency to the USD or vice versa (including to calculate the Recommended Sales Price or any other sum used to calculate the Base Price and for the purposes of this clause 16), the parties agree that the rate of exchange shall be the USD rate against an applicable currency based on the PMI Monthly Income Statement Standard Exchange Rate applicable for that month. The PMI Monthly Income Statement Standard Exchange Rate is specified by PMI and is generally calculated as the average rate for the USD against the applicable currency based on data from BGN Bloomberg over a period of thirty (30) consecutive days, for which the last day of such period shall be five (5) Business Days before the last Business Day of the month preceding the applicable month. By way of example, the PMI Monthly Income Statement Standard Exchange Rate for May 2022 shall be calculated with the last day of such period being April 22, 2022 and the first day of such period being March 23, 2022. |
| 16.17 | If either party fails to pay any sum due under this agreement by the due date for payment, such failure shall not, subject to clause 29.2(e), entitle the other party to terminate this agreement, but the non-paying party shall pay to the other interest (calculated on a daily basis) upon demand on the overdue payment from the date when such payment was due to the date of actual payment at a rate of two (2%) per cent above the Bank of England base rate per annum. |
| 16.18 | Any payments to be made by a party to the other party under this agreement shall be reduced by the amount that such paying party is required to withhold pursuant to any Applicable Law (“Withholding Taxes”). The withholding party shall submit proof of payment of the Withholding Taxes to the other party within a reasonable period of time after such Withholding Taxes are remitted to the proper taxing authority. |
| 17 | defects |
| 17.1 | Subject to clause 17.2, KBI shall be responsible for, and shall ensure that there are no Design Defects or E-Liquid Defects (any Design Defect or E-Liquid Defect being a “Relevant Defect”). |
| 17.2 | Save in respect of E-Liquid Defects (for which KBI shall be responsible), KBI shall not be responsible and shall have no liability for: |
| (a) | any defect in a Product that results from a deviation from the Design Specification for the Product during its manufacture or the manufacture of a Product in accordance with a Design Specification that KBI has updated or replaced where, at the date of manufacture of the relevant Product, KBI has advised PMI of the particular defect in writing and a Handover Confirmation for the new Design Specification has been has been signed in accordance with clause 9.6 ([***]) (a “Manufacturing Defect”); |
| (b) | any defect in a Product that originates from a change made to the Product or its Design Specification at PMI’s request or to ensure compliance with PMI Product Standards or Applicable Law in a Market where, in each case, KBI advised PMI of such defect in writing before implementation of the change and PMI elected to proceed with the change notwithstanding that advice (an “Excluded Defect”); or |
| (c) | any defect in the KBI Packaging that results from any unauthorised change or addition made by PMI to such KBI Packaging (including to the Design Specification for such KBI Packaging). |
| 17.3 | In the event of a Relevant Defect, without limiting PMI’s other rights and remedies, PMI may (at its sole discretion): |
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| (a) | require KBI to modify the Design Specification and other Documentation for the relevant Product to remedy the Relevant Defect promptly at KBI’s own cost. The parties shall discuss such modifications as necessary (including any reasonable concerns KBI may have around cost proportionality and timing that PMI may take into account when exercising its rights under this clause 17.3(a)), provided that PMI shall retain discretion over its decision to require KBI to make such modifications; |
| (b) | replace or, where commercially practicable, repair the Products that are affected by the Relevant Defect itself at the expense of KBI; and/or |
| (c) | require KBI to provide financial compensation to PMI for any loss, damage, cost or expense suffered or reasonably incurred by PMI and/or its Affiliates as a result of such Relevant Defect (including reasonable associated shipping, insurance and legal costs) and PMI shall comply with its duty to mitigate any such losses, damages, costs and expenses. |
| 17.4 | If the number of units of any Product affected by a Defect (including any Relevant Defect, Manufacturing Defect and/or Excluded Defect) in any given period exceeds one per cent (1)% of the total number of units of such Product sold by PMI or its Affiliates in the Markets in such period, PMI shall be entitled to conduct a root cause analysis in accordance with Schedule 7. The terms of Schedule 7 shall apply with respect to the root cause analysis and the results thereof. Without limiting Schedule 7 or any of KBI’s other rights or remedies, to the extent the results of such root cause analysis relate to Relevant Defects, KBI shall address the findings and implement the outcomes of such analysis if required by PMI pursuant to clause 17.3 above. |
| 18 | PRODUCT INDEMNITIES |
| 18.1 | During and after the Term of this agreement, KBI shall indemnify and keep indemnified PMI, its Affiliates, and its and their respective officers, directors, employees and agents (together, “PMI Indemnitees”) from and against any and all damages, losses, liabilities, costs and expenses (including reasonable legal and professional fees and costs) suffered or incurred by the PMI Indemnities to the extent arising out of or in connection with any Relevant Defect (including any and all suits, causes of action, disputes, controversies, investigations, notices, Claims, demands and Recalls relating to or arising out of any Relevant Defect) save to the extent such damages, losses, liabilities, costs or expenses are caused by a Manufacturing Defect or an Excluded Defect. PMI shall, and shall procure that the PMI Indemnities, take reasonable steps to mitigate any such damages, losses, liabilities, costs and expenses. |
| 18.2 | During and after the Term, PMI shall indemnify and keep indemnified KBI, its Affiliates, and its and their respective officers, directors, employees and agents (together “KBI Indemnitees”) from and against any loss, damage, liability, cost and expense (including reasonable legal and professional fees) suffered or incurred by the KBI Indemnitees as a result of any Claim associated with the Products where an Excluded Defect constitutes the main cause of such Claim save to the extent that KBI or an Affiliate of KBI is liable for such Claims, demands, actions or proceedings, costs, damages, losses, liabilities or expenses under this agreement. KBI shall, and shall procure that the KBI Indemnities, take reasonable steps to mitigate any such damages, losses, liabilities, costs and expenses. |
| 18.3 | Each party shall notify the other as soon as reasonably practicable of any suit, causes of action, dispute, controversy, investigation, notice, Claim, demand or Recall arising from or alleging a Relevant Defect, Manufacturing Defect, Excluded Defect and/or other kind of defect brought against it and/or any of its Affiliates in relation to any Market (“Product Defect Claim”) and shall provide promptly to the other party copies of all papers and official documents received in respect of any such Product Defect Claim. |
| 18.4 | If either party elects to investigate a Product Defect Claim or the circumstances surrounding a Product Defect Claim, the other party shall use its reasonable efforts to cooperate promptly with the investigating party’s investigations, but such investigation shall not in any way limit or affect the rights and obligations of PMI and KBI under clauses 18.1, 18.2, 18.3, 18.5 and 18.6. |
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| 18.5 | In respect of any Product Defect Claim brought against a PMI Indemnitee and/or a KBI Indemnitee: |
| (a) | PMI shall have the exclusive right, exercisable at its sole discretion, to control the conduct of such Product Defect Claim, including any counterclaim to, and defence and settlement of, such Product Defect Claim, subject to clause 18.5(e); |
| (b) | KBI shall not make any admission of liability, agreement or compromise in relation to the Product Defect Claim to any Third Party, without the prior written consent of PMI (not to be unreasonably withheld or delayed); |
| (c) | KBI shall, at its own cost (in respect of Product Defect Claims arising from Relevant Defects but in all other cases at PMI’s cost), provide reasonable technical and such other forms of assistance (including reasonable access on reasonable notice to its premises and its officers, directors, employees, agents, representatives or advisers, and to any relevant accounts, documents and records within the power or control of KBI and/or its Affiliates, subject always to clauses 3.2 and 3.3, and becoming a named party in proceedings) as are necessary to assist PMI in relation to the Product Defect Claim and shall ensure that its counsel cooperates closely with PMI’s counsel in relation to such Product Defect Claim, provided that PMI shall have the final decision-making authority in relation to such Product Defect Claim, subject to clause 18.5(e); |
| (d) | except to the extent any Claim arises from a Manufacturing Defect and/or Excluded Defect, KBI shall have a right actively to consult on the conduct of such Product Defect Claim and PMI shall take KBI’s reasonable views into account, provided that PMI shall have the final decision-making authority in relation to the conduct of such Product Defect Claim subject to clause 18.5(e), and where KBI requests in writing information relating to the Product Defect Claim for such purpose, PMI shall not unreasonably withhold or condition the provision of such information unless such information is legally privileged and/or its provision would breach any duty of confidence owed by a PMI Indemnitee; and |
| (e) | [***]. |
| 18.6 | KBI shall notify PMI in writing as soon as practicable and in any event within two (2) Business Days of any interaction or communication (including questions, notice of inspection, correspondence and sample requests) it and/or any of its Affiliates has with a Governmental Authority in any Market related to a Product. PMI shall have the exclusive right to lead and control the interaction or communication with the Governmental Authority (other than with a Governmental Authority in the US) and KBI shall, subject to clause 3.3, provide to PMI all information and documents as PMI may reasonably request regarding such interaction or communication. KBI shall: |
| (a) | provide PMI with a reasonable opportunity to comment on the proposed response to such interaction or communication before the same is sent by KBI or the Affiliate of KBI; |
| (b) | make all reasonable efforts to incorporate any observation or recommendation of PMI in any response or reply to such interaction or complaint; and |
| (c) | not make any admission of liability without the prior written consent of PMI (not to be unreasonably withheld or delayed). |
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| 19 | new PROPERTY |
| 19.1 | If KBI and/or any Affiliate of KBI develops or has developed on its behalf any New Property, PMI shall have a separate right [***] on an exclusive basis subject to the following terms. |
| 19.2 | KBI shall notify PMI in writing of the New Property (“New Property Notice”) as soon as KBI or an Affiliate of KBI is reasonably certain of: [***], subject to clauses 3.2 and 3.3 and subject to a non-disclosure agreement, to allow PMI to decide whether to [***]. If PMI notifies KBI that such information is [***]. |
| 19.3 | Subject to clause 19.4, PMI shall have [***] from the date of receipt of a New Property Notice to decide whether to [***]. |
| 19.4 | If PMI notifies KBI [***]. |
| 19.5 | If PMI decides to [***], it shall send a written notice [***] to KBI within the [***] and the parties shall negotiate in good faith to agree the [***] and any amendments to this agreement. If the parties agree on [***], which shall as agreed under this clause 19.5). |
| 19.6 | The parties shall take all relevant factors into account in relation to the [***] resulting from [***], including: (a) legal review and changes necessary for compliance with any Applicable Laws; and (b) any regulatory clearances/approvals that may be required ([***]) in the Markets to which the [***] relates (including providing for the consequences of a failure to obtain such clearances/approvals). |
| 19.7 | Save as set out in clause 4, KBI and its Affiliates shall not be restricted pursuant to this agreement with respect to the New Property [***] if: |
| (a) | [***]; |
| (b) | [***]; or |
| (c) | [***]. |
| 19.8 | KBI shall not and shall procure that its Affiliates shall not [***] to the New Property [***]. |
| 19.9 | [***]. |
| 20 | registration and maintenance of intellectual property |
| 20.1 | The parties shall meet and discuss a strategy for the registration of the Licensed IPR (including Joint Improvement IPR) in the Markets as a whole and on a Market-by-Market basis by KBI (“Registration Strategy”) as soon as reasonably practicable following the Effective Date and shall meet from time to time during the Term (including promptly after the development of any Improvement to a Product or any Joint Improvement IPR, and at either party’s request) to review and update the Registration Strategy. |
| 20.2 | PMI shall, in its sole discretion, set the Registration Strategy provided that: (a) PMI may not require KBI to register any Licensed IPR outside of the Markets pursuant to the Registration Strategy, and (b) nothing shall prevent KBI from registering any Licensed IPR in a Market, if KBI requests that the registration of such Licensed IPR in that Market is included on the Registration Strategy but PMI fails to add it to the Registration Strategy within thirty (30) days of such request. |
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| 20.3 | KBI shall, at its own cost and expense, implement, or procure that Bidi implements, the Registration Strategy diligently and in a timely manner having regard to any reasonable comments and suggestions made by PMI and shall keep PMI informed and up to date in relation to the progress of any applications including if KBI misses or is likely to miss any material date. |
| 20.4 | PMI shall provide all assistance and co-operation reasonably requested by KBI or its Affiliates in relation to any application and related proceedings made by or on behalf of KBI or its Affiliates in relation to Licensed IPR to be registered under the Registration Strategy (together the “Licensed IPR Registration Process”). |
| 20.5 | KBI shall notify PMI of all material dates relevant to the application and registration of any Licensed IPR in the Markets (including dates of disclosure, grace periods and similar) as soon as reasonably practicable and shall use best efforts to notify at least ninety (90) days before any filing date or deadline or thirty (30) days before any other key dates or deadlines relating to the application or registration process (including dates relating to objections, oppositions or similar). |
| 20.6 | Where the Registration Strategy requires KBI to register any Licensed IPR in a Market: |
| (a) | KBI may by giving PMI written notice request that PMI takes exclusive control of the conduct of any application and related proceedings made by or on behalf of KBI or an Affiliate of KBI in relation to such IPR and/or apply to register such IPR in KBI’s name and at KBI’s cost, [***]; and |
| (b) | if KBI is in breach of clause 20.3 then PMI may, by giving not less than [***] written notice to KBI if KBI has failed to remedy the breach during such period, [***], |
and each such circumstance:
| (c) | KBI shall provide all assistance and co-operation requested by PMI in relation to such application and related proceedings (including requiring any agent or counsel to take instructions from PMI directly); |
| (d) | KBI hereby irrevocably appoints PMI to be its attorney in its name and on its behalf to execute documents, use KBI’s name and do all things which are necessary or desirable for PMI to conduct any such application and related proceedings and to register such Licensed IPR. PMI may appoint one or more persons (including counsel) to act as substitute attorneys for PMI and to exercise such of the powers conferred by this power of attorney as PMI thinks fit and revoke such appointment and KBI shall do all things necessary to effect such appointment; |
| (e) | KBI shall promptly [***] received by or on behalf of KBI and/or an Affiliate of KBI; |
| (f) | unless required by Applicable Law, KBI shall not interact or communicate with any registry or applicable Governmental Authority in relation to the application and related proceedings for registration of the relevant Licensed IPR without PMI’s prior written approval and KBI shall submit to such registry or applicable Governmental Authority such documentation and information as reasonably required by PMI when required by PMI; |
| (g) | KBI shall indemnify and keep indemnified PMI from and against all costs and expenses properly incurred by PMI and/or its Affiliates arising out of or in connection with the exercise of PMI’s rights and/or obligations under this clause 20.6; and |
| (h) | PMI shall keep KBI informed and up to date in relation to the progress of any applications. |
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| 20.7 | PMI shall have the exclusive right to register and apply to register IPR anywhere in the world in respect of the Product Branding and in any Improvement to any PMI Background IP and/or the Product Branding. |
| 20.8 | Subject to clauses 10.4, 10.5 and 20.6, PMI shall not and shall procure that none of its Affiliates shall, at any time, apply to register any IPR identical or confusingly similar to the KBI Branding for any goods and services, or otherwise use any such IPR unless permitted or required under this agreement. |
| 20.9 | KBI shall not, and shall procure that none of its Affiliates shall, at any time apply to register any IPR identical to or confusingly similar to or that incorporates the Product Branding for any goods and services, or otherwise use any such IPR. |
| 20.10 | KBI shall, and shall procure that Bidi shall, promptly provide any and all assistance and do all things reasonably required by PMI, at PMI’s reasonable cost, to enable PMI or any of its Affiliates to record the licence of the Licensed IPR under this agreement in any registry or with any applicable Governmental Authority in a Market, including by entering into separate or short form sub-licences, letters of consent, power-of-attorneys, applications to record sub-licences, and schedules related to the aforementioned, which reflect the licences granted herein and the terms thereof. |
| 20.11 | KBI shall, or shall procure that Bidi shall, at its own cost, maintain and renew any Licensed IPR that are registered at the Effective Date in the Markets or which become registered after the Effective Date and, subject to clause 20.6(a), diligently continue the prosecution of all applications for Licensed IPR in the Markets. |
| 20.12 | [***]: |
| (a) | [***]; or |
| (b) | [***], |
[***].
| 20.13 | KBI shall, and shall procure its Affiliates shall: |
| (a) | not, save with the prior written consent of PMI (not to be unreasonably withheld or delayed) assign, transfer, surrender or abandon any of the registrations or applications for Licensed IPR, or allow any of them to lapse; |
| (b) | not take any action or omit to do any thing that harms or materially diminishes the value of, or the goodwill associated with, the Licensed IPR or that jeopardises or potentially invalidates the Licensed IPR. |
| 20.14 | Each party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this clause 20. |
| 21 | development of intellectual property |
| 21.1 | Subject to clause 21.2 and any agreement between the parties to the contrary, where the parties agree in writing that they are developing [***]: |
| (a) | the IPR in and to such [***] shall belong to KBI and, [***]; |
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| (b) | the [***] that [***] (including as set out in clauses 3.1(a), 3.1(b) and 3.1(c)) and: (i) [***] during the Term of this agreement and the Sell-Out Period and (ii) [***]; and |
| (c) | the parties’ decisions and related rights and obligations regarding [***] shall be governed by clauses 20.1 to 20.6 (inclusive) and clauses 20.10 to 20.14 (inclusive) shall apply in relation to [***]. |
| 21.2 | The parties agree that any [***] shall belong to PMI. To the extent such [***] vest in KBI and/or an Affiliate of KBI, KBI hereby assigns, or shall procure the assignment by its Affiliate of, such [***] to PMI with full title guarantee. |
| 21.3 | Subject to clause 21.2, if KBI and/or its Affiliates [***]: |
| (a) | if PMI so requests (and without charge), subject to clauses 3.2 and 3.3, KBI shall [***] under clause 3; |
| (b) | [***] shall automatically become an integral part of the Licensed Rights and licensed to PMI under the terms of clause 3 at [***]; and |
| (c) | the parties’ decisions and related rights and obligations regarding the [***] shall be governed by clauses 20.1 to 20.6 (inclusive) and clauses 20.10 to 20.14 (inclusive) shall apply in relation to maintenance of such [***]. |
| 22 | ENFORCEMENT OF INTELLECTUAL PROPERTY |
| 22.1 | Subject to clause 22.11, each party shall notify the other as soon as reasonably practicable of any information it has or its Affiliates have relating to any actual, suspected or threatened infringement by a Third Party of the Licensed IPR or breach of confidence, passing off or actionable act of unfair competition by a Third Party in relation to the Products in any of the Markets (including any application for, or grant of, any IPR in the Markets which conflict with any of the Licensed IPR) (“Infringing Action”). |
| 22.2 | On a Quarterly basis, or as reasonably necessary during the Term of this agreement, the parties shall, subject to clause 22.11, [***]: |
| (a) | [***]; |
| (b) | [***]; |
| (c) | [***]; |
| (d) | [***]. |
| 22.3 | Subject to clause 22.4, KBI shall implement and execute, at its own cost, the [***] and in doing so: |
| (a) | KBI shall only use professional outside counsel, and shall commit a reasonable budget to [***]; |
| (b) | KBI shall keep PMI reasonably and promptly informed of the [***]; |
| (c) | PMI shall have the right, but not the obligation, to [***] according to clause 22.2(d) above, and in case such [***]; and |
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| (d) | to the extent permitted by law, cooperate and coordinate with [***]. |
| 22.4 | Subject to clause 22.7, PMI shall have the exclusive right, exercisable at its sole discretion, to [***]. |
| 22.5 | Subject to clause 22.11, PMI shall give KBI [***] written notice of its or its Affiliates intention to [***], in sufficient detail to enable KBI to [***]: |
| (a) | bear all cost and expense related to any action or proceedings brought in relation to [***] equally, save for any costs and expenses that are expressly allocated to a party under clause 22.8 or for which a party is otherwise responsible for under this agreement; and |
| (b) | [***]. |
| 22.6 | If duly notified under clause 22.5 and KBI does not approve [***] in writing before [***], PMI may [***] and shall: |
| (a) | [***]; and |
| (b) | [***]. |
| 22.7 | If PMI notifies KBI in writing that it will not pursue [***], KBI may, based solely on [***]: |
| (a) | bear all cost and expense related to any action or proceedings brought in relation to such [***]; and |
| (b) | [***]. |
| 22.8 | In respect of any action and/or proceedings brought by PMI against a Third Party in relation to any Infringing Action in accordance with this clause 22 then, subject to clause 22.11: |
| (a) | to the extent it is based on the Licensed IPR, KBI shall have the right to appoint its own counsel at its own cost to advise KBI in relation to and to participate in (but not control) the proceedings initiated and conducted by PMI in relation to the Infringing Action and shall ensure that its counsel cooperates closely with PMI’s counsel in relation to such Infringing Action, provided that PMI shall have the final decision-making authority in relation to such Infringing Action; |
| (b) | KBI shall have a right actively to consult on such Infringing Action prior to PMI initiating any proceedings in relation to the Infringing Action against a Third Party (provided such consultation does not prejudice the Licensed IPR, Licensed Rights or the Products or PMI’s interest in them) and during such proceedings, and PMI shall take KBI’s reasonable views into account, provided that PMI shall have the final decision-making authority in relation to such Infringing Action, and where KBI requests in writing information relating to the Infringing Action for any purpose, PMI shall not unreasonably withhold or condition the provision of such information unless to the extent that any such information is legally privileged and/or its provision would breach any duty of confidence owed by a PMI Indemnitee; and |
| (c) | KBI shall, at its own cost, provide technical and such other forms of assistance (including access to its premises and its officers, directors, employees, agents, representatives or advisers, and to any relevant assets, accounts, documents and records within the power or control of KBI and/or its Affiliates and becoming a named party in proceedings) as are necessary to provide reasonable assistance to PMI in relation to the Infringing Action. |
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| 22.9 | In respect of any Infringing Action brought by KBI against a Third Party in accordance with this clause 22 then: |
| (a) | KBI shall keep PMI updated in relation to any progress and developments regarding such Infringing Action; |
| (b) | PMI shall have the right to appoint its own counsel at its own cost to advise PMI in relation to and to participate in (but not control) the Infringing Action proceedings initiated and conducted by KBI in relation to the Infringing Action and shall ensure that its counsel cooperates closely with KBI’s counsel in relation to such Infringing Action, provided that KBI shall have the final decision-making authority in relation to such Infringing Action; and |
| (c) | PMI shall have a right actively to consult on such Infringing Action prior to KBI initiating any proceedings in relation to the Infringing Action against a Third Party (provided such consultation does not prejudice the KBI IP or the interest of KBI, Bidi and their respective Affiliates in them) and during such proceedings, and KBI may take PMI’s reasonable views into account, provided that KBI shall have the final decision-making authority in relation to such Infringing Action, and where PMI requests in writing information relating to the Infringing Action for such purpose, KBI shall not unreasonably withhold or condition the provision of such information unless to the extent that such information is legally privileged and/or its provision would breach any duty of confidence owed by KBI. |
| 22.10 | Each party shall within [***] provide to the other party a breakdown of the [***] that are to [***] the parties under clause 22.5(a). [***]. |
| 22.11 | Nothing in this clause 22 shall restrict PMI’s and/or any of its Affiliate’s right to [***]. |
| 22.12 | Each party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this clause 22. |
| 23 | INFRINGEMENT CLAIMS BY THIRD PARTIES |
| 23.1 | During and after the Term of this agreement, subject always to clause 23.2 and the IP Waiver Letter, KBI shall indemnify and keep indemnified the PMI Indemnitees from and against any and all damages, losses, liabilities, costs and expenses (including reasonable legal and professional fees and costs, and costs and expenses of any Recall and mitigating action) suffered or reasonably incurred by the PMI Indemnitees arising out of or in connection with any Claim that any Product or KBI Packaging made in accordance with this agreement and/or the exercise of the Licensed Rights in accordance with the terms of this agreement infringes, misuses or misappropriates any third party’s IPR, save to the extent such Claim results from use of any PMI Background IP or results from a Manufacturing Defect (“IP Claim”). |
| 23.2 | KBI shall not be liable under this agreement for infringement, misuse or misappropriation of: |
| (a) | [***]; or |
| (b) | certain specific third party IPR in a particular Market where: |
| (i) | [***]; and |
| (ii) | [***] |
[***].
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| 23.3 | For the avoidance of doubt, KBI’s liability for infringement, misuse or misappropriation of third party IPR shall only be excluded by virtue of clause 23.2 with respect to the specific third party IPR and Market identified by KBI under clauses 23.2(b)(i)(A) and (if applicable) 23.2(b)(i)(B) and not any other third party IPR or Market. |
| 23.4 | Each party shall notify the other as soon as reasonably practicable of any IP Claim brought by a Third Party against it and/or any of its Affiliates, any opposition to any of the Licensed IPR, any claim that any of the Licensed IPR is invalid, and any other form of attack, charge or claim to which the Licensed IPR may be subject (together, an “Infringement Claim”). |
| 23.5 | In respect of any Infringement Claim brought against a PMI Indemnitee, Bidi or KBI and/or any of their respective Affiliates: |
| (a) | PMI shall have the exclusive right, exercisable at its sole discretion, to control the conduct of such Infringement Claim, including any counterclaim to, and defence and settlement of, save that, to the extent the Infringement Claim relates to the Licensed IPR: |
| (i) | KBI shall have a right to actively consult on such Infringement Claim and PMI shall take KBI’s reasonable views into account, provided that PMI shall have the final decision-making authority in relation to such Infringement Claim, and where KBI requests in writing information relating to the Infringement Claim for such purpose (including reasonably regular updates and material draft pleadings relating to the defence in advance), PMI shall not unreasonably withhold or condition the provision of such information, provided such information is not legally privileged and/or its provision would not breach any duty of confidence owed by the PMI Indemnitees; |
| (ii) | KBI shall have the right to appoint its own counsel at its own cost to advise KBI in relation to and to participate in (but not control) the Infringement Claim proceedings initiated and conducted by PMI and shall ensure that its counsel cooperates closely with PMI’s counsel in relation to such Infringement Claim, provided that PMI shall have the final decision-making authority in relation to such Infringement Claim; and |
| (iii) | PMI shall not, without the prior consent of KBI (such consent not to be unreasonably withheld or delayed): (i) make any admission that the Product or Licensed IPR in issue infringes the IPR asserted by the third party; (ii) conclude a settlement where the terms of such settlement require a payment to the third party that would be met by KBI under the indemnity in clause 23; or (iii) take any decision to appeal or not to appeal a relevant judgment against KBI or its Affiliates, or the Products; |
| (b) | each of PMI and KBI shall act in good faith with one another in defending and settling such Infringement Claim; |
| (c) | KBI shall not make any admission of liability, agreement or compromise in relation to the Infringement Claim without the prior written consent of PMI other than to PMI; and |
| (d) | KBI shall, at its own cost, provide technical and such other forms of assistance (including access to its premises and its officers, directors, employees, agents, representatives or advisers, and to any relevant assets, accounts, documents and records within the power or control of KBI and/or its Affiliates and becoming a named party in proceedings) as are necessary to assist PMI in relation to the Infringement Claim and shall ensure that its counsel cooperates closely with PMI’s counsel in relation to such Infringement Claim, provided that PMI shall have the final decision-making authority in relation to such Infringement Claim. |
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| 23.6 | Each party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this clause 23. |
| 24 | liability |
| 24.1 | Nothing in this agreement shall limit or exclude: |
| (a) | either party’s liability for: |
| (i) | death or personal injury caused by its negligence; |
| (ii) | fraud or fraudulent misrepresentation; or |
| (iii) | any other liability which cannot be limited or excluded by applicable law; |
| (b) | either party’s liability: |
| (i) | under clause 23 (Infringement Claims by Third Parties); |
| (ii) | for breach of clause 31 (Confidentiality); |
| (iii) | for any claim or action relating to any liability suffered or incurred as a result of gross negligence or intentional or wilful misconduct; or |
| (c) | KBI’s liability for any claim or action relating to any liability suffered or incurred as a result of death or personal injury arising out of or relating to Defect (other than a Manufacturing Defect or the Excluded Defect). |
| 24.2 | Subject to clause 24.1, neither party shall be liable for any punitive, exemplary, treble or other multiple damages, or for any indirect or consequential losses, or for any loss of anticipated savings or business goodwill, under or in connection with this agreement. |
| 24.3 | Subject to clause 24.1, the total aggregate liability of KBI and its Affiliates under this agreement in the Initial Period, and then separately in each Extension Period, (whether from breach of contract, tort (including negligence), breach of statutory duty, strict liability or otherwise) shall in no circumstances exceed the greater of: |
| (a) | ten million ($10,000,000) USD; and |
| (b) | an amount equal to the total of the Royalties due to KBI (but not yet paid) plus the Royalties (including the Guaranteed Royalty) paid to KBI under this agreement during the immediately preceding twelve (12) consecutive months |
provided that the amount under (b) shall never exceed thirty million ($30,000,000) USD.
| 24.4 | Any liability on the part of KBI in respect of the matters set out in clauses 24.1 shall not utilise or reduce the cap on KBI’s liability under clause 24.3. |
| 24.5 | If a payment due from either party under any indemnity in this agreement is subject to tax (whether by way of direct assessment or withholding at its source), the receiving party shall be entitled to receive from the paying party such amounts as shall ensure that the net receipt, after tax, to the receiving party in respect of the payment is the same as it would have been were the payment not subject to tax but if the receiving party receives a credit from the relevant tax authority on account of such additional sum paid, the receiving party shall pay such credit to the paying party within thirty (30) days of receipt. |
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| 25 | Parent company guarantee, ip side letter and IP WAIVER LETTER |
| 25.1 | On or before the Effective Date KBI shall procure that each Guarantor shall: |
| (a) | execute and deliver to PMI the Parent Company Guarantee; and |
| (b) | deliver to PMI a certified copy of the board minutes of each Guarantor approving the execution of such Parent Company Guarantee. |
| 25.2 | On or before the Effective Date PMI shall execute and deliver the IP Side Letter to Bidi and Kaival and KBI shall procure that Bidi and Kaival shall execute and deliver to PMI the IP Side Letter. |
| 25.3 | On or before the Effective Date PMI shall execute and deliver to KBI the IP Waiver Letter and KBI shall execute and deliver the IP Waiver Letter to PMI. |
| 26 | insurance |
| 26.1 | During the Term of this agreement and for a period of six (6) years after the expiry or termination of this agreement, KBI shall maintain in force, with a reputable A rated insurance company, such insurance as may be necessary to cover KBI’s liabilities that may arise under or in connection with this agreement including: |
| (a) | public liability insurance at an amount not less than ten million ($10,000,000) USD per event; |
| (b) | if KBI employs any person, employer’s liability insurance at an amount not less than ten million ($10,000,000) USD per event; and |
| (c) | professional indemnity insurance at an amount not less than ten million ($10,000,000) USD per event. |
| 26.2 | At the PMI’s request KBI shall promptly provide both the insurance certificate giving details of cover and the receipt for the current year’s premium in respect of each insurance. |
| 26.3 | KBI shall ensure that PMI’s interest is noted on each insurance policy, or that a generic interest clause has been included. |
| 26.4 | KBI shall notify PMI promptly in writing of: |
| (a) | any material changes to the level, type or other material provisions of insurance cover from those notified to PMI; and |
| (b) | any fact, relevant circumstance or matter that it becomes aware of which has caused or is reasonably likely to cause the relevant insurer to give notice to cancel, rescind, suspend or avoid any insurance or any cover or claim under any insurance. |
| 27 | corporate REPRESENTATIONS and WARRANTIES |
| 27.1 | PMI warrants and represents to KBI that: |
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| (a) | it is a company duly incorporated and validly existing under the laws of Switzerland; |
| (b) | it has all corporate power, authority and approvals required to enter into, execute, and deliver this agreement and to perform its obligations under this agreement; |
| (c) | it has obtained and shall maintain throughout the Term of this agreement and the Sell-Out Period all consents, approvals, licenses, permits, authorisations, certifications, and registrations with any Governmental Authority required for the performance of its obligations under this agreement. |
| 27.2 | KBI warrants and represents to PMI that: |
| (a) | it is a company duly incorporated and validly existing under the laws of Delaware, the US; |
| (b) | it has all corporate power, authority and approvals required to enter into, execute, and deliver this agreement and to perform its obligations under this agreement; |
| (c) | it has obtained and shall maintain throughout the Term of this agreement and the Sell-Out Period all consents, approvals, licenses, permits, authorisations, certifications, and registrations with any Governmental Authority required for the performance of its obligations under this agreement except for the Regulatory Approvals. |
| 28 | KBI REPRESENTATIONS and WARRANTIES |
| 28.1 | KBI warrants, represents and undertakes to PMI on an ongoing basis (unless otherwise stated below) that: |
| (a) | it is the sole legal and beneficial owner of all Licensed IPR or the exclusive licensee in relation to the Markets of all Licensed IPR, with the right to license Licensed IPR to PMI on an exclusive basis and otherwise on the terms of this agreement; |
| (b) | the Licensed IPR are free from all Encumbrances other than the right for Kaival to distribute products in the KBI Markets under the Distribution Agreement; |
| (c) | KBI and/or its Affiliates have not as at the Effective Date, and shall not on or after the Effective Date grant any third party any right, licence, waiver, covenant not to assert or sue, option or other beneficial right under or in connection with: (i) any Product in any Market other than New Property in respect of which KBI is unrestricted pursuant to clause 19.7 or (ii) the IPR licensed or to be licensed under this agreement in relation to any Market (including any right to obtain ownership or a licence of such IPR); |
| (d) | without limiting clauses 28.1(c) and 28.1(k), the Distribution Agreement has been amended before the Effective Date such that, after the Effective Date and for the duration of the Agreement and Sell-Out Period, Kaival has no right to distribute any present or future Product in any Market and, subject to clause 19.7, no right of first refusal or first offer in relation to any New Property (or the IPR therein) in any Markets, and KBI shall promptly provide PMI with written evidence of such amendment upon request; |
| (e) | save for Regulatory Approvals, and the PMI Branding which PMI shall provide, and subject to clause 23.2 [***], the Licensed Rights are reasonably sufficient for, and comprise all the Materials and IPR reasonably necessary for, the Exploitation of the Products and KBI Packaging as permitted under this agreement; |
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| (f) | subject to clause 23.2 [***], from the date on which PMI begins to Exploit the Products or Licensed Rights in that Market in accordance with clause 3, the Licensed IPR are, or upon issuance will be, valid, subsisting and enforceable against any Third Party; |
| (g) | as at the Effective Date, [***] nothing has been done or failed to be done by KBI and/or its Affiliates that will or may cause the Licensed IPR with respect to the Markets to be invalid, vulnerable to cancellation or revocation, or unenforceable, or for any application comprised in such Licensed IPR not to proceed to grant; |
| (h) | all maintenance and renewal fees in relation to the Licensed IPR have been duly paid in full and on time and there are no outstanding or missed official actions or other responses required by any patent or trademark office or registry in respect of the same; |
| (i) | subject to clause 23.2 [***], save for any PMI Background IP, the Products and KBI Packaging made pursuant to this agreement, their Exploitation, and the exercise of the Licensed Rights in relation to the Markets and other territories as permitted in this agreement, will not infringe, misuse or misappropriate any third party’s IPR; |
| (j) | as at the Effective Date, so far as KBI is aware, there has been no infringement by any third party of any Licensed IPR, nor any third party breach of confidence, passing off or actionable act of unfair competition in relation to such Licensed IPR and no such infringement, breach of confidence, passing off or actionable act of unfair competition is current or anticipated; |
| (k) | it has not granted, and will not grant, any rights that conflict with the rights it grants to PMI under this agreement or that would otherwise prevent PMI from exercising its rights or performing its obligations under this agreement; |
| (l) | it shall perform the Development Services and ensure that its staff provide services and give advice pursuant to clause 5.4 in a professional manner, using reasonable skill and care and personnel who are sufficiently qualified, skilled and experienced, and in compliance with Applicable Law; |
| (m) | that it does not have, and its Affiliates do not have, any officers, directors or employees who are Government Officials and it shall inform PMI in writing as soon as reasonably practicable if any officers, directors or employees become Government Officials; |
| (n) | as at the Effective Date, KBI and/or its Affiliates does not sell and has not sold any Product outside of the US, nor has KBI and/or its Affiliates applied for any Regulatory Approval in relation to any Product outside the US; and |
| (o) | [***], no instances of material property damage, serious or disabling personal injury, or death caused by or associated with any of the Products or KBI Packaging including any (i) adverse event or experience report accompanied by a medical certificate; or (ii) any report of life-threatening event, persistent or significant disability or incapacity, long-term hospitalization, medical treatment or birth defect are known by or have been reported to KBI and/or KBI’s Affiliates, and KBI will promptly notify PMI and provide PMI with all relevant details upon KBI and/or KBI’s Affiliates becoming aware of the occurrence of any of the foregoing events. |
| 29 | termination |
| 29.1 | Without affecting any other right or remedy available to it, PMI may terminate this agreement (in whole or in part): |
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| (a) | at any time by giving not less than [***] written notice to KBI; |
| (b) | [***] upon written notice or [***] as specified by PMI in such notice if: |
| (i) | KBI commits a material breach of any term of this agreement and (if such breach is remediable) fails to remedy that breach within a period of [***] after being notified in writing to do so; |
| (ii) | if there is a Change of Control; or |
| (iii) | if an Insolvency Event occurs in relation to KBI. |
| 29.2 | Without affecting any other right or remedy available to it, KBI may terminate this agreement (in its entirety): |
| (a) | at any time by giving not less than [***] written notice to PMI; |
| (b) | by giving not less than [***]; |
| (c) | [***]; |
| (d) | [***] upon written notice or [***] as specified by KBI in such notice if PMI commits a material breach of any term of this agreement (excluding failure to meet the KPIs which is governed by clause 14.2) and (if such breach is remediable) fails to remedy that breach within a period of [***] after being notified in writing to do so; |
| (e) | [***] upon written notice or upon such date as specified by KBI in such notice if PMI fails to [***] payments due under this agreement before, on or within [***] of the applicable due date for payment provided that KBI has notified PMI in writing that [***] is overdue at least [***] before serving its notice to terminate; or |
| (f) | at the end of the Initial Period by giving PMI at least [***] written notice if the Products [***]provided that such failure is due to PMI’s deliberate acts or omissions. |
| 30 | consequences of termination |
| 30.1 | Upon expiry or termination of this agreement (in whole or in part) for any reason, a six (6) month period (“Sell-Out Period”) shall commence to allow for the sell-off of Products made or ordered and scale down the business. Without prejudice to clause 30.6, during the Sell-Out Period: |
| (a) | KBI shall collaborate with PMI to enable PMI to continue to sell Products and KBI Packaging whilst scaling down the business in a smooth and orderly fashion; |
| (b) | notwithstanding the termination or expiry of this agreement, PMI’s exclusive licence pursuant to clause 3.1 and KBI’s obligations under clauses 4 and 5, together all provisions in clauses 20, 22 and 28, shall continue during the Sell-Out Period; and |
| (c) | PMI shall continue to pay to KBI the Royalties for sales of Products it makes and sells in accordance with clause 16, after the application of applicable credits thereunder. |
| 30.2 | On expiry or termination of this agreement for any reason and subject to any express provisions set out elsewhere in this agreement: |
| (a) | all rights, licences and sub-licences granted pursuant to this agreement shall cease; and |
41
| (b) | each party shall cease to use, and (at the other party’s election) return or destroy, the other party’s Confidential Information save to the extent such party requires that Confidential Information to continue to perform its obligations and exercise its rights under this agreement and except for one copy of such Confidential Information which may be kept solely for archival purposes and/or for legal and/or regulatory purposes for no longer than permitted by Applicable Law. |
| 30.3 | In the event of termination of this agreement by PMI for breach by KBI, without limiting PMI’s other rights and remedies, KBI shall promptly and not later than [***] from the date of a notice by PMI to KBI, repay any [***] to PMI. |
| 30.4 | In the event of termination or expiry of this agreement (other than termination by KBI due to a breach by PMI), KBI shall promptly and within ninety (90) days from the date of a notice by PMI repay to PMI any portion of the Guaranteed Royalty paid by PMI that has not been utilised as payment for Royalties due under this agreement. |
| 30.5 | Termination or expiry of this agreement shall not affect any rights, remedies, obligations or liabilities of the parties that have accrued up to the date of termination or expiry, including the right to claim damages in respect of any breach of the agreement which existed at or before the date of termination or expiry. |
| 30.6 | Any provision of this agreement that expressly or by implication is intended to come into or continue in force on or after termination or expiry of this agreement, including clauses 15, 17, 18, 21.1(b)(ii), 21.3(c), 23, 25, 26 and 30 to 48, shall remain in full force and effect. |
| 31 | CONFIDENTIALITY |
| 31.1 | Subject to clauses 31.2 and 31.3, each party undertakes to the other: |
| (a) | to keep all Confidential Information strictly confidential; |
| (b) | not to disclose the Confidential Information in whole or in part to any third party; and |
| (c) | to use the Confidential Information solely in order to comply with its obligations under this agreement or to receive the benefit of this agreement (the “Purpose”) and not otherwise for its own benefit or the benefit of any third party. |
| 31.2 | Each party may disclose the other party’s Confidential Information: |
| (a) | to its Affiliates and its and their respective its employees, officers, contractors, subcontractors, representatives and advisers (“Representatives”) who need to know such information for the Purpose. Each party shall ensure that Representative to whom a disclosure is made is subject to equivalent obligations of confidentiality as those that bind the party under this clause 31.2 and each party shall be liable for the acts and omissions of each such Representative that lead to a breach of that party’s obligations under this clause 31.2; and |
| (b) | as may be required by law, a court of competent jurisdiction, a Governmental Authority or a recognised securities exchange provided that: (i) the party to which the Confidential Information relates has been notified by the party intending to disclose it of the intended disclosure prior to the disclosure taking place (where permitted); and (ii) the party intending to disclose the Confidential Information has provided (where permitted) such assistance as has been reasonably requested by the party to which the Confidential Information relates in order to restrict the scope of the intended disclosure to the maximum effect; |
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| (c) | as is reasonably necessary: (i) in order to comply with, or take the benefit of, clause 3; (ii) to apply for, obtain and maintain Regulatory Approvals and make related filings in relation to the Products in any Markets and to respond to Regulatory Authorities; and (iii) to apply for, prosecute, enforce, defend and maintain any IPR where permitted under this agreement; |
| (d) | in the case of the PMI only, to PMI’s actual or potential sub-licensees and/or other third parties permitted to Exploit the Licensed Rights in accordance with this agreement and Sub Licences, provided that PMI shall be liable for the compliance of such third parties and sub-licensees with the obligations in this clause 31 and shall ensure that any such third party and sub-licensees to whom a disclosure is made is subject to equivalent obligations of confidentiality as those that bind PMI under this clause 31.2. |
| 31.3 | The obligations of confidentiality under this agreement shall not apply (or shall cease to apply as the case may be) to any Confidential Information which: |
| (a) | becomes public knowledge other than as a result of a breach of this clause 31; |
| (b) | was or is lawfully obtained by the receiving party without any obligation of confidentiality from a third party who was or is entitled to disclose it; or |
| (c) | was independently created by the receiving party without the use of, or reference to, any of the disclosing party’s Confidential Information. |
| 31.4 | Save as permitted under clause 31.2(b), neither party shall otherwise make, or permit any person to make, any public announcement concerning the subject matter or terms of this agreement, the transactions contemplated by it, or the relationship between the parties, without the prior written consent of the other party. |
| 31.5 | Each party acknowledges and agrees that damages alone would not be an adequate remedy for any breach of this clause 31. |
| 32 | Child/Forced labour |
| 32.1 | Neither party shall employ any person who is younger than the age of fifteen (15) or the applicable minimum employment age, whichever is higher. |
| 32.2 | Each party shall procure that its permitted employees under the age of eighteen (18) shall not be engaged by it or its Affiliates in work that by its nature or the circumstances in which it is carried out, is likely to harm the health or safety of that employee and that the weekly and daily working schedules of such permitted employees under the age of eighteen (18) comply with all Applicable Laws. |
| 32.3 | Neither party shall employ persons under conditions where work or service is exacted from them under the menace of any penalty or for which such person has not offered himself or herself voluntarily. |
| 33 | Anti-Bribery and Corruption and Anti-Money Laundering |
| 33.1 | Each party represents and warrants that: |
| (a) | it and its Relevant Affiliates have complied, and throughout the Term and Sell-Out Period, it and its Relevant Affiliates will comply with all Anti-Bribery and Corruption Laws, all Applicable Laws relating to anti-money laundering and any implementing regulations and/or amendments thereto (the “Anti-Money Laundering Laws”), and all Applicable Laws relating to sanctions and any implementing regulations and/or amendments thereto (the “Sanctions Laws”); |
43
| (b) | it and its Relevant Affiliates have not engaged, and throughout the Term and Sell-Out Period, it and its Relevant Affiliates will not engage in any activity, practice, or conduct which would constitute an offence under any Anti-Bribery and Corruption Laws, Anti-Money Laundering Laws, or Sanctions Laws; |
| (c) | it and its Relevant Affiliates have not created, and throughout the Term and Sell-Out Period shall not create, any arrangement with a Government Official that would compromise its ability to perform its obligations under this agreement; |
| (d) | throughout the Term and Sell-Out Period, it and its Relevant Affiliates shall not take any actions in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Government Official or to any other person while knowing that all or some portion of the money or value shall be offered, given, or promised to a Government Official for the purposes of: |
| (i) | influencing a Government Official in his official capacity in order to assist any party, its Relevant Affiliates, or any other person in obtaining or retaining business or a business advantage, or in directing business to any Third Party; |
| (ii) | securing an improper advantage; |
| (iii) | being a facilitating payment (as defined in the FCPA); |
| (iv) | inducing any such Government Official to use his influence to affect or influence any act, omission, or decision of a Governmental Authority in order to assist any party, its Relevant Affiliates, or any other person in obtaining or retaining business, or in directing business to any Third Party; or |
| (v) | providing an unlawful personal gain or benefit, of financial or other value, to any such Government Official; |
throughout the Term and Sell-Out Period, no part of any revenue or income accruing, directly or indirectly, to it or its Relevant Affiliates in connection with this agreement or any remuneration it receives from the other party under this agreement shall be used for any purpose which would cause a violation of Anti-Bribery and Corruption Laws;
| (e) | it and its Relevant Affiliates do not have and shall not create or maintain any secret or unrecorded fund or asset for the purpose of facilitating any prohibited payment according to Anti-Bribery and Corruption Laws throughout the Term and Sell-Out Period; |
| (f) | it and its Relevant Affiliates have not, unless permitted (or not restricted) by the relevant Governmental Authority responsible for the imposition of Sanctions (if any) or its rules or regulations, conducted any direct or indirect business dealings of any nature whatsoever with an individual or entity (i) that is a Sanctioned Party or (ii) is located or organized within, or doing business or operating from a country or territory that is, or whose government is, the subject of Sanctions at the relevant time as long as such dealings have a material adverse impact on the operation of this agreement or any aspect of its operation; |
| (g) | neither it nor any of its Relevant Affiliates is a Sanctioned Party; and |
44
| (h) | there is no pending investigation by a Governmental Authority, enquiry, or proceeding concerning it or any Person or entity acting on its behalf in relation to non-compliance with any Anti-Bribery and Corruption Laws, Anti-Money Laundering Laws or Sanctions Laws. |
| 33.2 | Each party shall promptly notify the other party in writing providing full details if at any time: |
| (a) | it, or any of its Relevant Affiliates, is or becomes a Sanctioned Party; |
| (b) | it becomes aware of any breach of any of the representations, warranties, undertakings, or obligations contained in or referred to in this clause 33; or |
| (c) | it becomes aware of any fact, matter, or circumstance that has or will or might reasonably be expected to put the other party in breach of Anti-Bribery and Corruption Laws, Anti-Money Laundering Laws, or Sanctions Laws. |
| 33.3 | Each party (the “Breaching Party”) shall indemnify and keep indemnified the other party (the “Non-Breaching Party”), its Affiliates, and its and their respective officers, directors, employees and agents (together, “Non-Breaching Indemnitees”) from and against any and all Claims, demands, actions or proceedings, costs, damages, losses, liabilities and expenses (including legal and professional fees and costs) suffered or incurred by such Non-Breaching Indemnitees as a result of any breach by the Breaching Party of its obligations under clauses 28, 32 and 33. Notwithstanding the foregoing, each party acknowledges and agrees that damages alone may not be an adequate remedy for a breach of the obligations under clauses 28, 32 and 33 and, as an arbitral remedy, the Non-Breaching Party shall be entitled in its sole discretion to seek the remedies of injunction, specific performance, and other equitable relief for any threatened or actual breach of obligations under clauses 28, 32 and 33. |
| 34 | FORCE MAJEURE EVENT |
| 34.1 | If either party is affected by Force Majeure Event which prevents that party from performing its obligations under this agreement, the affected party shall: |
| (a) | promptly notify the other of the nature and extent of the circumstances in question; |
| (b) | use all reasonable endeavours to mitigate and/or eliminate the consequences of such Force Majeure Event and inform the other party of the steps which it is taking and proposes to take to do so; and |
| (c) | give written notice to the other party as soon as reasonably possible after the Force Majeure Event has ended, that it has ended and resume performance of its obligations under this agreement. |
| 34.2 | Provided it complies with clause 34.1, neither party will be liable to the other party for any delay or failure in performing its obligations under this agreement. In such circumstances the time for performance shall be extended by a period equivalent to the period during which performance of the obligation has been delayed or failed to be performed. |
| 35 | Notices |
| 35.1 | A notice or other communication under or in connection with this agreement shall be in writing and shall be delivered personally, by courier or sent by email to the party due to receive the notice or communication, to the person and at its address or email address set out in clause 35.3 or another person, address or email address specified by that party by written notice to the other party. |
45
| 35.2 | Unless there is evidence that it was received earlier, a notice or other communication is deemed given: |
| (a) | if delivered personally or by courier, when left at the address set out in clause 35.3; |
| (b) | if sent by email, when the email is sent, or, if this time falls outside business hours in the place of receipt, when business hours resume, provided that a copy of the notice is sent by another method referred to in this clause 35.2 within one (1) Business Day of sending the email unless an email acknowledgement (other than an automated response or “read receipt”) of the notice is received by the other party. |
| 35.3 | The address referred to in clause 35.1 is: |
If to PMI:
| Addressee: | [***] |
| Address: | [***] |
Email address: [***]
If to KBI:
| 35.4 | Addressee: [***] |
| Address: | 4460 Old Dixie Highway, Grant, Florida 32949, United States of America |
Email address: [***]
| 35.5 | This clause does not apply to the service of any proceedings or other documents in any legal action or, where applicable, any arbitration or other method of dispute resolution. |
| 36 | Further assurance |
Each party shall, and shall use all reasonable endeavours to procure that any necessary third party shall, promptly execute and deliver such documents and perform such acts as may reasonably be required for the purpose of giving full effect to this agreement.
| 37 | Assignment and other dealings |
| 37.1 | Save as expressly set out in this agreement, neither party shall assign, transfer, mortgage, charge, sub-license, subcontract, delegate, declare a trust over or deal in any other manner with any of its rights or obligations under this agreement without the prior written consent of the other party. |
| 37.2 | KBI may subcontract any of its obligations under this agreement to any Affiliate of KBI upon prior written notice to an Affiliate of KBI. |
| 37.3 | Without limiting clause 3, PMI may assign, novate, transfer, subcontract and/or delegate this agreement or any or all of its rights and/or obligations under this agreement to any Affiliate of PMI upon written notice to KBI or to any Third Party that is not an Affiliate of PMI with KBI’s written consent (not to be unreasonably withheld or delayed). |
46
| 38 | Waiver |
No failure or delay by a party to exercise any right or remedy provided under this agreement or by law shall constitute a waiver of that or any other right or remedy, nor shall it prevent or restrict the further exercise of that or any other right or remedy. No single or partial exercise of such right or remedy shall prevent or restrict the further exercise of that or any other right or remedy.
| 39 | Entire agreement |
| 39.1 | This agreement and [***] constitute the entire agreement between the parties and supersedes and extinguishes all previous agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to their subject matter. |
| 39.2 | Each party agrees that it shall have no remedies in respect of any statement, representation, assurance or warranty (whether made innocently or negligently) that is not set out in this agreement. Each party agrees that it shall have no claim for innocent or negligent misrepresentation based on any statement in this agreement. |
| 40 | Variation |
No variation of this agreement shall be effective unless it is in writing and signed by the parties (or their authorised representatives).
| 41 | Severance |
| 41.1 | If any provision or part-provision of this agreement is or becomes invalid, illegal or unenforceable, or if either party receives written legal advice from a reputable and independent professional legal advisor that, or any Governmental Authority finds that, any provision or part-provision of this agreement is or will be in breach of or prohibited or unenforceable under Applicable Law, it shall be deemed deleted in relation only to the Markets affected by the relevant invalidity, unenforceability, Applicable Law or finding, but that shall not affect the validity and enforceability of: |
| (a) | the rest of this agreement in relation to those Markets; or |
| (b) | that provision or part-provision and the rest of this agreement in relation to any other Markets. |
| 41.2 | If any provision or part-provision of this agreement is deemed deleted under clause 41.1 the parties shall use their best endeavours, acting in good faith, to find a legal and commercially viable alternative to the relevant provision or part thereof that, to the greatest extent possible, achieves the intended commercial result of the original provision. |
| 42 | Third party rights |
| 42.1 | No one other than a party to this agreement shall have any right to enforce any of its terms. The parties agree that any damages, losses and liabilities suffered, and costs and expenses incurred, by: |
47
| (a) | KBI Indemnitees or PMI Indemnitees which are recoverable under the indemnities in this agreement shall be deemed to have been suffered or incurred by, and shall be recoverable by, KBI and PMI (respectively) on their behalf; and |
| (b) | an Affiliate of a party under or in connection with this agreement which would have been recoverable by that party had such party suffered or incurred them directly, shall be deemed to have been suffered or incurred by, and shall be recoverable by, such party on behalf of its Affiliate. |
| 43 | No partnership or agency |
| 43.1 | Nothing in this agreement is intended to, or shall be deemed to, establish any partnership or joint venture between any of the parties, constitute either party the agent of the other party, or authorise either party to make or enter into any commitments for or on behalf of the other party. |
| 43.2 | Each party confirms it is acting on its own behalf and not for the benefit of any other person. |
| 44 | COSTS |
Except as otherwise expressly provided in this agreement, each party shall pay its own costs and expenses of and incidental to the negotiation, preparation, and execution by it of this agreement and of all other documents referred to in it.
| 45 | Counterparts |
This agreement may be executed in any number of counterparts, each of which shall constitute a duplicate original, but all the counterparts shall together constitute the one agreement.
| 46 | Language |
This agreement is drawn up in the English language. If this agreement is translated into another language, the English language version shall prevail.
| 47 | Governing law |
This agreement and any dispute or claim (including non-contractual disputes or claims) arising out of or in connection with it or its subject matter or formation (a “Dispute”) shall be governed by and construed in accordance with the law of England and Wales.
| 48 | dispute resolution |
| 48.1 | Subject to clause 50, the parties shall attempt to settle any Dispute by negotiation in accordance with this clause 48.1. Either party shall give to the other written notice of a Dispute, setting out its nature and full particulars (“Dispute Notice”), together with relevant supporting documents. On service of the Dispute Notice, [***] of PMI and [***] of KBI shall attempt in good faith to resolve the Dispute. |
| 48.2 | If the [***] of PMI and [***] of KBI are for any reason unable to resolve the Dispute within thirty (30) Business Days of service of the Dispute Notice, the Dispute may be referred to mediation in accordance with clause 48.3 and/or arbitration in accordance with clause 49 and no party may commence any arbitral proceedings or mediation before the end of such period without the prior written agreement of the other party. |
48
| 48.3 | If both parties consent, the parties may, without prejudice to any other proceedings, seek to settle any Dispute by mediation in accordance with the International Chamber of Commerce (the “ICC”) Mediation Rules. Unless otherwise agreed by the parties, the place of mediation shall be nominated by the mediator and the cost of the mediator shall be split equally between the parties. |
| 49 | arbitration |
| 49.1 | Subject to clauses 48 and 50, any Dispute shall be exclusively, definitely, and finally settled by arbitration under the Rules of Arbitration (the “Rules”) of the ICC in effect at the time of the submission of the request for arbitration, which Rules are deemed to be incorporated by reference into this clause and: |
| (a) | the seat of arbitration shall be London, and hearings relating to the arbitration, unless the parties agree otherwise, shall be heard in London; |
| (b) | the language of the arbitration proceedings shall be English; |
| (c) | the arbitration tribunal shall consist of three arbitrators. PMI shall nominate one arbitrator (the “first arbitrator”) and KBI shall nominate one arbitrator (the “second arbitrator”). The two arbitrators thus appointed shall nominate the third arbitrator, who shall act as chairman. If (i) within thirty (30) days of a request from KBI, PMI fails to nominate the first arbitrator, (ii) within thirty (30) days of a request from PMI, KBI fails to nominate the second arbitrator, or (iii) if the first and second arbitrators fail to nominate the third arbitrator within thirty (30) days after the appointment of the first arbitrator or the second arbitrator (whichever is later), the appointment shall be made by the International Court of Arbitration of the ICC in accordance with the Rules; |
| (d) | if any Dispute raises issues which are substantially the same as or connected with issues raised in a Dispute which has already been referred to arbitration (an “Existing Dispute”) or arises out of substantially the same facts as are the subject of an Existing Dispute (a “Related Dispute”), then the arbitral tribunal appointed or to be appointed in respect of any such Existing Dispute shall also be appointed as the arbitral tribunal in respect of any Related Dispute, save where that arbitral tribunal considers such appointment would be inappropriate; |
| (e) | where the same arbitral tribunal has been appointed in relation to two or more Disputes under clause 49.1(d), the arbitral tribunal may order that the whole or part of the matters at issue shall be heard together upon such terms or conditions as the arbitral tribunal thinks fit; |
| (f) | any arbitral award rendered shall be in writing and shall set forth in reasonable detail the facts of the dispute and the reasons for the arbitrators’ decision, and each party shall bear its own costs save as otherwise determined in the arbitration award; and |
| (g) | any award or other outcome of such arbitration shall be final and binding upon the parties from the day it is made. |
| 49.2 | This arbitration agreement is subject to English law. |
| 50 | Interim relief |
| 50.1 | At any time during a Dispute between the parties, either party shall have a right to apply for interim relief, including pre-arbitration attachments and injunctions, necessary to preserve the parties’ rights under this agreement or to maintain the parties’ relative positions with respect thereto until such time as the arbitration award is rendered or the Dispute is otherwise resolved. Solely for the purposes of interim relief, each party: |
49
| (a) | irrevocably and unconditionally submits to the exclusive jurisdiction of the courts of the State of Delaware; |
| (b) | agrees that it will not attempt to deny or defeat such exclusive jurisdiction by motion or other request for leave from any such court; |
| (c) | agrees that any actions or proceedings arising in connection with this agreement or the transactions contemplated by this agreements shall be brought and determined in the courts of the State of Delaware; |
| (d) | waives any claim of improper venue or any claim that those courts are an inconvenient forum; and |
| (e) | agrees that it will not bring any action for interim relief relating to this agreement or the transactions contemplated by this agreement in any court other than the aforesaid courts. |
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IN WITNESS of which this agreement has been executed and, on the date set out above, delivered as a deed.
| Executed and delivered as a deed by PHILIP MORRIS PRODUCTS S.A. acting by [***], who, in accordance with the laws of the Switzerland, are acting under the authority of the company | .............................. Authorised Signatory .............................. Authorised Signatory | |
| Executed and delivered as a deed by KAIVAL BRANDS INTERNATIONAL, LLC acting by NIRAJKUMAR PATEL and ERIC MOSSER, who, in accordance with the laws of the United States of America, are acting under the authority of the company | .............................. Authorised Signatory .............................. Authorised Signatory | |
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Schedule
1
The Markets
52
Market Countries
|
|
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| [***] | |
| OTHER MarketS | |
| [***] | |
53
Schedule
2
KBI Intellectual Property Rights
54
| 1 | Patents |
[***]
| 2 | registered designs |
| [***] |
| 3 | Unregistered rights |
[***]
| 4 | documentation |
[***]
55
Schedule
3
KBI Branding
[***]
56
Schedule
4
PMI Product Standards
[***]
57
Schedule
5
Key Performance Indicators
| 1 | non-binding expansion criteria and key performance indicators |
| 1.1 | For each Market: |
[***]
| 2 | MINIMUM key performance indicators: |
[***]
58
Schedule
6
Market Specific Terms
Intentionally left blank
59
Schedule
7
Root Cause Analysis and Attributable Replacement Cost
| 1 | definitions |
For the purposes of this Schedule, the following definitions shall apply:
| 2 | [***] |
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Schedule
8
Parent Company Guarantee
THIS DEED is dated [DATE]
Parties
| (1) | Philip Morris Products S.A. incorporated and registered in Switzerland with company number (registered no. CH-105-950.151) whose registered office is at Quai Jeanrenaud 3, 2000 Neuchatel, Switzerland (“PMI”). |
| (2) | Bidi Vapor, LLC, a Florida limited liability company organized and registered in the United States of America as a- Florida limited liability company whose registered office is at 200 S. Orange Ave. Suite 2300, Orlando FL 32801 United States of America (“Bidi”). |
| (3) | Kaival Brands Innovations Group, Inc., a Delaware corporation incorporated and registered in the United States of America as a Delaware limited liability company whose registered office is at 4460 Old Dixie Hwy, Grant, FL 32949 United States of America (“Kaival”). |
(Bidi and Kaival each being a “Guarantor” and together the “Guarantors”)
Background
| (A) | By an agreement dated on or about the date of this guarantee PMI and Kaival Brands International, LLC of 4460 Old Dixie Hwy Grant, FL 32949, United States of America (“KBI”) entered into a deed of licensing agreement dated on or around the date of this guarantee under which KBI licenses various intellectual property rights to PMI on an exclusive basis to enable PMI to, inter alia, make and sell ‘e-cigarettes’ (“Agreement”). |
| (B) | The Guarantors would derive substantial direct and indirect benefits from the transactions contemplated by the Agreement. |
| (C) | The Guarantors have agreed to guarantee the financial obligations and liabilities of KBI under and in connection with the Agreement on the terms set out below. |
Agreed Terms
| 1 | Interpretation |
| 1.1 | Any capitalised terms used herein will have the meanings set forth in the Agreement unless defined otherwise in this guarantee. |
| 1.2 | In this guarantee, save where the context requires otherwise: |
| (a) | a reference to a person includes a natural person, corporate or unincorporated body (whether or not having separate legal personality). |
| (b) | a reference to a company shall include any company, corporation or other body corporate, wherever and however incorporated or established. |
| (c) | words in the singular shall include the plural and in the plural include the singular. |
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| (d) | a reference to writing or written includes email but not fax. |
| (e) | a reference to this guarantee or to any other agreement or document is a reference to this guarantee or such other guarantee or document, in each case as varied from time to time. |
| (f) | references to clauses are to the clauses of this guarantee. |
| (g) | any words following the terms including, include, in particular, for example or any similar expression shall be construed as illustrative and shall not limit the sense of the words, description, definition, phrase or term preceding those terms. |
| 2 | financial Guarantee and indemnity |
| 2.1 | Each Guarantor, severally and not jointly: |
| (a) | guarantee to PMI and its successors, transferees and assignees the due and punctual performance of fifty percent (50.0%) of all of KBI’s present and future obligations under and in connection with the Agreement if and when they become due and performable in accordance with the terms of the Agreement (“Guaranteed Obligations”); |
| (b) | shall pay to PMI from time to time within ten (10) business days after written demand fifty percent (50.0%) of all monies (together with interest on such sum accrued before and after the date of demand until the date of payment) which have become payable by KBI to PMI under the Agreement but which has not been paid at the time the demand is made. |
| 2.2 | Each Guarantor, as a principal obligor and as a separate and independent obligation and liability from its obligations and liabilities under clause 2.1(a) agrees severally (and not jointly) to indemnify and keep indemnified PMI in full and on demand from and against fifty percent (50.0%) of all and any losses, costs and expenses suffered or incurred by PMI arising out of, or in connection with: |
| (a) | any failure by KBI to perform or discharge the Guaranteed Obligations; or |
| (b) | any of the Guaranteed Obligations being or becoming totally or partially unenforceable by reason of illegality, capacity, lack or exceeding of powers, ineffectiveness of execution or any other matter, |
but the total liability of each Guarantor under this clause 2.2 shall be no greater than fifty percent (50.0%) of KBI’s liability under the Agreement was (or would have been, had the relevant obligation been fully enforceable).
| 3 | PMI protections |
| 3.1 | This guarantee is and shall, at all times, be a continuing security until the Guaranteed Obligations have been satisfied or performed in full, and is not revocable and is in addition to and not in substitution for and shall not merge with any other right, remedy, guarantee or security which PMI may at any time hold for the performance of such obligations and may be enforced without first having recourse to any such security. |
| 3.2 | The Guarantors’ liability under this guarantee shall not be reduced, discharged or otherwise adversely affected by: |
| (a) | any arrangement made between KBI and PMI; |
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| (b) | any alteration in the obligations undertaken by KBI whether by way of any addendum or variation or otherwise; |
| (c) | any waiver or forbearance by PMI whether as to payment, time, performance or otherwise; |
| (d) | the taking, variation, renewal or release of, the enforcement or neglect to perfect or enforce any right, guarantee, remedy or security from or against KBI or any other person; |
| (e) | any unenforceability, illegality or invalidity of any of the provisions of the Agreement or any of KBI’s obligations under the Agreement, so that this guarantee shall be construed as if there were no such unenforceability, illegality or invalidity; |
| (f) | any legal limitation, disability, incapacity or other circumstances relating to KBI, or any other person; |
| (g) | the dissolution, amalgamation, reconstruction, reorganisation, change in status, function, control or ownership, insolvency, liquidation or the appointment of an administrator or receiver of KBI or any other person; or |
| (h) | any act, omission, matter or thing which would not have discharged or affected the liability of the Guarantors had it been a principal obligor instead of a guarantor; or |
| (i) | any other act or omission except an express written release of the Guarantors by PMI. |
| 3.3 | The Guarantors waive any right they may have to require PMI (or any trustee or agent on its behalf) to proceed against or enforce any other right or claim for payment against any person before claiming from either Guarantor under this guarantee. |
| 3.4 | Until all amounts which may be or become payable under the Agreement or this guarantee have been irrevocably paid in full, each Guarantor agrees it shall not, as a result of this guarantee or any payment performance under this guarantee: |
| (a) | be subrogated to any right or security of PMI; |
| (b) | claim or prove in competition with PMI against KBI or any other person with respect to amounts owed by KBI to such Guarantor; |
| (c) | demand or accept repayment of any monies or claim any right of contribution, set-off or indemnity (except during times when no amounts are payable and delinquent under the Agreement or this guarantee), and |
any sums received by a Guarantor in breach of this clause 3.4 shall be held by such Guarantor in trust for and shall be promptly paid to PMI.
| 3.5 | This guarantee is in addition to and shall not affect nor be affected by or merge with any other judgment, security, right or remedy obtained or held by PMI from time to time in respect of the discharge and performance of the Guaranteed Obligations by KBI. |
| 3.6 | No Guarantor may assign or novate this guarantee, or any rights or obligations hereunder, whether by operation of contract, law or otherwise, except with the prior, express written consent of PMI, and any attempted assignment or novation by either Guarantor in violation of this clause 3.6 shall be void. |
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| 4 | Addendum or variation to the Agreement |
The Guarantors authorise KBI and PMI to make any addendum or variation to the Agreement, the due and punctual performance of which addendum and variation shall, subject to the terms of this guarantee and, amongst other things, be guaranteed by the Guarantors in accordance with the terms of this guarantee.
| 5 | Payment |
| 5.1 | All sums payable by a Guarantor under this guarantee shall be paid in full to PMI by that Guarantor in the currency in which the Guaranteed Obligations are payable: |
| (a) | without any set-off, condition or counterclaim whatsoever; and |
| (b) | free and clear of any deductions or withholdings whatsoever except as may be required by law or regulation which is binding on the Guarantor. |
| 5.2 | If any deductions or withholding is required by any law or regulation to be made by a Guarantor, the amount of the payment due from such Guarantor shall be increased to an amount which (after making any deduction or withholding) leaves an amount equal to the payment which would have been due if no deduction or withholding had been required. |
| 5.3 | Each Guarantor shall promptly deliver or procure delivery to PMI of all receipts issued to it evidencing each deduction or withholding which it has made. |
| 5.4 | Neither Guarantor shall, and neither Guarantor may, direct the application by PMI of any sums received by PMI from a Guarantor under any of the terms in this guarantee. |
| 5.5 | Each Guarantor shall pay interest on any sum due by that Guarantor under this guarantee, calculated as 2% a year above the Bank of England’s base rate from time to time from when the overdue sum became due, until it is repaid, whether before or after judgment. |
| 5.6 | PMI shall not be entitled to recover any amount in respect of interest under both this guarantee and any arrangements entered into between KBI and PMI in respect of any failure by KBI to make any payment in respect of the Guaranteed Obligations. |
| 6 | Costs |
| 6.1 | Each Guarantor shall severally (and not jointly) on a full indemnity basis pay to PMI on demand fifty percent (50.0%) of the amount of all costs and expenses (including legal and out-of-pocket expenses and any VAT on those costs and expenses) which PMI incurs in connection with: |
| (a) | the preservation, or exercise and enforcement, of any rights under or in connection with this guarantee or any attempt to do so; and |
| (b) | any discharge or release of this guarantee. |
| 6.2 | Each party shall pay its own costs in connection with the negotiation, preparation, and execution of this guarantee, and all documents ancillary to it. |
| 7 | guarantor Representations and warranties |
| 7.1 | Each Guarantor represents and warrants to PMI, severally and not jointly: |
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| (a) | that it is a duly incorporated limited liability company and/or corporation, as applicable, validly existing under the law of its jurisdiction of incorporation or organization and it has the power to own its assets and carry on its business as it is being conducted; |
| (b) | that it has full power under its constitution or equivalent governing documents in the jurisdiction in which it is established to enter into this guarantee and to perform the obligations expressed to be assumed by it or contemplated by this guarantee; |
| (c) | that it has been duly authorised to enter into this guarantee and that it has taken all necessary corporate action to authorise the execution, delivery and performance of this guarantee; |
| (d) | that this guarantee when executed and delivered will constitute a legally binding obligation on it enforceable in accordance with its terms; |
| (e) | that all necessary consents and authorisations for the giving and implementation of this guarantee have been obtained; |
| (f) | that its entry into and performance of its obligations under this guarantee will not constitute any breach of or default under any contractual, government or public obligation binding on it; and |
| (g) | that it is not engaged in any litigation or arbitration proceedings that might affect its capacity or ability to perform its obligations under this guarantee and to the best of its knowledge no such legal or arbitration proceedings have been threatened or are pending against it. |
| 8 | Confidentiality |
| 8.1 | Each party undertakes that it shall not at any time during this guarantee or after its termination or expiry, disclose to any person any confidential information concerning the business, affairs, customer, clients or suppliers or another party or any of its Affiliates, except as permitted by clause 8.2. |
| 8.2 | Each party may disclose another party’s confidential information: |
| (a) | to its employees, officers, representatives, contractors, subcontractors or advisers who need to know such information for the purposes of exercising the party’s rights of carrying out its obligations under or in connection with this guarantee. Each party shall ensure that its employees, officers, representatives, contractors, subcontractors or advisers to whom it discloses another party’s confidential information comply with this clause 8; and |
| (b) | as may be required by law, a court of competent jurisdiction or any governmental or regulatory authority. |
| 8.3 | No party shall use any other party’s confidential information for any purpose other than to exercise its rights and perform its obligations under or in connection with this guarantee. |
| 8.4 | Each party shall ensure that its employees, officers, representatives or advisers to whom it discloses the other party’s confidential information comply with this clause 8. |
| 8.5 | Notwithstanding the provisions of clause 10.4 to the contrary, this clause 8 is in addition to, and not in lieu of, all other agreements of one or more of the parties containing confidentiality, non-disclosure, and similar provisions. |
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| 9 | Notices |
| 9.1 | A notice or other communication under or in connection with this guarantee shall be in writing and shall be delivered personally, by courier or sent by email, to the party due to receive the notice or communication, to the person and at its address or email address set out in clause 9.3 or another person, address or email address specified by that party by written notice to the other parties. |
| 9.2 | Unless there is evidence that it was received earlier, a notice or other communication is deemed given: |
| (a) | if delivered personally or by courier, when left at the address set out in clause 9.3; |
| (b) | if sent by email, when the email is sent, or, if this time falls outside business hours in the place of receipt, when business hours resume, provided that a copy of the notice is sent by another method referred to in this clause 9.2 within one (1) Business Day of sending the email unless an email acknowledgement (other than an automated response or “read receipt”) of the notice is received by the sending party. |
| 9.3 | The address referred to in clause 9.1 is: |
If to PMI:
| Addressee: | [***] |
| Address: | [***] |
Email address: [***]
If to Bidi:
| Addressee: | [***] |
| Address: | [***] |
Email address: [***]
With a copy to (which shall not constitute notice)
| Addressee: | [***] |
| Address: | [***] |
Email address: [***]
If to Kaival:
| Addressee: | Eric Mosser, COO Kaival Brands Innovations Group, Inc. |
| Address: | 4460 Old Dixie Highway, Grant, Florida 32949 |
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Email address: [***]
With a copy to (which shall not constitute notice)
| Addressee: | [***] |
| Address: | [***] |
Email address: [***]
| 10 | general |
| 10.1 | PMI shall be entitled by notice in writing to the Guarantors to assign the benefit of this guarantee at any time to any person without the consent of either Guarantor being required and any such assignment shall not release either Guarantor from liability under this guarantee. |
| 10.2 | Each party shall, and shall use all reasonable endeavours to procure that any necessary third party shall, promptly execute and deliver such documents and perform such acts as may be required for the purpose of giving full effect to this guarantee. |
| 10.3 | No variation of this guarantee shall be effective unless it is in writing and signed by the parties (or their authorised representatives). |
| 10.4 | Except as otherwise set forth in clause 8.5, this guarantee constitutes the entire agreement between the parties and supersedes and extinguishes all previous agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter. |
| 10.5 | Each party agrees that it shall have no remedies in respect of any statement, representation, assurance or warranty (whether made innocently or negligently) that is not set out in this guarantee. Each party agrees that it shall have no claim for innocent or negligent misrepresentation based on any statement in this guarantee. |
| 10.6 | No failure or delay by a party to exercise any right or remedy provided under this guarantee or by law shall constitute a waiver of that or any other right or remedy, nor shall it prevent or restrict the further exercise of that or any other right or remedy. No single or partial exercise of such right or remedy shall prevent or restrict the further exercise of that or any other right or remedy. |
| 10.7 | If any provision or part-provision of this guarantee is or becomes invalid, illegal or unenforceable, it shall be deemed deleted, but that shall not affect the validity and enforceability of the rest of this guarantee. |
| 10.8 | If any provision or part-provision of this guarantee is deemed deleted under clause 10.7 the parties shall negotiate in good faith to agree a replacement provision that, to the greatest extent possible, achieves the intended commercial result of the original provision. |
| 10.9 | No one other than a party to this guarantee shall have any right to enforce any of its terms. The parties agree that any damages, losses and liabilities suffered, and costs and expenses incurred, by: |
| (a) | PMI Indemnitees which are recoverable under the indemnities in the Agreement shall be deemed to have been suffered or incurred by, and shall be recoverable by, PMI on their behalf; and |
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| (b) | an Affiliate of a PMI under or in connection with the Agreement which would have been recoverable by PMI had such party suffered or incurred them directly, shall be deemed to have been suffered or incurred by, and shall be recoverable by, PMI on behalf of its Affiliate. |
| 10.10 | This guarantee may be executed in any number of counterparts, including electronically by DocuSign or AdobeSign, each of which shall constitute a duplicate original, but all the counterparts shall together constitute the one deed. |
| 11 | law and Jurisdiction |
| 11.1 | This guarantee and any dispute or claim (including non-contractual disputes or claims) arising out of or in connection with it or its subject matter or formation shall be governed by and construed in accordance with the law of England and Wales. |
| 11.2 | Each party irrevocably agrees that the courts of England and Wales shall have non-exclusive jurisdiction to settle any dispute or claim (including non-contractual disputes or claims) arising out of or in connection with this guarantee or its subject matter or formation. |
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IN WITNESS of which this agreement has been executed and, on the date set out above, delivered as a deed.
| Executed and delivered as a deed by PHILIP MORRIS PRODUCTS S.A. acting by [***], who, in accordance with the laws of the Switzerland, are acting under the authority of the company | .............................. Authorised Signatory .............................. Authorised Signatory |
GUARANTORS:
| Executed and delivered as a deed by KAIVAL BRANDS INNOVATIONS GROUP, INC. acting by NIRAJKUMAR PATEL and ERIC MOSSER, who, in accordance with the laws of the United States of America, are acting under the authority of the company | .............................. Authorised Signatory .............................. Authorised Signatory |
| Executed and delivered as a deed by BIDI VAPOR, LLC acting by NIRAJKUMAR PATEL, who, in accordance with the laws of the United States of America, is acting under the authority of the company | .............................. Authorised Signatory |
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Schedule
9
IP Side Letter
Deed of Letter
1. Bidi Vapor, LLC
[***]
United States of America
(“Bidi”)
2. Kaival Brands Innovations Group, Inc.
4460 Old Dixie Hwy
Grant, FL 32949
United States of America
(“Kaival”)
10 June, 2022
Dear Sir/Madam,
Re.: Philip Morris Products S.A. – Rights with respect to certain intellectual property and distribution rights under the Licensing Agreement
As you, Bidi and Kaival, are aware, we, Philip Morris Products S.A., [***] (“we”, “us”, “our” and “PMI”) have entered into a deed of licensing agreement (the “Licensing Agreement”) with Kaival Brands International, LLC of 4460 Old Dixie Hwy Grant, FL 32949, United States of America (“KBI”) dated on or around the date of this deed of letter, under which KBI sublicenses various intellectual property rights to PMI on an exclusive basis in the Markets to enable PMI to, inter alia, make and sell the Products, including, without limitation, disposable Nicotine E-Cigarettes as more fully set forth in the Licensing Agreement. A copy of the Licensing Agreement is attached in the Schedule to this letter and is incorporated herein by this reference in its entirety as if originally set forth herein.
We are writing to:
| ● | Bidi as you are the owner of the various intellectual property rights sub-licensed to PMI by KBI under the Licensing Agreement, which rights you have licensed to KBI to enable the grant of the sub-licence to PMI under the Licensing Agreement; |
| ● | Kaival as you are Bidi’s exclusive worldwide distributor of various ‘e-cigarette’ products and the owner of all the outstanding and issued membership interests in KBI. |
Capitalised terms used in this deed of letter that are not defined herein shall have the meanings given to them in the Licensing Agreement.
In consideration of the payment of £1 by PMI to each of you, Bidi and Kaival (the receipt and sufficiency of which is hereby acknowledged), it is hereby agreed that:
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| 1. | Bidi, as the owner of the Licensed IPR, agrees that if a KBI Failure occurs (as such term is defined in clause 2(a) of this Deed of Letter), then Bidi hereby: (a) grants PMI a direct license of the Licensed IPR (in the case of a License Failure); and/or (b) shall perform KBI’s obligations, and/or hereby grants the same rights directly as contemplated, under the Relevant Clauses to which that KBI Failure relates, in each case as to the foregoing (a) and (b), under the same terms and conditions as set forth in the Licensing Agreement for the duration of that KBI Failure and to the extent (but only to the extent) of that KBI Failure, but except as follows in each instance: (y) Bidi is not responsible for causing KBI, Kaival, or any of their Affiliates (other than Bidi and entities controlled by Bidi, where applicable) to grant any rights or perform any obligation set out in (a) or (b); and (z) Bidi is entitled to the same rights, accommodations, and protections as KBI that relate to the Relevant Clauses of the Licensing Agreement, mutatis mutandis (the “Direct Agreement”). Notwithstanding the foregoing or any other provision in this Deed of Letter to the contrary: (a) to the extent that any KBI Failure or Bidi’s performance of its obligations under this Deed of Letter leads to any monetary damages, losses or liabilities, all claims, actions, and proceedings pertaining thereto (collectively, the “Monetary Losses”) shall, for all purposes, be treated exclusively as Monetary Losses of KBI under the Licensing Agreement but subject always to the terms and provisions thereto and any ancillary document arising out of or relating to the Licensing Agreement, including, but not limited to the Deed of Guarantee dated of even date herewith between Bidi, Kaival, and PMI (the “Guarantee”) and in the event of any conflict between the provisions of the Guarantee and this Deed of Letter, the provisions of the Guarantee shall prevail; (b) at no time shall KBI’s Failure excuse or discharge PMI’s performance of any of its duties, obligations, or conditions set forth in the Licensing Agreement or any ancillary documents arising out of or relating to the Licensing Agreement as long as PMI benefits from the Direct Agreement as set out above; and (c) nothing shall be construed to require Kaival to provide the Direct Agreement to PMI. |
| 2. | For purposes of this Deed of Letter, the terms “KBI Failure” or “KBI’s Failure” shall mean: (a) in the context of the Direct Agreement, that KBI is not able or fails to: (i) sub-license all or any portion of the Licensed IPR to PMI (“License Failure”), and/or (ii) perform its obligations or grant the rights as contemplated in the exclusive grant of license under clause 3 (to the extent it applies to Bidi), clauses 10.5, 17.3(a), 18.5, 19, 20.6 (other than clause 20.6(g)), 22.4, 22.8(c), 23.5, 28.1(c) (to the extent it is within Bidi’s power with respect to the exclusive license) or 28.1(k) of the Licensing Agreement (“Relevant Clauses”), in each case of (i) and (ii) of this sentence, pursuant to the terms and conditions of the Licensing Agreement due to any fact, condition, or circumstance that is not caused indirectly or directly by breach of the Licensing Agreement, and any other written agreement relating thereto between PMI and/or its Affiliates on the one hand, KBI, Kaival, Bidi and/or their Affiliates, on the other hand, gross negligence, wilful misconduct or bad-faith actions or omissions by PMI or on PMI’s behalf; and (b) in the context of the Direct Grant of Limited International Distribution Rights, that KBI is not able or fails to provide the Limited International Distribution Rights to PMI pursuant to the terms and conditions of the Licensing Agreement due to any fact, condition, or circumstance that is not caused indirectly or directly by breach of the Licensing Agreement, and any other written agreement relating thereto between PMI and/or its Affiliates on the one hand, KBI, Kaival, Bidi and/or their Affiliates, on the other hand, gross negligence, wilful misconduct or bad-faith actions or omissions by PMI or on PMI’s behalf. |
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| 3. | Kaival, as the exclusive worldwide distributor (subject to the Licensing Agreement) of certain products manufactured by Bidi as more particularly set forth in that certain Third Amended and Restated Exclusive Distribution Agreement dated of even date herewith by and between Kaival and Bidi, has contributed to KBI the necessary international distribution rights so the Products can be sold by PMI in the Markets (the “Limited International Distribution Rights”) and solely with respect to the Limited International Distribution Rights granted to KBI by Kaival to allow KBI to fulfil its duties and obligations set forth in the Licensing Agreement, Kaival hereby directly grants to PMI the Limited International Distribution Rights under the same terms as set forth in the Licensing Agreement for the duration of KBI’s Failure and to the extent (but only to the extent) of KBI’s Failure as defined in clause 2(b) of this Deed of Letter (the “Direct Grant of Limited International Distribution Rights”). Notwithstanding the foregoing or any other provision in this Deed of Letter to the contrary: (a) any Monetary Losses shall, for all purposes, be treated exclusively as Monetary Losses of KBI under the Licensing Agreement but subject always to the terms and conditions thereto and any ancillary document arising out of or relating to the Licensing Agreement, including, but not limited to the Guarantee and in the event of any conflict between the provisions of the Guarantee and this Deed of Letter, the provisions of the Guarantee shall prevail; (b) at no time shall KBI’s Failure excuse or discharge PMI’s performance of any of its duties, obligations, or conditions set forth in the Licensing Agreement or any ancillary documents arising out of or relating to the Licensing Agreement as long as PMI benefits from the Direct Grant of Limited International Distribution Rights as set out above; and (c) nothing shall be construed to require Bidi to provide the Direct Grant of Limited International Distribution Rights to PMI. |
| 4. | [***]. |
| 5. | Bidi hereby confirms that it owns the Licensed IPR and that it will not, save with the prior written consent of PMI (which consent shall not be unreasonably withheld, delayed, or conditioned) assign, transfer, surrender or abandon any of the registrations or applications for Licensed IPR, or allow any of them to lapse, in each case to the extent that such actions (or failure to take such actions, as applicable) would result in a breach of a representation, warranty, covenant, agreement or obligation (including, without limitation, an obligation to procure) of KBI under the Licensing Agreement. |
| 6. | Kaival hereby confirms that it contributed the Limited International Distribution Rights to KBI in accordance with the Capital Contribution Agreement dated even date herewith and that neither KBI nor Kaival, without the prior written consent of PMI (which consent shall not be unreasonably withheld, delayed, or conditioned) shall assign, transfer, terminate, surrender, or abandon the Limited International Distribution Rights in each case to the extent that such actions would result in breach of a representation, warranty, covenant, agreement or obligation (including, without limitation, an obligation to procure) of KBI under the Licensing Agreement. |
| 7. | Kaival, Bidi, and PMI acknowledge and agree that the end of the Sell-Out Period following expiry or termination of the Licensing Agreement shall void Bidi’s and Kaival’s obligations under clauses 1, 3, 4, 5, and 6 of this Deed of Letter. |
| 8. | PMI hereby: (a) makes each of the covenants set forth in clauses 3.6, 20.8, and 31 of the Licensing Agreement to and for the benefit of Bidi (provided, however, that if KBI’s prior written consent is required for an action under clause 3.6 of the Licensing Agreement, this covenant does not require Bidi’s prior written consent therefor); and (b) acknowledges and agrees that clause 42 of the Licensing Agreement does not preclude Bidi from receiving and exercising the rights under the Licensing Agreement that are provided to Bidi pursuant to this Deed of Letter, and acknowledges that Bidi is an intended beneficiary thereof for all purposes described in this Deed of Letter, provided that Bidi and KBI may not recover or claim from PMI the same loss, damage, liability, cost or expense. |
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| 9. | This Deed of Letter cannot be varied or amended unless in writing and signed by PMI, Kaival, and Bidi. |
| 10. | Bidi and Kaival confirm that PMI and KBI are authorized to agree to any addendum or variation to the Licensing Agreement in writing and that clauses 1, 3, and 4 above shall apply in relation to the Licensed IPR and the Limited International Distribution Rights under the Licensing Agreement that are agreed between PMI and KBI. |
| 11. | The parties acknowledge and agree that damages alone would not be an adequate remedy for any breach of this deed of letter. |
| 12. | This Deed of Letter is governed by English law and subject to the non-exclusive jurisdiction of the English courts. |
We would be grateful if you would confirm your agreement to the terms set out in this Deed of Letter by signing below and returning this Deed of Letter.
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This Deed of Letter has been executed and, on the date set out above, delivered as a deed.
Yours sincerely,
| Executed and delivered as a deed by PHILIP MORRIS PRODUCTS S.A. acting by [***], who, in accordance with the laws of the Switzerland, are acting under the authority of the company | ..............................
Authorised Signatory
.............................. Authorised Signatory |
| Executed and delivered as a deed by KAIVAL BRANDS INNOVATIONS GROUP, INC. acting by NIRAJKUMAR PATEL and ERIC MOSSER, who, in accordance with the laws of the United States of America, are acting under the authority of the company | ..............................
Authorised Signatory
............................. Authorised Signatory |
| Executed and delivered as a deed by BIDI VAPOR, LLC acting by NIRAJKUMAR PATEL, who, in accordance with the laws of the United States of America, is acting under the authority of the company | .............................. Authorised Signatory |
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Schedule
Licensing Agreement
[To insert]
75
Schedule
10
IP Waiver Letter
[***]
[***]
[***]
This letter is governed by English law and subject to the exclusive jurisdiction of the English courts.
We would be grateful if you would confirm your agreement to the terms set out in this deed of letter by signing below and returning this deed of letter.
Yours sincerely,
Philip Morris Products S.A.
Name: [***]
Title: Authorized Signatory
Signature: ……………………………………..
Name: [***]
Title: Authorized Signatory
Signature: ……………………………………..
[***]
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Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Nirajkumar Patel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kaival Brands Innovations Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: June 21, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President, and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Mark Thoenes, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kaival Brands Innovations Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: June 21, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Kaival Brands Innovations Group, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarterly period ended April 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: June 21, 2022 | By: | /s/ Nirajkumar Patel |
| Nirajkumar Patel | ||
| President and Chief Executive Officer |
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Kaival Brands Innovations Group, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
| 1. | The Quarterly Report on Form 10-Q of the Company for the quarterly period ended April 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: June 21, 2022 | By: | /s/ Mark Thoenes |
| Mark Thoenes | ||
| Interim Chief Financial Officer |
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Kaival Brands Innovations Group, Inc. and will be retained by Kaival Brands Innovations Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.